ASX board’s revolving door, Ramsay write-down, inaccurate balance sheets, anonymous Credit Corp attack, Bell goes “renounceable” and more board tilts

Another investment banker exit the ASX board

Rick Holliday-Smith is a well-regarded and effective chair of both ASX and Cochlear and he took the right steps again last week in accepting the resignation of Robert Priestley, who was managing director of JP Morgan at the time of the $2.5 billion ANZ placement which the ACCC alleges constituted cartel conduct.

The ASX announcement set the right tone with Priestley saying he didn’t want to cause any distractions at ASX and Holliday-Smith commending him for observing the highest corporate governance standards.

However, looking back over the past decade, it is clear the ASX board has now suffered more than its fair share of resignations courtesy of governance snafus, often involving investment bankers.

For starters, they lost CEO Elmer Funke Kupper in 2016 after he admitted to knowing about a $200,000 payment to Cambodian strong man Hun Sen when he was CEO of Tabcorp.

When the GFC hit, ASX was also embarrassed by the presence of Michael Sharpe on its board, the former audit committee chair of Babcock & Brown, along with Trevor Rowe, the chairman of spectacular tollroad flop Brisconnections.

At the time, I publically called for their departure and also engaged directly with then ASX chairman David Gonski, saying that a board tilt would happen if there wasn’t action. Having run for ASX 3 times previously, he knew this was no hollow threat.

Within 48 hours of our discussions, ASX released this statement explaining exactly when Sharpe and Rowe would be exiting, so the planned 2009 ASX board tilt was abandoned. Just the threat of it got the job done.

After Gonski departed the governance exits from the ASX board continued and the transparency was sorely lacking with this 2013 announcement revealing that Shane Finemore and Russell Aboud had resigned.

It took press reports such as this piece in The Australian (pay) to explain that the two former UBS executives had been caught up in a US short-selling scandal and fined by the US Securities and Exchange Commission.

ASX was also a business which thought it was sensible having someone like Maurice Newman as chairman for 14 years. This farewell address from Newman at the 2008 ASX AGM remains one of the most ridiculous ever given by an ASX50 chairman as he slammed all and sundry for daring to criticise ASX’s performance.

Throw in the ill-considered ASX attempt led by David Gonski to merge with the Singapore exchange in 2011 and there have been more than enough mis-steps at the top.

For mine, the time is now approaching for chairman Rick Holliday-Smith, 68, to hand over to a successor.

Tenure limits at many big companies range between 9 and 12 years but if you board hop courtesy of a takeover, the clock can start again. That’s exactly what happened with Rick when he spent from 1998 until 2006 as chairman of SFE Corp and then rolled onto the ASX board when the businesses merged and became ASX chairman in March 2012. Six years is long enough, but which of these other 8 directors could succeed him?

I would love to see ASX chaired by someone who has an investor perspective, rather than a history in transactions or trading.

The historical dominance of brokers and investment bankers on the board has been broken by the three resignations in 5 years of Finemore, Aboud and now Priestley. Let’s hope they don’t appoint anyone else who runs into trouble.

Ramsay write-down and Australia’s most under-cooked balance sheets

Ramsay Healthcare’s late founder Paul Ramsay probably didn’t intend it this way, but he has put a bit of a target on the company’s back with his foundation’s move into the culture wars over how universities should teach courses on western civilisation.

The people who control Australia’s biggest foundation and Paul Ramsay’s estate – primarily Michael Siddle and Peter Evans - are also still chair and deputy chair  of the public company, which this week suffered its first hiccup in years with a profit downgrade and some write-offs in the UK.

This shock announcement triggered a 10% share price slide to $56.11 over the next two trading days, which suggests the board may have left it too late and could yet be the subject of some attention from the class action lawyers.

As happens all too often with profit warnings, this one followed some material share sales by senior insiders, such as former Ramsay CEO Chris Rex who raised $27.2 million in March last year dumping 400,000 shares at $68.10. However, that was 15 months ago and business conditions can significantly change in that time frame.

Write-downs are often confusing things because a key consideration should always be the size of the balance sheet in the first place.

In the case of Ramsay, it started the week capitalised at more than $12 billion and with a February 2018 balance sheet claiming that it was worth just $2.42 billion. Then along it comes with a non-cash $125 million write-down, net of tax. You have to wonder what the ATO thinks about these big non-cash write-downs which save shareholders plenty of cash when it comes to their annual tax bill, but somehow won’t impact the dividend.

