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Reporting season insight: how to manage a change of CEO

March 2017

Antares Equities

Senior management changes can have huge impacts on investor sentiment and share price performance, given the role that these people play in driving corporate strategy.

When faced with senior management departures, there are several approaches that companies can take. Three examples that have played out during the February reporting season illustrate this.

Brambles Limited

Brambles took the “new broom” approach with CEO Tom Gorman’s announced departure in 2016. An external candidate was appointed to succeed him – Graham Chipchase from the UK – and the company then downgraded its profit outlook in January 2017 before releasing a poor result in February. In effect, new management “swept away” existing guidance and also removed the company’s commitment to longer term return on equity targets. Investors, including us, were very disappointed and the stock performed poorly.

Aristocrat Leisure Limited

Aristocrat took the opposite approach to Brambles – appoint from within – and this has served the company well. Jamie Odell, the outgoing CEO of Aristocrat, was well liked by investors for his success in turning the company around. His successor is Trevor Croker, who has worked with Odell for years at Aristocrat and was already managing significant parts of the business. To us, this is a less risky strategy that should result in less uncertainty. Although Aristocrat did not report in February (the company has a September year-end), management did upgrade FY17 earnings guidance despite being only a couple of months into the financial year. This has had a significant positive effect on the share price as it has significantly reduced investors’ concerns about the management change.

Ramsay Health Care Limited

Ramsay has taken the “say nothing” approach to the retirement of its long-standing Managing Director, Chris Rex. The market knows that he is leaving but the company has not announced a new appointment or explained how the recruitment process will proceed. This is perhaps the riskiest management change strategy, especially for a company like Ramsay that is trading on a high valuation (a price earnings ratio of around 28 times one year forward earnings) and is vulnerable to disappointing news. Ramsay’s share price has fallen around 10% since the release of its earnings report that included news of this management change. We believe the uncertainty generated by this “no news” approach will take quite some time to unwind, regardless of who is eventually appointed to the role.

Important information

The above information is of a general nature and has been prepared without taking account of your individual investment objectives, financial situation or particular investment needs. It is not intended as financial advice to retail clients. Before making an investment decision, you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. We recommend you consult with your financial adviser, who can help you determine how best to achieve your financial goals and whether investing in a fund is appropriate for you.

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