Companies going through restructuring generally emerge as leaner and better performing businesses.
Some of them also reward their shareholders with better returns and healthier share prices. The trick is to pick those low value ones now which will do well after the restructure.
Credit Suisse has for the last three years outlined a group of Australian companies set to restructure and each year that list has outperformed.
“Last year our 16 restructurers did superbly well as it was loaded with commodity companies attempting to offset the headwind of falling prices,” write analysts Hasan Tevfik and Peter Liu in a note to clients.
This year Credit Suisse has compiled a list of 17 restructurers.
“However, we doubt the screens returns will be anywhere near as good as last year,” the analysts write. “After all restructurers do best in turnaround years and last year was a turnaround year.”
Restructuring is happening more often. In 1999 only 15% of ASX200 companies reported a restructuring expense. In 2016, it was more than 25%.
“Australia Inc is trying harder to embrace change, to do more with less, to generate value,” says Credit Suisse. “Aussie shareholders should be happy.”
Last year restructurers had a clear tilt towards commodity companies. This year the dominant theme is “post acquisition cost synergies”.
The stocks include the ANZ Bank, which is moving away from retail in Asia to more institutional business, plus Boral, Crown, Computershare, Fairfax, IOOF, Myer and Speedcast.
Credit Suisse’s restructure picks:
In 2016, about 50 ASX-listed companies reported a restructuring expense. The Credit Suisse 17 are the pick of the bunch.
“With the help of our analysts we remove those where change is less likely or may not even move the needle, despite management announcements suggesting otherwise,” the analysts write.
“We have, however, included some stocks where the change could already be priced in. Our previous work on restructurers suggests many may overshoot analysts’ consideration of fair value.
“Many of our restructuring candidates for 2017 are the types of stocks that previously performed well during earnings expansions.
“They are lowly valued. They are under-earning. They are cyclical. Successful execution of the restructuring should be yet another reason why they may outperform.”