The Ramsay write-down highlights how most ASX50 corporate balance sheets are not even close to reality. Here are another 3 examples of very conservative balance sheets, just like Ramsay:

CSL: market cap of $89.8 billion but the balance sheet claims net assets of just $US3.84 billion.

Aristocrat Leisure: market cap of $19.7 billion and balance sheet assets of just $1.51 billion.

Cochlear: market cap of $11.6 billion versus claimed net assets of just $575 million.

And here are two which are a little closer to reality:

Wesfarmers: market cap of $55.8 billion against claimed net assets of $22.8 billion, most of which is the Coles acquisition.

Macquarie Group: market cap of $41.5 billion and reports net assets of $18.18 billion

With the market hitting a 10 year high this week, are there any balance sheets out there where the claimed net assets get even half way to the current market cap? Best to look for struggling stocks that have overpaid for acquisitions or capital investments to fill this list:

AMP: market cap of $10.6 billion is still clear of the claimed net assets of $7.3 billion.

Origin Energy:  market cap of $17.1 billion versus claimed net assets of $11.1 billion after recent write-downs.

QBE Insurance: market cap of $13.1 billion against claimed net assets of $8.9 billion.

If these are the most inflated balance sheets, no one can accuse our top 50 companies of failing to take write-downs or over-cooking their balance sheets.

However, this can still happen as we noted last week with this list of 17 failed companies which collectively claimed they were worth more than $14 billion at the time they collapsed.

In defence of anonymous motivated attacks by short sellers

Credit Corp is the latest company to come under assault from short-sellers, after an anonymous 37 page report was released online which subsequently sent the share price tumbling.

I was happy to defend Glaucus in The Constant Investor after it crushed Blue Sky and am even prepared to defend elements of the anonymous hit on Credit Corp, which has been a stand out performer for investors in recent years, running up from below 50c after the GFC to a recent peak of $22.81.

I flew to Sydney for the 2008 Credit Corp AGM and detected an element of hubris from the board and management when subjected to questioning.

One of the directors, former Westpac executive Richard Thomas, launched a scathing attack on the merits of shareholder class actions which had been launched. So why did Credit Corp settle for $6.5 million a couple of years later then, albeit largely funded by its insurers?

The Credit Corp board is small and long-serving with lots of industry experience and skin in the game, fitting the model of success championed by Professor Peter Swan from UNSW. The 4 male non-executive directors have all done more than 10 years and are well invested, especially chair Don McLay who owns 1.63 million shares and that’s after pocketing more than $3 million from shares sales in recent years.

Having performed so well since, it is understandable for a well-regarded company to get on its high horse and slap down critics. However, having made so much money in the often controversial debt collection and unsecured lending market, it comes as no surprise to hear reports that it has been pushing the envelope.

Sure, anonymous attacks looks dodgy, but the ultimate scoreboard here is the market. If investors suddenly think Credit Corp is worth 7.32% less than the day before, then by definition the report has some credibility and it is up to the company to respond to the criticism and win back the faith of investors. Let the free speech flow with full-throated rebuttals after the contrarian or contradictor voices are heard, even if disseminated anonymously.

At one point on Friday afternoon, Credit Corp shares were down 22% when it hit a low of $14.58, but the recovery to $17.46 by the close suggests this considered 4 page response had some credibility with investors.

The Credit Corp board has adopted language to try and discredit the report. Long serving CEO Thomas Beregi was quoted saying the following in The Weekend Australian:

“It is completely anonymous and for me that is something that is probably a little bit annoying, that we are required to respond to something (that) is no better than a blog site or pub talk or whatever.’’

The original reluctant request for a trading halt on June 21 also highlighted the “anonymous” nature of the report. Then the actual 4 page response appeared on the ASX announcements platform with the headline “response to anonymous report” at 11.50am on Friday, enabling trading to resume in the afternoon.

Credit Corp has almost 6000 retail investors and the only thing missing here is someone actually publishing the anonymous report so ordinary investors can digest the details of the attack.

Journalists, proxy advisers, fund managers, regulators and Credit Corp’s major institutional investors have all seen it, but us retail investors are left in the dark.

In circumstances like this, perhaps the ASX should have forced Credit Corp to lodge the 37 page hit on its ASX announcements platform, although that then means it is publically available into the foreseeable future.

If worried about defamation or giving credibility to dubious anonymous critics, Credit Corp could have published it on its own website in the short term and then taken it down later, although there might be ASIC problems with that given the report is “unlicensed”.

