Public

Automotive Holdings (AHG) 2016 AGM Voting Intentions

Company/ASX Code : Automotive Holdings Group Limited (AHG)
Registry : Link Market Services
Poll/Show of Hands : Poll on all items
Webcast : No
Venue :
10am Crown Convention Centre (Botanical 2, Lower Level)
Great Eastern Highway
Perth, Western Australia
Monitor : Mr John Campbell
AGM Details / NoM : Friday 18th November, 2016

Improvement in results, with long serving MD to retire

This company is monitored by John Campbell assisted by Keith Mellis. The monitors had a pre-AGM meeting with Chairman David Griffiths and Company Secretary David Rowland.

ASA Position
Not Applicable
Consideration of accounts and reports

Financial performance

AHG’s results show a small improvement on 2015 with NPAT $90.1m (2015: $88.1m) and free cash flow of $31.8m (2015: ($42.4) negative).  AHG’s largest segment, Automotive with assets of $1.7bn, showed a 10.6% improvement in revenue with an 8.1% improvement in EBITDA on a near constant margin.  The Refrigerated Logistics segment, with total assets of $332m, experienced a reduction in revenue of 4.7% and a 12.1% reduction in EBITDA on a slightly reduced margin.  Return on assets for Refrigerated Logistics is unsatisfactory at 2.4% compared to 8% for Automotive.  The Other Logistics segment is small and reduced the loss it contributed to group results.  We will ask how the board intends to achieve a reasonable return on funds invested in logistics.  

AHG has recorded an impairment charge of $4.7m in 2016 which related to that part of a larger IT project designed for Covs business that was sold during the year.  Assets under construction are $82.1m and about 40% relates to a number of IT projects that are expected to be completed in 2017 and 2018 financial years.  

Earnings per share improved from 28.7 to 29.4 cps but this will be under pressure in 2017 after the recent placement and share purchase plan.  Although having experienced a net free cash flow deficit (ie free cash flow less dividends) in each of the last 7 years, the directors increased dividends by half a cent to 22.5 cps.  The final dividend remained unchanged from 2015 at 13 cps.  We understand that dealer acquisitions are funded periodically by placements/SPPs and that such capital raisings will even out any shortfall in cash flow for dividends over a period.

Key events

AHG continued their practice in acquiring dealerships around the country to expand their business – they see this as a critical part of the business plan as they claim to be able to improve returns on capital invested over that made by the acquired dealerships.  This year’s acquisitions totalled $71,995m (2015: $71,963m).  Franchise agreements with vehicle manufacturers limit the extent to which AHG can acquire dealerships but it owns a relatively small share of the motor vehicle dealers in each state.  

Subsequent to balance date, AHG acquired the remaining minority interest in its 360 Finance subsidiary, which acts as a finance broker in arranging loans for car buyers.  Also subsequent to balance date, the Australian Securities and Investments Commission has launched a review of motor vehicle dealers’ commissions on finance and insurance products sold to car buyers and it is not known how this may impact future results.

Subsequent to balance date, AHG completed a placement and share purchase plan – see item 8 below.

Key Board or senior management changes

Managing Director, Bronte Howson, who is to retire during 2016/7, has led AHG for 17 years, of which the last 10 have been as a listed company.  He has built up AHG to be the top automotive retailer in the country by acquiring dealerships and converting them to the AHG business model.  His leadership of the dealer teams is seen by us as an important aspect of AHG’s success.  His successor, John McConnell, takes over as managing director from 1 January 2017 after leaving Inchcape plc, a UK listed automotive distributor, as its finance director.  

ASA focus issues

AHG’s record with respect to ASA focus issues is poor:

•    Rather than an entitlement issue, AHG undertook a placement subsequent to balance date, which is referred to in item 8 below, but it did take steps to broaden the SPP offer to shareholders at our request;

•    AHG has no board policy with respect to ‘skin in the game’;

•    AHG determines the number of performance rights to be allocated to executives based on an assessed value less than market value (refer item 6); and

•    AHG uses an adjusted profit to exclude unusual items when measuring performance for remuneration purposes.

