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Published 30 January 2013 21:58, Updated 04 February 2013 13:07
Chief executives of pubic companies are under constant pressure to perform, and these five leaders – including National Australia Bank chief executive Cameron Clyne – could be feeling the heat more than most in 2013.
Tick, tock. If the fact that Australian CEOs last about three year’s less than their global peers wasn’t enough to keep local top executives up at night, the shock dumping of Rio Tinto chief executive Tom Albanese following $13 billion of writedowns at the miner is a stark reminder that the clock is ticking for every CEO.
But for a small group of CEOs, 2013 may be make or break. While the 14 per cent rise in the S&P/ASX 200 in the past six months shows the mood of investors is improving, they remain skittish and bad news will be punished.
That makes the half-yearly profit reporting season starting in February crucial for leaders and companies struggling to win the confidence of the market. While analysts and funds managers expect companies to report zero or low earnings growth, investors will want companies to meet expectations and present a good story about the outlook.
CEOs that can’t deliver, or who drop a bad surprise, will find shareholders and boards looking to hold them to account.
Platypus Asset Management founder and chief investment officer Donald Williams sums up the mood. “The economy is growing but the number of companies you can find growing earnings will be very limited, it’s the smallest I’ve seen … there is more risk around company earnings, which puts pressure on leadership.”
Every industry faces its unique pressures but BRW has spoken to a wide range of market players to find the five leaders most likely to have their feet held to the flames in 2013.
National Australia Bank’s Cameron Clyne may seem like an obvious inclusion on the list based on the fact that NAB has had the worst performing share price and earnings per share growth of the big four banks. And that’s not just in the past year but also in the past decade and it includes the four years of Clyne’s tenure.
In Clyne’s defence, NAB’s domestic business – in isolation from the toxic UK division – has performed quite well since he has been at the helm.
Roy Morgan figures show NAB has improved customer satisfaction among bank customers in the past four years and APRA figures show he has increased market share in the home loan market in that time.
What makes these milestones seem somewhat less impressive is the fact that not only are they coming off a low base but the bank has used a discount strategy to buy market share, essentially sacrificing margins for volume.
However, Clyne won’t keep the top job by chipping away at the market share of his domestic competitors. NAB needs a leader who can shake off the past decade of share price and earnings per share (EPS) stagnation and force analysts and money managers to re-rate the bank in line with the other three majors.
NAB’s market capitalisation is roughly the same today as it was 10 years ago and in the past 10 years – a period that could only be described as a good time to be a big bank – NAB has had flat EPS growth, while the average of the other three majors has been about 100 per cent.
Commonwealth Bank claims the strongest EPS growth of the big four for past 10 years at 128 per cent, Westpac the second best at 90 per cent and ANZ third at 65 per cent, according to Morningstar figures.
Most onlookers will argue that the successful sale of NAB’s UK assets is essential to delivering value to shareholders, who are growing impatient.
If Clyne can complete the deal at a reasonable price, it may prove to be the catalyst that puts the bank on a new growth path.
If he can’t find a buyer or if the deal is botched under his leadership, it may prove to be his undoing.
Spanish lender Banco Santander was speculated to be an interested acquirer of the assets and then not.
In the meantime, shareholders are likely to be thinking four years is long enough for Clyne to find the keys to unlock value.
Richard Leupen’s 13 years at the helm of outsourced services company UGL has included two major global sharemarket crashes but it’s arguable he will have never been under more pressure than when he walks into his first-half results presentation on February 27.
With his contract up for renewal in early 2014, a share price that’s gone nowhere for a year and the memory that Australia’s largest funds manager AMP Capital voted against his last remuneration report (despite the company narrowly missing a “second strike” against it), Leupen is also having to contend with UGL being talked down as a “stock to short” before the reporting season.
Merrill Lynch’s Duncan Simmonds is among analysts that think UGL will miss its earnings and cash flow generation expectations amid a slowdown in capital spending on civil and mining engineering projects that has reduced UGL’s new contract wins more than most of its competitors.
Leupen may say his focus has been elsewhere, bedding down a strategy he hopes will mean UGL eventually thrives despite the grim times ahead for resources-related companies.
That would be his purchase of the DTZ property services business in 2011, which more supportive analysts such as Ross Macmillan from Morningstar think might prove prescient.
“He [Leupen] picked the end of the mining boom pretty well at UGL’s annual meeting last August,” he says. “That was a signal UGL had changed strategy and was moving into the property sector.”
Buying the Los Angeles-based property services business has proven to be a bit of a reverse takeover – Macmillan says DTZ is now “bigger and more influential” than the lower growth contracting and infrastructure operations.
Leupen has faced pressure from impatient shareholders to sell the well-performing DTZ almost from the moment he bought it.
However, MacMillan thinks talk of a demerger is premature by at least 18 months and that Leupen is determined to see through the change that will likely be his legacy.
“The chief executive is going to be scrutinised because he’s basically changing UGL from a mining services to a property c1ompany,” MacMillan says. “He’s made the decision so it’s on his head to make it work.”
Leupen will need to prove he can run a property business with a completely different culture to what he has known, MacMillan says, and do it while trying to maintain profitability and dividend forecasts.
