9 November 2016 Asia Pacific/Australia Equity Research Quantitative Analysis ESG Alpha Series Research Analysts QUANTITATIVE ANALYSIS Richard Hitchens 61 2 8205 4467 [email protected] Rem reports: One strike and you are out! Sandra McCullagh 61 2 8205 4729 In this report we take a look at the performance characteristics of ASX 300 [email protected] companies that have experienced a strike against their remuneration report by Zoe Whitton having more than 25% of shareholders vote against the report. 61 2 8205 4613 [email protected] We are interested about how such companies tend to perform in the lead up to the AGM where the strike occurs and how they perform afterwards. Figure 1: Performance of remuneration report strike companies 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -26 -22 -18 -14 -10 -6 -2 2 6 10 14 18 22 26 Source: Company data, Credit Suisse estimates, Thomson Reuters Datastream Our findings suggest that: ■ Poor company performance, as reflected by weak shareholder returns leading up to an AGM, is a possible pre-cursor to a strike, ■ Weakness in the immediate couple of weeks leading up to the AGM is possibly indicative of associated bad press, particularly for large cap companies, ■ Subsequent confirmation of a strike contributes to further share price weakness over the next month, particularly for small cap companies, ■ Medium-term performance for small cap companies also appears to be hampered by a strike, and ■ While large cap companies appear to experience a negative reaction to a strike it tends to be short-lived. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 9 November 2016 Rem reports: One strike and you are out! In this report we take a look at the performance characteristics of ASX 300 companies that have experienced a strike against their remuneration report by having more than 25% of shareholders vote against the report. We are interested to see how such companies typically perform in the lead up to the AGM where the strike occurs and then see how they perform afterwards. While we are assuming perfect foresight by analysing the lead up performance of just the companies that in the end experience a strike, it is likely that these companies will have experienced some negative press on the topic in the lead up to the AGM, so it is interesting to see whether recent weak momentum is a contributor to the strike and whether predicted lead up bad press contributes to share price weakness. Our findings suggest that: ■ Poor company performance as reflected by weak shareholder returns leading up to an AGM is a possible pre-cursor to a strike, ■ Weakness in the immediate couple of weeks leading up to the AGM is possibly indicative of associated bad press (particularly for large cap companies), ■ Subsequent confirmation of a strike contributes to further share price weakness over the next month for small cap companies, ■ Medium-term performance for small cap companies also appears to be hampered by a strike, and ■ While large cap companies appear to experience a negative reaction to a strike it tends to be short-lived. Data For the purpose of this event study analysis we have collected a sample of companies of all remuneration report strikes that occurred for ASX 300 companies in 2014 and 2015. In particular, there were 16 in 2014 and 19 in 2015 for a total of 35 events in our sample (as shown in Figure 2): ESG Alpha Series 2 9 November 2016 Figure 2: ASX 300 Remuneration Report Strikes 2014 Name Strike # AGM Date 2015 Name Strike # AGM Date HVN Harvey Norman 1 25-Nov-14 TGS Tiger Resources 1 27-May-15 BRU Buru Energy 1 23-May-14 ARI Arrium 1 17-Nov-15 CAB Cabcharge Aust 2 26-Nov-14 MOC Mortgage Choice 2 28-Oct-15 SDL Sundance Rsc 1 27-Nov-14 UGL UGL 2 28-Oct-15 FXL FlexiGroup Limited 1 19-Nov-14 WEB Webjet 1 11-Nov-15 NCM Newcrest Mining 1 31-Oct-14 AST AusNet Services 1 23-Jul-15 BLY Boart Long 1 19-May-14 BKN Bradken Limited 1 10-Nov-15 MMS McMillan Shakespeare 1 29-Oct-14 CDD Cardno Limited 1 23-Sep-15 PRY Primary Health Care 1 28-Nov-14 PBG Pacific Brand 1 27-Oct-15 MOC Mortgage Choice 1 29-Oct-14 RKN Reckon 2 20-May-15 SVW Seven Group 1 19-Nov-14 LNG Liquefied 1 19-Nov-15 PDN Paladin Energy 1 20-Nov-16 PRT Prime Media 1 10-Nov-15 RKN Reckon 1 21-May-14 ANN Ansell Limited 1 8-Oct-15 SEH Sino Gas 1 30-May-14 