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SPOTLESS GROUP HOLDINGS LIMITED ACN 154 229 562
INVESTORUPDATE
MAY 2017
IMPORTANT NOTICESImportant notice and disclaimer
This document is a presentation of general information about Spotless Group Holdings Limited (Spotless) current
at the date of the presentation (25 May 2017). The information contained in this presentation does not purport
to be complete. It does not constitute personal advice and does not take into account the investment objectives,
financial situation or needs of any particular investor. It is important that you consider the information in the
Bidder’s Statement (together with supplementary Bidder’s Statements) issued by Downer Services and the Target’s
Statement (together with the supplementary Target’s Statement) issued by Spotless in light of your particular
circumstances. You should seek advice from your financial, legal or other professional adviser before deciding
whether to accept or reject the Offer.
Forward looking statements
This document contains certain forward looking statements and comments about future events, including Spotless’
expectations about the performance of its businesses and statements of current intention or expectation.
Forward looking statements can generally be identified by the use of forward looking words such as, ‘outlook’,
‘expect’, ‘anticipate’, ‘likely’, ‘intend’, ‘should’, ‘could’, ‘may’, ‘predict’, ‘plan’, ‘propose’, ‘will’, ‘believe’, ‘forecast’,
‘estimate’, ‘target’, ‘guidance’ and other similar expressions within the meaning of securities laws of applicable
jurisdictions. Indications of, and guidance on, future earnings or financial position or performance are also forward
looking statements.
Forward-looking statements are subject to inherent risks and uncertainties. Although Spotless believes that the
expectations reflected in any forward-looking statement included in this document are reasonable, no assurance
can be given that such expectations will prove to be correct. Actual events, results or outcomes may differ
materially from the events, results or outcomes expressed or implied in any forward-looking statement.
None of Spotless or its Directors, officers and advisers gives any representation, assurance or guarantee to
Spotless Shareholders or any other person as to the accuracy or likelihood of fulfilment of any forward-looking
statement, or any events or results expressed or implied in any forward-looking statement, except to the extent
required by law. You are cautioned not to place undue reliance on any forward-looking statement. The forward-
looking statements in this document reflect views held only as at the date of this document. Except as required
by applicable law or the ASX Listing Rules, Spotless does not undertake to update or revise these forward-looking
statements nor any other statements (written or oral) that may be made from time by or on behalf of Spotless,
whether as a result of new information, future events or otherwise.
Risk factors
Spotless Shareholders should note that there are a number of risk factors attached to their investment in Spotless
and other risks which apply in the event the Offer is accepted. You should refer to section 7.2 of the Target’s
Statement (as supplemented by the Supplementary Target’s Statement) which sets out further information
regarding those risks.
25 May 2017
Dear fellow Spotless Shareholder,
You will have recently received the Bidder’s Statement from Downer in respect of its takeover offer to acquire your Spotless Shares for $1.15 per share (the Offer), which Downer has declared as its final price, in the absence of a superior proposal. You will have also received our Target’s Statement containing the unanimous recommendation of your Spotless Directors to REJECT the Offer.
Spotless is currently at an inflection point and, for the reasons outlined in the Target’s Statement dated 27 April 2017 (and as supplemented by the Supplementary Target’s Statement dated 23 May 2017), your Board continues to believe that the Offer does not represent adequate value for your Spotless Shares and, unanimously recommend
you REJECT the Offer.
The management team has a clear strategy to deliver earnings growth and is executing on this strategy. Early signs are promising with an uplift in contract win and renewal rates, a growing pipeline of business development opportunities, the mobilisation of new PPPs and progress on the turnaround of Laundries.
For the reasons set out in the Target’s Statement dated 27 April 2017 (and as supplemented by the Supplementary Target’s Statement date 23 May 2017), the Board believes that Spotless can create more value for shareholders over the medium term as an independent company through continued execution of management’s strategy.