“Earnings will be flat this year but it could be an exciting time for that property business over the next three years, particularly if the US recovery really kicks in,” he says. “I can’t see Leupen wanting to step away from that – provided he proves to the board he can do it.”
To say Greg Robinson has had to hit the ground running in his first year-and-a-half as chief executive at Newcrest Mining would be an understatement.
As the bellwether in the gold mining industry in Australia, Newcrest already starts 2013 on the back foot. The industry’s margins are getting thinner with higher sector costs and growing capital expenditure requirements; separately, investors looking for exposure to gold are finding they can avoid operational risks that come with investing in exploration companies by turning to alternative investment vehicles such as exchange traded funds.
Gold exploration companies historically have traded at a premium to other mining-exploration companies but that relationship is being called into question by investors. As Citigroup analyst Daniel Seeney points out, Newcrest traditionally has traded at twice the net present value premium to BHP Billiton, but now it trades about 30 per cent over BHP’s net present value premium.
Against this backdrop, Newcrest enters 2013 with its hands full. Its two big projects – the Cadia East Operations in NSW and the Lihir operation on Niolam Island in the New Ireland Province of Papua New Guinea – will represent between 30-40 per cent and 50-70 per cent respectively of the company’s next five years of production growth.
With about $3.3 billion of shareholder capital invested, the two projects – the Lihir operation was taken over by Newcrest under former CEO Ian Smith in 2010 and Cadia, an existing asset – represent considerable operational risk and will test the mettle of the leadership as they begin to measure production against fairly bullish guidance.
Robinson revealed on Friday that he intends to stick with his original guidance despite December quarter gold output of 492,906 ounces coming in below the 500,000 ounces the market was expecting.
Investors are aware of the mechanical challenges the company faces at Lihir, where previous mechanical failures point to corrosion issues; the production potential of Cadia depends on the caving performance of the part of the mine that remains largely untested.
Whether Newcrest’s big bets are likely to pay off should begin to become evident in the production numbers as early as June this year, which analysts, shareholders and the rest of the investment management community will be watching closely.
Even by the cut-throat standards of Australian commercial television, James Warburton is under extreme pressure as he enters his second year as chief executive of Ten Network.
Ratings are patchy and the network is regularly beaten by the publicly owned Australian Broadcasting Corp. The “young and funky” reputation is long gone, a fact glaringly illustrated by a digital media strategy still in its infancy. There are even rumblings that the four Rich Listers who together own 42 per cent of Ten – chairman Lachlan Murdoch, James Packer, Gina Rinehart and WIN Television owner Bruce Gordon – will conspire to take it private.
Even one of the good things Warburton thought he had going for him – last December’s $230 million capital raising to repair a balance sheet reeling from a $13 million loss in 2011-12 – has not turned out as well as hoped.
Last week it was revealed that Ten’s long-suffering retail investors had taken up only 71 per cent of their entitlements in the raising, which offered four new shares for each five they owned at the “mad low price” of 20¢ each. That was the colourful description offered by Laurence Freedman, who made his fortune as one of the investors that bought Ten out of receivership in 1992 – at a price-per-share that was higher, he points out, than the new issue.
While Citi rattles the tin for Ten, seeking another $24 million, what Warburton needs is a ratings smash that can do for him what The Voice did for the Nine Network last year.
He won’t get it from a major sporting event, the rights to which are all locked away elsewhere for the time being. (Ten has to make do with a few rugby tests but investors are understood to have pressured Warburton to secure a major football code next time around.)
The first episode of the new series of MasterChef provided something of a fillip for the share price but Freedman pours cold water on this.
“[It’s at] half it’s previous viewers, despite no competition on the night.”
Analysts, however, are living in hope that Channel Ten’s 2013 line-up turns up something.
The return of The Simpsons to the main channel has been applauded, while series such as American Idol (featuring The Voice’s Keith Urban) are tipped to recover at least some of the younger viewers being poached from Ten by rival digital channels, notably Nine’s Go channel, as well as by internet downloads.
David Jones is representative of a group of bricks and mortar retailers battling the twin headwinds of a poor consumer environment and fierce online competition. While the blame for the tardiness with which the retailer has chosen to approach the brave new world – where fast fashion and ecommerce have dramatically changed the rules of customer engagement – can not be placed squarely on chief executive Paul Zahra, most onlookers will question whether the model can be reinvented under his leadership.
DJs will devote most of its energy in 2013 to rolling out its new point of sale and staffing strategies, which Zahra hopes will position it to compete with online retailers and the onslaught of overseas competitors that are expected to continue to hit Australian shores this year.
H&M, Uniqlo and Forever 21 franchises are all expected to be rolling out new stores this year, Mike Baker of Baker Consulting points out.
The point of sale roll-out brings with it operational risks as management and staff adapt to the changes; moreover, analysts believe the roll-out will be occupying minds that otherwise should be looking forward and thinking about how people will be shopping in five years rather than how they were shopping five years ago or even today.
The company will likely have some good news during 2013, with an economic uptick expected to bring some improved sales figures and the low base it is starting its online business (now 1 per cent of sales a generated online), Zahra is likely to highlight more positive numbers this year as a sign of the big retailer’s turnaround. Rather than see this is a positive, though, those who fully appreciate the challenges will be concerned this optimism will be used as a way from management to paint a picture that it’s on the right track.