Summary



 


ASA Position
For
Resolution 1.1: Re-election of Mr David Griffiths as a Director

Mr Griffiths was appointed a director in 2007 and he has been the company’s chairman since 2010.  He is also Chairman of another listed company, Wellard.  He was a banker and then executive chairman of the stockbroking firm Porter Western prior to becoming a professional director.  He is appropriately qualified and experienced for his position but as he has already served more than 9 years, this may be his final term with ASA support as, after 12 years, ASA no longer classifies directors as independent and without him as such, there is no majority of independent directors.

Mr Griffiths’ involvement as Chairman of Wellard, which listed on the ASX in December 2015 at $1.39 per share and whose share price is currently 22 cents, is somewhat concerning. However, in light of Mr Griffiths’ performance at AHG over the past few years and advice from Mr Griffiths that he is working hard on Wellard’s recovery, we will support his re-election on this occasion.


ASA Position
For
Resolution 1.2: Election of Ms Jane McKellar as a Director

Ms McKellar was appointed an independent non-executive director in December 2015.  She has held senior executive positions in a number of international companies and she is a director of two other listed companies.  Whilst she has no shareholding in AHG at present, we prefer directors to hold at least the equivalent of one year’s fees in company shares after their initial 3-year term of appointment. We propose to support the re-election of Ms McKellar.


ASA Position
For
Resolution 2: Approval of amended AHG Performance Rights Plan

AHG is proposing to amend its performance rights plan in certain respects to bring it up to date with modern trends in incentive based remuneration arrangements.  We see no reason to oppose these amendments to the existing plan approved by shareholders in 2007.


ASA Position
For
Resolution 3: Approval of STI grant to CEO/Managing Director Bronte Howson

It is proposed that 65,878 performance rights are allocated to Mr Howson being STI performance rights calculated as the excess of his STI bonus over $800,000 with respect to financial targets and $300,000 with respect to non-financial targets, divided by the share price at 30 June 2016 of $3.76 (determined as a 30-day VWAP).  His STI in total at $1,347,700 is marginally more than his fixed salary of $1,234,004, as a result of financial performance exceeding target and his STI arrangement allowing extra payment for ‘stretch’ performance.  Performance on other criteria is said to be between threshold and target but no details are provided.  The rights will vest so long as Mr Howson remains an employee at 30 September 2017.  

In view of Mr Howson’s announced retirement arrangements there is to be no LTI performance rights allocation in 2016.


ASA Position
Against
Resolution 4: Approval of Mr Howson’s retirement package

Mr Howson ceased to be CEO on 28 August 2016 and will cease to be MD on 31 December 2016.  He is required to remain an employee until 30 September 2017 to assist in the transition of his former role to Mr John McConnell who was appointed CEO from 29 August 2016.  It is proposed that 219,298 performance rights issued in 2015 under his LTI plan which would have been tested for vesting at 30 June 2017 are now to be tested for meeting performance hurdles at 31 December 2016, and that of 183,655 performance rights issued in 2016 under his LTI plan, two-thirds, being 122,437 rights will also be tested as at 31 December 2016 and vested at that date if hurdles are achieved, with the balance of 61,218 rights lapsing.  If his plan arrangements were adhered to, the 2015 rights would be retained and tested as at 30 June 2017 and only one third (61,218) of the 2016 rights would be retained and tested the following year. 

In addition, Mr Howson is to receive a termination payment of $600,000.  He is to receive his fixed salary of $1,234,000 until 30 June 2017, then a fixed salary of $25,000 a month until termination on 30 September 2017 and will be entitled to a short-term cash incentive in 2017 of up to $1,200,000.  We believe that these benefits are very generous and are not aligned with shareholder rewards as Mr McConnell will also be receiving a salary package for the relevant period.  


ASA Position
For
Resolution 5: Approval of performance rights grant to the new CEO John McConnell

Mr McConnell’s employment terms were announced in August being fixed remuneration of $1,200,000 pa, with short-term incentives to a maximum of $1,500,000 for stretch performance, payable as to 50% in cash and the balance in performance rights, and a long-term incentive of $666,667 for which performance rights are proposed to be issued on the terms set out in the explanatory memorandum to the notice of meeting.  Mr McConnell is entitled to 207,684 performance rights (determined by dividing the above amount of $666,667 by the face value of AHG shares at 1 July 2016 discounted for expected dividends prior to vesting), up to one half of which will vest if relative TSR falls between the 50th and 75th percentiles of comparator group TSR, and up to one half will vest if EPS growth falls in the range 7% to 10% pa over the 3-year performance appraisal period.  Each half of the rights will vest fully if performance equals or exceeds the top of the range for each hurdle.