The enclosed business update demonstrates the positive momentum of the business and highlights the reasons for the Directors’ recommendation to REJECT the Downer offer:
1. Spotless has a clear strategy to deliver earnings growth and value to shareholders as an independent company.
2. The Spotless management team has driven a strong agenda of change over the last 18 months to drive earnings growth.
3. Spotless’ contract portfolio is being optimised for growth. It already comprises 47% high margin, multi-service and facilities management contracts(1) and 57% of contracted revenue is in identified growth markets(2). Spotless is set to increase the proportion of earnings from priority growth services and end markets from here.
4. Investment in business development is demonstrating early signs of success, including improved win and renewal rates of high quality contracts — with $330m of revenue signed during March 2017(3)…
5. …and a continued strong pipeline of high quality opportunities — with annual revenue prospects of over $500m from the top 15 opportunities.
6. Spotless has a proven track record in the social infrastructure PPP market with 18 PPPs with a total life time revenue of $10.8 billion. New PPP mobilisations are progressing well and we continue to win new PPP contracts.
7. The Laundries turnaround is underway and the recent Cabrini laundry acquisition strengthens Spotless’ market-leading position in Health.
8. Spotless has guided to growth in NPAT for FY18, with an outlook for continued growth in FY19 and the longer term.
9. Downer has acknowledged Spotless’ strong fundamentals including earnings from stable businesses with resilient earnings and long term contracts that provide high certainty over revenues.
10. Downer has adopted a conservative approach to estimating potential synergies.
Your Directors continue to unanimously recommend that shareholders REJECT the Downer Offer and each Director who holds or controls Spotless Shares continues to intend to REJECT the Offer in relation to those Spotless Shares.
If you have any questions in relation to the enclosed materials or your shareholding in Spotless, please call the Spotless Shareholder Information Line on 1300 963 991 (for calls made from within Australia) or +61 1300 963 991 (for calls made from outside Australia) Monday to Friday between 8.30am and 5.30pm (AEST).
Thank you for being a Spotless Shareholder.
Yours sincerely,
Garry Hounsell Chairman
(1) Based on estimated FY17 revenue.(2) Based on estimated FY17 revenue. Growth end markets include Health, Government, Education, Defence and Leisure and Hospitality.(3) Total value of key strategic contracts awarded (including new wins) during March 2017.
i
ii
SPOTLESS INVESTOR UPDATE | MAY 2017
Spotless’ Directors unanimously recommend
shareholders REJECT Downer’s offer.
KEY MESSAGES
• Our strategy is clear
• We are executing the plan
• The portfolio is being optimised
• Win and renewal rates are up
• The pipeline is growing
• New PPP mobilisations are progressing well
• Laundries turnaround is underway
• We have guided to growth
• Spotless’ strategic value has been made clear by Downer
• Downer will benefit from material synergies
ii
1
SPOTLESS INVESTOR UPDATE | MAY 2017
OUR STRATEGY IS CLEAR
Enhanced BD capabilities and refreshed
branding
Sector-leading proposals and
higher win rates
Innovation and technology
partnerships
High performance culture and
capability build
DRIVE NEW BUSINESS WINS
Large
contracts
Integrated
facility
services
Long-dated
PPPs
Scalable
defence and
laundries
FOCUS ON HIGH-MARGIN, HIGH-RETURN SECTORS
Spotless has a clear strategy to deliver earnings growth and value to shareholders as an independent company.
Health Government Education Defence
FOCUS ON GROWTH END MARKETS Leisure and
Hospitality
2
SPOTLESS INVESTOR UPDATE | MAY 2017
WE ARE EXECUTING THE PLAN
The Spotless management team has driven a strong agenda of change over the last 18 months.
KEY INITIATIVES IMPLEMENTATION PROGRESS(1)
LE
AD
ER
SH
IP
New management team
and performance culture
• Majority of senior management roles replaced in last 18 months
• Improved performance targets and accountability
GR
OW
TH
Investment in business
development and
marketing capabilities
• Increased business development headcount
• Refreshed brand and marketing collateral
• Target ROIC >20% on new business wins and renewals
Momentum in pipeline
growth and win-rates
• Early signs of success through improved win and renewal rates of higher quality contracts
Exit of unprofitable
contracts
• Identification of unprofitable contracts complete and exit underway
• Process for potential sale of exited contract bundles has commenced
• Will drive simplification of business, group margin improvement and reduced overhead
INIT
IAT
IVE
S
Improve Laundries
• Laundries identified as potential source of value creation
• Performance improvement initiatives underway
• Cabrini laundry acquisition strengthens market-leading position in Health
Strengthen balance sheet
• Target reduction in net debt of $50m in 2H17 driven by recently revised dividend payout ratio to 40 – 60% to align Spotless with peers, improved capex controls and potential asset sales
• Realisation of $80m of working capital savings in progress
Initiated Completed
(1) Estimated.
