Wilson Asset Management

By Tansy Harcourt

“There’s nothing like a bear market to stoke some activism,” Steve Johnson, chief investment officer of Forager Funds said. “Fund managers like us get more desperate or urgent in terms of making companies realise the value that is there and to protect that value.

Unless something dramatic changes in the next week, then 2022 has certainly been a wipe-out for many. The benchmark S&P/ASX200 Index is down 4.4 per cent for the calendar year to date, with all sectors bar energy, utilities and materials in the red.

Top of the list for needing a shake-out at the top is Santos, according to Investors Mutual outgoing founder Anton Tagliaferro, who owns shares in the oil company and has been “very disappointed” in its share performance in a year when all other oil stocks have appreciated materially.

Santos shares have risen 7.8 per cent this year, compared with Woodside, which has risen about 60 per cent this year, Karoon, which has risen about 24 per cent, and Beach Energy, which has risen 25 per cent.

Oil prices have surged to an average of $US102 per barrel of Brent crude in the year to November, on the back of the war in Ukraine and a decrease in US domestic supply.

“Something needs to change,” said Mr Tagliaferro. “Oil prices have gone up significantly in the last 12 months and the share price of Santos is virtually unchanged. They have had very poor execution in key areas.”

Mr Tagliaferro pointed to the Barossa gas project, which has come to a court-ordered halt to drilling due to poor engagement with local indigenous communities. Also of concern was its failure to sell its Alaskan assets, which meant the company fell short of raising $3bn from asset sales.

The strength of companies that produce fossil fuels is likely to trigger major questions by shareholders on how much they care about ESG when they are losing money on so much of their share portfolios.

“What will be interesting is how people react in an environment where returns are actually negative and a lot lower,” Sandon Capital founder Gabriel Radzyminski said.

“For some people the environment is a matter that is above and beyond a mere financial outcome,” Mr Radzyminski said. “I think for a lot of other people, the reality of losing money, is far more significant.

In the US, there has been a backlash against ESG in some Republican states, where the issue has become highly politicised. States such as Texas and West Virginia have pulled billions from companies such as BlackRock in what is seen as a punishment for considering ESG in their investment decisions.

In Australia, where environmental policies have lagged most developed nations, this politicisation could be less of a problem.

Indeed the most-high profile case of shareholder activism this year — being the very ESG-specific move against AGL — may have further to play out next year as smaller investors question the motivations of billionaire Mike Cannon-Brookes.

Mr Cannon-Brookes’ Grok Ventures, controlling 11.28 per cent of AGL, managed to block the company’s plan to demerge, and install four of his own candidates to the board and on a platform of decarbonisation.

It was quite an effort to be sure, but Mr Johnson believes this year there will be push-back: not just at AGL but also on the whole idea of jumping headlong into ESG.

“What you are seeing at AGL is that a particular shareholder who has a view of how the world should be and you may not find the whole register agrees with that,” Mr Johnson said.

He also pointed to BHP, which sold the Cerrejón coal mine in Columbia to Glencore. The Swiss giant then went on to make five times the purchase price in just one year.

“What has this actually achieved for the world? The asset is still there. It’s still producing coal. It’s just owned by someone else and BHP shareholders have lost billions of dollars worth of value.”

Coal and other fossil fuel companies that have been outperforming the market will still be under pressure this coming year, not on performance but on the need to return money to shareholders rather than reinvest in new mines.

“This is a space where we are going to see activism around capital discipline rather than expansion,” Mr Johnson said. “That’s what‘s likely to keep prices and profits high for longer than would otherwise be the case.”

When looking at his own share portfolio, Mr Johnson named Bigtincan and Whispir as likely candidates for activism and needed pressure to “live within their means.” Bigtincan responded to a recent takeover offer by conducting a share placement, frustrating many shareholders.

Outspoken investor Geoff Wilson from Wilson Asset Management said there were a number of companies his firm holds that should be doing buy backs or being more aggressive on their dividends given a discount to net tangible assets (NTA) or excess cash or franking credits on the balance sheet.

While he is happy with how the companies he owns have performed operationally through a very tough 2022, he thinks directors and boards can do more to extract shareholder value In 2023.

“As an example, Australian Vintage have recently just sold two vineyards for double their balance sheet value yet their share price trades at a 40 per cent discount to NTA,” Mr Wilson said. “They should be buying back stock in our view or if they aren‘t willing to do that, they should sell the whole business.”

Sigma is another business Mr Wilson thinks is undervalued by the market with a possible sale and leaseback or other asset sales a way to extract value.

“Both Super Retail, Silk Lasers and Capitol Health have strong balance sheets and should be buying back stock. While Mermaid Marine has performed strongly and management has done an exceptional job, the business is still trading at a discount to NTA and we think they should be doing a buyback too.”

Mr Wilson also named Myer as a company that has the potential to reward shareholders with a stronger fully franked dividend at its upcoming result.

In Mr Wilson‘s view, regional construction and residential property company, Mass Group should consolidate after a period of acquisitive growth over the last 12-18 months given a tougher property market.

Also on his list was Seven Group, with the outspoken investor saying Seven should sell its stake in Beach Energy.

“We think management of Seven are excellent, however we don’t think Beach fits within Seven’s industrial services portfolio. If they were to sell their shareholding it would be very positive for the Seven Group and generate a rerating of their share price.”

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