PMV Premier Investments 1 27-Nov-15 CCV Cash Converters 3 19-Nov-14 VRL Village Road 1 19-Nov-15 UGL UGL 1 30-Oct-14 DCG DGL 1 18-Nov-15 ALQ ALS Limited 1 30-Jul-15 DOW Downer EDI 1 4-Nov-15 IPD ImpediMed 1 28-Oct-15 Source: Company data, Thomson Reuters Datastream Performance analysis To analyse the performance of companies that experience remuneration report strikes we calculate average event returns relative to the market (i.e. ASX 300) during the 26 weeks before and after the AGM where the strike occurs. As shown in Figure 2 all the AGMs occur at different dates, so for the purpose of our event study we effectively line up all the AGM dates at time equals 0 and work backwards and forwards on a weekly basis to calculate the average returns across our full sample. As such we end up with an index of expected share price behaviour of companies that experience a strike around the strike event date. We also calculate the average returns on equal-weighted and market cap-weighted bases to identify any size biases in the indicator. Equally-weighted results An equal-weighted average tends to provide better information about the raw behaviour, but it does give higher weight to small caps and less weight to large caps than a benchmark aware investor would tolerate. The results of our equally-weighted analysis are shown in Figure 3. ESG Alpha Series 3 9 November 2016 Figure 3: Equal-weighted average relative performance vs ASX 300 of remuneration report strike companies 26 weeks either side of the strike 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -26 -22 -18 -14 -10 -6 -2 2 6 10 14 18 22 26 Source: Company data, Credit Suisse estimates, Thomson Reuters Datastream Before we make observations about the findings we must acknowledge that the sample is quite small, so it is hard to be definitive about the findings. However, we are seeking to identify relationships that seem plausible in relation to the underlying thematic. Observations We make the following observations about Figure 3: ■ Lead up performance is weak: It is notable that on average the companies that end up experiencing a strike have typically underperformed in the lead up to the strike, which is possibly reflective of broader operational difficulties. Accordingly, the votes for a strike may reflect investors disgruntled views toward management for possible poor performance. ■ Strikes lead to near-term underperformance: Whilst many pieces of news come out at an AGM and it is therefore not possible to isolate the impact of a strike directly, it is notable that companies with a confirmed strike tend to underperform the broader market over the next month or so. A confirmed strike will likely be associated with some negative press exacerbating any other negatives that may have contributed to the strike. ■ A hindrance to medium-term performance: After the immediate impact of the strike is reflected in the price it appears that strike as a possible indicator of broader company concerns becomes a hindrance on the medium-term performance of the company, i.e. they struggle to outperform, albeit however not underperform either. Whilst the sample is small these findings are broadly consistent with what you might have expected to have found, which is pleasing. ESG Alpha Series 4 9 November 2016 Market cap-weighted results Market-cap weighted results obviously give more weight to large caps and less weight to small caps, consistent with investment strategies of benchmark aware investors. A comparison between these results and the former equal-weighted results provide a guide as to whether there is a size bias in the results, i.e., whether the effect is stronger for smaller or larger companies. The results of our market cap-weighted analysis are shown in Figure 4. Figure 4: Market cap-weighted average relative performance vs ASX 300 of remuneration report strike companies 26 weeks either side of the strike 10% 8% 6% 4% 2% 0% -2% -4% -26 -22 -18 -14 -10 -6 -2 2 6 10 14 18 22 26 Source: Company data, Credit Suisse estimates, Thomson Reuters Datastream Again we need to remember that we are dealing with a small sample here so it is hard to be definitive about the findings. However, we are again seeking to identify relationships that seem plausible in relation to the underlying thematic.