Automotive Holdings (AHG) 2015 AGM Voting Intentions

Company/ASX Code : Automotive Holdings Group Limited (AHG)
Registry : Link Market Services
Poll/Show of Hands : To be confirmed
Webcast : No
Venue :
10am Fraser’s Function Centre,
Fraser Ave, Kings Park
Perth, Western Australia
Monitor : Mr John Campbell
AGM Details / NoM : Friday 20th November, 2015

This company is monitored by Mr John Campbell and Mr John Ferguson.

ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

The group’s performance is demonstrated by excellent metrics in all respects other than gearing (see below).  Revenue increased by 10.8% on 2014, net profit after tax up 20% to $94.2m and earnings per share up 6% to 30.7 cents.  Dividends increased from 21 cents per share in 2014 to 22 cents in 2015.

AHG is the largest automotive retailer in the country with 175 franchises at 101 dealerships, new and used vehicles, cars and trucks, with service, finance and insurance services.  Its refrigerated logistics division is Australia’s largest provider of this service.  Its other logistics supplies spare parts to the industry, mining supplies and some motor cycle retailing.  

AHG incurred net after-tax costs of $6.1 million during 2015 in relation to integration and acquisition-related activities, impairment of assets less benefits applicable to Son of Holdback GST claims. Business acquisitions of $4.1m comprised the Bradstreet Motor Group, Leo Muller CJD and Paceway Mitsubishi and involved non-recurring costs such as redundancy, technology, and occupancy related costs in transitioning acquisitions to AHG practices and procedures. AHG recorded an impairment expense of $7.4m in relation to the other logistics’ WMC operations involving the distributorship of Higer buses and JAC trucks.  AHG’s other unusual item was $5.4m recovery in GST refunds after a court decision in the Son of Holdback case went against the ATO. 

Nominal gearing is very high by contemporary standards showing as a debt/equity ratio of 127%.  However, this includes $582m of floorplan finance included in current liabilities and secured over vehicles held as inventory to an equivalent value.  In floorplan finance, the lender maintains ownership of the vehicle whilst it is available for sale by the dealer and the liability is only settled when the vehicle is sold.  Accounting standards require the asset and liability to be shown separately in the balance sheet although the reality is that asset and liability are offset.  Floorplan finance is normally disregarded in looking at gearing of motor dealerships and on that basis shows a debt/equity ratio of 25%, up from 15% in 2014.  The increase is due to acquisitions mentioned above.  Interest cover is 5.2 times.  

ASA will congratulate board and management on the year’s performance.

ASA Position
Item 2a: Election of Mr Gregory Duncan as a Director

Mr Duncan is the former CEO of the Trivett dealership group and of an advisory firm JWT Bespoke.  He is the founder and chairman of One Way Traffic trading as CarsGuide.  He is a chartered accountant, and given his qualifications and car industry experience, his election will be supported by ASA.

ASA Position
Item 2b: Re-election of Mr Robert McEniry as a Director

Mr McEniry has had a long career in the motor industry, having risen to be CEO of Mitsubishi Australia.  He is the chairman of the Burston Group which is competitor of AHG in the auto-parts sector.  Given the current ACCC concerns over the sale of the retail part of the Covs division to the Burston Group, we need to be satisfied that proper steps are being taken to ensure that conflicts of interest are being appropriately managed.  

ASA Position
Item 3: Approval of LTI grant to the CEO Mr Bronte Howson

It is proposed that performance rights are allocated to Mr Howson as follows:

•    26,094 FY2015 rights calculated as the excess of his STI bonus over $800,000 divided by the share price at 30 June 2015 of $4.24 (determined as a 30-day VWAP) – we have no issue with this element of Mr Howson’s remuneration.  His STI in total at $910,638 is less than his fixed salary of 1.2m, and because his maximum STI award could have been nearly as much as his fixed salary, and 73% of it was based on NPAT, the hurdles must be quite tough although few details are disclosed. 

•    183,655 FY2016 rights will vest to the extent that the dual performance hurdles of TSR and EPS growth are achieved over the three year period to 30 June 2018.  The hurdles seem to us to be fair but we would prefer a longer performance appraisal period than 3 years.  Further the number of rights issued is determined by dividing the LTI potential award of $666,667 by a computed fair value of $3.53.  We do not accept the use of ‘fair value’ for calculating the number of rights to be used because the use of ‘fair value’ discounts the market value of shares to compensate for the risk of a future fall in value, thus providing an executive with extra rights to compensate for that risk, but the reason for the incentive is avoid the risk by achieving the hurdles.  In this instance however, Mr Howson’s LTI entitlement of $666,667 is reasonable by comparison with many other entities we monitor, and if the award was calculated on the same basis as the STI, it would be approximately $779,000, or only 63% of fixed salary.  

In summary, whilst we would prefer a 4-year appraisal period and for the LTI award to be calculated on a similar basis to the STI award in using market value and not fair value, we accept that the outcome is reasonable and will vote in favour of the resolution.

ASA Position
Item 4: Adoption of Remuneration Report

ASA has guidelines for executive remuneration which call for the following features:

•    As noted above, the LTI award is calculated using fair value but the ASA wants to see market value used for this purpose.

•    There should be a 4-year performance appraisal period for the LTI – AHG adopts a 3-year period.

•    A proportion of the LTI shares to be subject to a 2-year holding lock after vesting.  No such lock is disclosed in the remuneration report.

•    The STI available to the CEO should be less than the LTI potential, so as to focus on strategy rather than year-to-year performance.  Conversely, the ASA prefers STI to exceed LTI for other executives.  AHG adopts this policy for other executives but not for Mr Howson, whose LTI potential for 2015 was less than his STI.  

•    There is little transparency as to the STI performance measures and the extent to which each was achieved.

However, taken as a whole the remuneration of KMPs is reasonable and properly aligned to shareholder interests.  Given the good performance of the group and the overall level of remuneration paid to KMP, we will vote in favour of the remuneration report.

The individuals (or their associates) involved in the preparation of this voting intention have a shareholding in this company.

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