Perhaps ASIC should reflect on its quite onerous licensing regime in Australia as it contemplates how to regulate offshore reports – both anonymous and identified like Glaucus.

For instance, under the licence which Alan Kohler has got for The Constant Investor, legal advice has suggested I’m not allowed to participate in his Thursday Facebook live sessions. Come on, a couple of journalists chewing the fat on Facebook would be a licence breach!

If ASIC licensing is made too onerous, the obvious response would be to drive commentators and analysts, such as motivated short sellers, into the un-regulated world of anonymous hits, which is what we have seen this week.

Using a fake name as the author is clearly dodgy, but if anyone has a copy of the anonymous Credit Corp report, please email it through to stephen@maynereport.com.

Bell Financial Group goes for a renounceable…sort of

The Melbourne-based broker Bell Potter has managed hundreds of capital raisings amongst smaller companies over the past 15 years and the vast majority have diluted retail investors.

Only some of the small Perth-based brokers, such as Patersons and Euroz, have a worse record when it comes to listed clients doing placements without SPPs or non-renounceable offers.

In light of this, it was at first very pleasing to read the headline that Bell Financial Group had opted for a $36.4 million renounceable rights issue, something very few of their clients ever do.

However, Bell’s 1-for-5 offer at 68c is only renounceable in the sense that you could sell your entitlement on the market up until rights trading ceased on June 19. But for the retail shareholder who does nothing – and that will include me with just 10 shares – there is no bookbuild at the end.

Instead, any shortfall will be snapped up the under-writer, which is the controlling Bell family. This is almost as bad as what Gerry Harvey did in 2014-15, when he picked up cheap stock as under-writer to a deeply discounted Harvey Norman non-renounceable offer.

Bell Financial Group shares closed at 82c on Friday, so the 68c offer is priced at a 17% discount. The proof in the pudding will be the outcome. Just how many of Bell’s 2300 shareholders will take up the offer and what sort of windfall will the insiders get courtesy of yet another capital raising structured to dilute the retail shareholder who does nothing.

There was absolutely nothing stopping Bell from selling off the shortfall to the highest bidder and compensating non-participants. Instead, the founding family magnanimously agree to no under-writing fee, safe in the knowledge they will profit from their own shareholders who don’t act rationally and either take up the offer or sell their rights on market.

In terms of what should happen to Bell Financial Group in response to this, read the next item.

Time for some board tilts to change capital raising practice

After 20 years in the shareholder activism space, I’m convinced that the fastest way to change market practice is to stand candidates for the board of any company which commits the sin you are trying to eradicate.

I’ve seen time and again how boards – and politicians - agree to a request if they know it will avoid an election contest for their position.

Back in 2014, then City of Melbourne Lord Mayor Robert Doyle told Victorian Planning Minister Matthew Guy that I would run against him in the seat of Bulleen, if he didn’t deliver one of these 3 requests from City of Melbourne, where I was deputy chair of the planning committee:

1. Abandon the rule which saw the state government decide all applications above 25,000sqm.
2. Introduce developer taxes similar to what occurs in Sydney and Brisbane.
3. Release all the departmental advice on applications above 25,000sqm determined by the state government.

In the end, Matthew Guy opted to release all the departmental advice, so I left him alone in the Victorian election and everyone was happy.

Anyway, the point of all this is just to say that with capital raising rip-offs still happening most days, a systematic series of board tilts is what is need to quickly change market practice.

If boards knew that placements without SPPs and non-renounceable entitlement offers with no overs, triggered an automatic board tilt from shareholders activists, they would quickly adapt to the new environment and start respecting retail shareholders. At the moment, they continuously treat us like dirt, showing no respect.

After the GFC, I ran for boards such as NAB, Santos and Ten Network Holdings because of unfair capital raising structures and Westfield shareholders only received this $5000 SPP offer in 2009 after a board tilt was threatened following its earlier $2.9 billion placement.

The Australian Shareholders’ Association will be having a strategy day in August and the directors will be discussing our collective risk-appetite, primarily as it relates to spending member funds.  It doesn’t cost anything to run for a board, but a series of tilts after shoddy capital raisings would certainly ruffle a few feathers, whilst also changing market practice.

At the moment, I’m not allowed to run for any boards as part of an agreement reached to win ASA board endorsement for an unsolicited nomination in 2016. It would be nice to be unshackled for the upcoming AGM season as nothing else seems to be working in terms of changing market practice on capital raisings.

That’s all for now.

Keep doin’ ya best, Stephen Mayne