This reporting season, we believe that every listed company needs to outline the full extent of COVID-oriented assistance received. COVID-oriented assistance will be a significant issue this reporting season. It will materially impact company results across most sectors. Assistance includes the extent of JobKeeper payments, tax concessions as well as debt repayment and rent deferrals. Indirect “assistance” will also be enjoyed in particular by some consumer discretionary companies which will report a significant increase in sales over the January to June period this year due in part to Government stimulus in the economy. Clearly some businesses will experience a very strong “hibernation” period.
Without the right information in appropriate detail, it is hard to make a sound judgement. The added disclosure should be a requirement and condition of tax payer assistance.
Indeed, The Australian Securities and Investments Commission (ASIC) has been quite clear on this point. In recent guidance regarding end of year accounts as they relate to COVID 19 it said, “The underlying reasons for improved performance or improved elements of performance related to the impact of the COVID-19 pandemic should be described in the Operating Financial Review (OFR) (or directors’ report), as well as strategies, risks and future prospects.” ASIC also says, “Transparency is important to market and investor confidence in financial reports.”
We humbly agree. As if this wasn’t clear enough, ASIC goes on to say, “Useful and meaningful disclosure on sources of estimation uncertainty and key assumptions will enable users to understand the basis for the estimates and judgements made. Information should be sufficiently specific to the circumstances affecting the entity and the impact on particular assets, liabilities, revenues and expenses… ”. Further it outlines, “The information and explanations in the OFR should tell the story and be specific to the circumstances of the entity and provide all information that members of the listed entity would reasonably require to make an informed assessment of… the financial position of the entity, including how the entity’s financial condition has been affected by the impact of the COVID-19 pandemic.”
This disclosure is important for a number of reasons. It will assist investors to understand moving forward, what level of stimulus needs to be cycled next period and it gives us a feel for the underlying health of the business, excluding the assistance.
However it is important for another reason. We are of the view that Government (tax payer) assistance should not be used for buy backs or to positively impact senior executive remuneration (short or long term incentives). If the country is paying, companies must support the country – not just the shareholders and/or the senior executives of the company.
Not only do we believe that such an outcome is not the intent of the assistance, but the assistance is unlikely to be sustained at current levels and hence changing the long term capital structure of the company with short term stimulus isn’t sustainable. Not that we necessarily believe senior executives should take a pay cut (although sometimes that is appropriate). However, they should not unfairly be direct beneficiaries of assistance.
“Supporting the country” also means taking an updated view on how the interests of key stakeholders are balanced. Where considerable assistance has been received we would expect to see a company’s employees treated well. This could be via flexible and paid leave, better working conditions, maintenance of employment levels, keeping good supplier and customer relationships. The result of this may mean a lower dividend to shareholders in the short term.
In fact, we’d go further.
Where it makes sense, we’d encourage Government assistance to go towards well considered further investment which will create jobs and future growth. This could be combined with additional Government incentives (accelerated depreciation for example) in targeted areas of the economy such as food supply, the manufacturing of protective equipment, medical items and other essential goods and services where we can no longer rely on uninterrupted international supply chains.
That would be genuine support for the country
During October 2020 the Fund returned 2.85% versus the S&P/ASX 300 Accumulation Index of 1.89%, outperforming the market by 0.96% (after fees). Overweight positions in Insurance stocks and an underweight position in Metals & Mining contributed to relative performance while overweight positions in Consumer Staples and Media & Entertainment detracted from relative performance.
We speak with Anthony Mellowes, CEO, SCA Property Group (ASX: SCP) about recent strong sales figures from its centres, improved rent collection and its focus on sustainability. The Ethical Partners Australian Share Fund holds an overweight position in SCP.
During September 2020 the Fund returned -3.40% versus the S&P/ASX 300 Accumulation Index of -3.60%, outperforming by 0.20% (after fees). Overweight positions in Insurance stocks and an underweight position in Construction stocks and Healthcare detracted from performance while overweight positions in Industrials (specifically Building Products) and underweight positions in Information Technology and Energy contributed to performance