Ann: Investor Presentation - Market Update, page-22

JoeGambler

I did not reply to the specific issue that you raised in your last post, because that would have required me to poke around the Annual Report, which I have now done.

In answer to your specific issue, my view is that Management can reverse, or not reverse, PDL impairments to deliver the FY21 NPAT that Management wants. We mushrooms do not know what value lies hidden from view, particularly in respect to the PDL asset value. However, I rather that the assets are undervalued than overvalued, which I suspect is the case.

I have no problem with smoothing NPAT per se, but I do not want bonus incentives that tempt Management to do things without deterrents to mitigate their negative aspects – mainly share dilutions in favour of Instos, but to the detriment of retail shareholders.

For the NPAT CAGR long-term incentive, the period set is three years, but we must use the NPAT of FY18 to derive the level of NPAT to start the three years ending EOY 30/06/21. Therefore, the CAGR formula is (FY21/FY18)^(1/3) - 1, not (FY21/FY18)^(1/4) - 1.

NPAT for FY18 was $64.290m, so if we assume NPAT for FY21 is going to be $88m, the formula gives a CAGR of 11.03%, which fractionally eclipses the 11% LTI hurdle. Management has little incentive to do better than 11% CAGR, so it probably won't try to show NPAT much above $88m, IMO. Holding it at circa $88m makes hitting the CAGR in FY22 easier. The current guidance for Fy21 is $85 to $90m – surprise, surprise.

The foregoing suggests why a bad year (annus horribilis), like FY20, is advantageously made to appear even worse (annus horribilior), or even a most horrible year, annus horribilissimus. When I was a salesman, I tended to hold back sales that would get me just short of the set targets, then I would bring them to light in the new sales year.

The use of NPAT as an incentive basis is dysfunctional. The metric should be EPS, because EPS recognises share dilution.

No debt and cash sitting in the balance sheet is seen as a good thing, and it helps NPAT by reducing interest. It also helps Management remain within banking covenants, and thus dilutes the significance of the deterrent relating to banking covenants. Consequently. Management might have been tempted to raise more capital to give them financing headroom, rather than because the CR optimised the best interest of shareholders.

The ROE-related incentive does not deter raising capital at a low SP, because NPAT improvements that spring from the cash raised occurs irrespective of how many shares were added to get the cash.