Important highlights from upcoming meetings, provided by Glass Lewis’ global research team
Link Administration Holdings Limited
Australian Securities Exchange – November 16
Back in June 2017, Link Administration announced the acquisition of Capita Asset Services for A$1,548. The acquisition, since rebranded as Link Asset Services (“LAS”), was undertaken as part of the company’s growth strategy and sought to provide immediate scale and a wider platform for UK/European expansion. A further benefit of the deal, the purchase of Capita Asset Services was also expected to be strongly EPS accretive.
For the year ended June 30, 2018, LAS has contributed A$94 million to the Company’s operating EBITDA, leading to a year on year Operating EBITDA increase of 53.1%. Excluding the LAS contribution, the Operating EBITDA increase over the year is a more modest 10.3%.
However, shareholders may raise an eyebrow over the impact the deal will have on the vesting of executive incentive awards. Despite predicting that the acquisition would be EPS accretive, after reviewing outstanding LTI grants the board announced that it was “satisfied that, on balance, retaining the existing EPS targets is appropriate.” The free kick from the deal’s EPS accretion means that the company’s FY2019 financial performance would have to decline by more than 5% for the EPS tranche of FY2016 awards not to vest at least in part. The current forecast consensus on FY2019 EPS growth is 11.8%.
Growth through acquisition is part of the company’s disclosed strategy. However shareholders will ultimately judge the success of the acquisition on demonstrable growth over time driven by realised efficiency benefits. Without appropriately adjusting EPS targets for outstanding awards, executives may be rewarded on what is just a short-term sugar hit to earnings. Given the scale of the windfall gain, it may be enough to give shareholders pause when considering the remuneration report.
Blue Sky Alternative Investments Limited
Australian Securities Exchange – November 19
“Any publicity is good publicity” – or so goes the expression. The reality for companies is often very different. A case in point being Blue Sky Alternative Investments Limited (“Blue Sky”), who have found themselves being the focus of media attention for most of 2018.
The Brisbane-based private equity firm had been an emerging darling on the ASX as its assets under management and share price grew (from A$1.00 per share at its listing in January 2012 to a height of A$14.70 per share in December 2017). Despite the growth, the firm had largely flown under the radar – although, cognisant of its rise in the ASX indices, the board had begun addressing its governance and remuneration concerns. In the company’s interim report for the six months ending December 31, 2017, it was flagged that the board would reduce the executive component of the board to a majority of independent non-executive directors “in anticipation of a transition from the ASX 300 to the ASX 200”.
However, the board was blindsided by U.S. short-seller Glaucus Research Group in March 2018 when it dropped a research report calling out Blue Sky for inflating the value of its investments and hiding the composition of its fee-earning assets under management figure. In particular, Glaucus’ report stated that Blue Sky’s fee-earning assets under management was not the A$4 billion presented by the company but was in fact less than A$1.5 billion.
Despite the board and management’s attempts respond to the report and ease market concerns over the following months, Blue Sky’s share price spiraled downward with the increased media scrutiny. The day prior to the Glaucus report release on March 28, 2018, the share price sat at A$11.45 and dropped to a low of A$1.40 on July 5, 2018. After a brief spike, as of October 31, 2018, the share price sits at A$1.20.
The fallout has been immense for the firm, with the MD Robert Shand and executive director/chief investment officer Alexander McNab both exiting the Company. In addition, a number of executive directors stood down from the board (while retaining their roles within the organisation). Indeed, the Glaucus report fast-tracked the board’s plan for rejuvenation: At last year’s AGM, the board consisted of nine members, six being executives. This year, there are only four directors.
In September 2018, Blue Sky was thrown a lifeline after executing a binding agreement with Oaktree Capital Management to be the recipient of a seven-year loan facility worth A$50 million. Shareholders will be asked to vote on the conversion rights, which would allow Oaktree to obtain more than a 20% interest in the company.
Fortescue Metals Group Limited
Australian Securities Exchange – November 15
In many respects, Fortescue Metals Group Limited (“Fortescue”) has been an outlier in the Australian mining world when it comes to corporate governance practices – and not in a negative sense.
With the emphasis on gender equality amongst Australian institutional investors, Fortescue finds itself one of the few mining/materials entities to be led by a female MD/CEO and having a 50% female representation on both its executive KMP team and its non-executive cohort of directors. This is despite many of its fellow Western Australian mining peers often decrying the gender push due to the difficulties in attracting female talent to the executive and board ranks in the sector. Even when the company deviates from good governance conventions, such as the absence of an independent chair, the board has adopted best market practices to address concerns (in this case appointing a lead independent director).
So it may come to the surprise of some investors that, with the appointment of Elizabeth Gaines as MD/CEO, the board is seeking shareholder approval for Ms. Gaines’ equity grants for the next three financial years, rather than the typical single-year grant. Fortescue are not the only company to tread down this path, with both Bellamys’s and Bapcor previously attempting the same approach to equity grant bundling. Deviating from accepted norms has not gone favourably for the prior two, with Bellamy’s bundled equity proposal receiving 30.86% opposition at the 2016 AGM and Bapcor receiving 11.83% and 16.37% opposition to the individual FY2018 and FY2017 equity grants at the 2017 AGM. In this case, Fortescue hasn’t provided any rationale for bundling three years’ worth of equity grants together; don’t be surprised if the voting follows the same pattern.
Emeco Holdings Limited
Australian Securities Exchange – November 15
Out of the blue, Emeco Holdings Limited (“Emeco”) have jumped on the combined incentive bandwagon (the collapsing of short-term and long-term incentives into a single variable incentive plan). Having not flagged the potential change in the prior remuneration report and not providing an in-depth rationale for the appropriateness of the combined incentive, the mining equipment hire and services company may find themselves at the end of a high vote against the 2018 Remuneration Report as investors appear to be more sceptical of these new plans.
In addition, Emeco’s contentious Management Incentive Plan (“MIP”) is rearing its ugly head again at the 2018 AGM. In FY2017, the company had acquired Andy’s Earthmovers (Asia Pacific) Pty Limited and Orionstone Holdings Pty Limited. The acquisitions were approved by shareholders at an EGM held on March 13, 2017 where the MIP was established and approval for an award to the MD/CEO of up to 210 million shares in the Company was granted. The fine print to the MIP grant, however, was that shareholders were held hostage – they had to approve the MIP and equity grant for the acquisitions to also be approved. No MIP meant no value-adding acquisitions.
Despite receiving approval, Emeco’s board did not award the MIP grant and is seeking shareholder approval at the 2018 AGM to grant Mr. Testrow 45 million shares under the MIP – still without performance hurdles. The company states that “[t]he issue of [s]hares under the [MIP] is proposed to incentivise [the MD/CEO] to remain with the Company and align his interests with the long term interests of [the Company’s] [s]hareholders.”
With a face value of approximately A$14.85 million, shareholders may question the appropriateness of this award, and moreover whether the awarding of the MIP contradicts the adoption of a combined incentive plan. Unlike last year, the vote will be free from the shackles of the acquisition transaction.