A number of features of the LTI award do not align with ASA guidance – 3 year appraisal period, not 4 years, full vesting on conclusion without any holding lock, and the number of rights available under the LTI plan is determined using fair value principles to discount market value for future dividends to which there should be no entitlement prior to vesting.  The most serious of these is the use of a reduced value for determining the number of performance rights to be issued, but if a market value of say $4.52 (as used for the placement and SPP – refer item 8) had been used, the value of performance rights issued would be approximately $939,000 or about 78% of his fixed salary, which we regard as reasonable for a chief executive.  Accordingly, with some reservation, we support this allocation of rights to the new CEO.


ASA Position
For
Resolution 6: Increase to NED remuneration cap

The directors propose to increase the maximum level of fees paid from $900,000 pa to $1,100,000 pa, or about 7% pa increase.  The limit of $900,000 was set in 2013 and at that time it had been increased from $750,000 to allow for fee increases and an increase in the number of directors from 7 to 8.  At present there are 8 directors and the amount paid is close to the current pool limit.  The board has been advised that fees are approximately $25,000 per director below those paid on average to companies of AHG’s status and the increase will give the board flexibility as to appointing an additional director to replace Mr Stancliffe who is not seeking re-election at the AGM, if it decides to do so.


ASA Position
For
Resolution 7: Approval of prior issue of placement shares

Subsequent to balance date, AHG completed a placement and share purchase plan which raised $90m and $23m respectively at $4.52 per share.  The ASA prefers companies to raise fresh capital by entitlement issues to shareholders but recognises that placements have commercial advantages.  

ASA is opposed to selective institutional placements as these do not respect the property rights of existing shareholders to retain their proportionate stake in the company.  As a demonstration of ASA’s general concern about the way selective placements do not respect the property rights of existing shareholders, ASA will generally vote against resolutions which seek to refresh the 15% placement capacity in any 12 month period, except where the resolution relates to securities issued as part of an executive incentive scheme supported by the ASA or a capital raising conducted by way of a renounceable rights issue, Pro-rata Accelerated Institutional, Tradable Retail Entitlement Offer (PAITREO) or included a Share Purchase Plan (SPP) on the same or better terms than the institutional offer.  

In the circumstances we asked AHG to send reminders to shareholders if the SPP rights were in the money shortly before it closed to and lift the announced cap for oversubscriptions; AHG complied with these requests. Accordingly, we will vote in favour of this resolution. 


ASA Position
For
Resolution 8: Adoption of Remuneration Report

Total remuneration for executives was $6.5m in 2016 as against $7.2m in 2015, mainly due to the non-vesting of 2013 long term incentives because hurdles were not achieved by a small margin.  ASA has guidelines for executive remuneration which compare with AHG remuneration plans as follows:

•    As noted above, the LTI award is calculated using discounted market value but the ASA wants to see full 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.

•    There is little transparency as to the extent to which STI performance measures were achieved.

We note that in 2015 there was a significant (16%) vote against the remuneration report based on the advice of a proxy advisor opposed to the remuneration structure.  Since 2015, AHG has made two improvements in terms of disclosing actual remuneration outcomes as well as the statutory disclosures, and in setting the incoming CEO’s short-term incentive to be paid as to 50% in cash and 50% in deferred shares.  We would like to see this feature extended to executive STIs as well as the CEO.  Again, we believe that, taken as a whole the remuneration of KMPs is reasonable and properly aligned to shareholder interests.  Whilst the shortcomings as regards ASA guidelines are significant, given the good performance of the group particularly in a depressed WA economy, and the overall level of remuneration paid to KMP, we will vote in favour of the remuneration report.



The individual(s) (or their associates) involved in the preparation of this voting intention have no shareholding in this company. 


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