3
SPOTLESS INVESTOR UPDATE | MAY 2017
THE PORTFOLIO IS BEING OPTIMISED
Spotless’ contract portfolio is being optimised for growth. It already comprises 47% high margin, multi-service and facilities management contracts and 57% of contracted revenue is in identified growth markets. Spotless is set to increase the proportion of earnings from priority growth services and end markets from here.
38%
9%
17%
9%
20%
7%
Multiple
Cleaning
Food
Laundry
Facilities Management
Tech Services (1)
Integrated and facilities
management 47%
Laundry and technology
26%
Cleaning and food
27%
Priority growth services
20%
12%
7%
7%
6% 4%
17%
9%
11%
6%
Government
Resources
Business and Industry
Laundry
Defence
Health
PPP
Leisure and Hospitality
Education
Tech Services (1)
Restructureand invest
26%
Priority growth markets
Restructureand maintain
17%
Invest /optimise
and grow57%
Portfolio Mix by Service Line
By estimated FY17 revenue
Portfolio Mix by End Market
By estimated FY17 revenue(2)
(1) Includes AE Smith, UASG, Nuvo and TGS.
(2) Amounts shown do not sum due to rounding.
Commentary
Targeting high return long-dated,
expandable multi-service
contracts that leverage Spotless’
scale, geographical footprint
and breadth of capabilities
Commentary
Focused on high-growth end
markets including Health,
Government, Education,
Defence and Leisure and
Hospitality, most of which
are expected to experience
robust growth
4
SPOTLESS INVESTOR UPDATE | MAY 2017
WIN AND RENEWAL RATES ARE UP
Investment in business development is demonstrating early signs of success. Spotless has achieved improved win and renewal rates of high quality contracts.
50%
21%
12%
71%
41%
21%
By number By lifetime revenue By annual revenue
1H16 1H17
21%
20%
9%
Key wins in FY17: Key renewals in FY17:
(1) 1H17 renewal rates have not been adjusted for the contract portfolio rationalisation (which would have a positive impact on rates shown).
(2) Excluding Rio Tinto renewal loss in 1H16, renewal rate was 79%.
(3) Total value of key strategic contracts awarded (including new wins) during March 2017.
Win Rates Renewal Rates(1)
84%
63%66%
95%
69%72%
By number By lifetime revenue By annual revenue
(2)
11%
6% 6%
1H16 1H17
Total value signed during March 2017 ~$330m(3)
NZ Schools
5
SPOTLESS INVESTOR UPDATE | MAY 2017
THE PIPELINE IS GROWING
Investment in business development is demonstrating early signs of success. Spotless continues to have a strong pipeline of high quality opportunities, with annual revenue prospects of over $500m from the top 15 opportunities.
Top 15 Pipeline Opportunities(1)
ACCOUNT NAMEPRIORITY
SECTORMULTI-SERVICE LONG-DATED(2)
POTENTIAL
ANNUALISED
REVENUE (A$M)
POTENTIAL
CONTRACT
VALUE (A$M)
INDICATIVE
TIMING
Health services provider 65 655 1H18
Property developer 55 115 1H18
Retailer 50 240 1H18
Accommodation provider 40 200 1H18
Government department 35 105 2H18
Government department 30 30 1H18
Property developer 30 35 1H18
General industry 30 170 2H18
Property developer 30 55 1H18
Resources 25 75 2H18
General industry 25 50 1H18
Government department 25 100 1H18
Health services provider 25 235 2H18
Government department 25 110 1H18
General industry 25 70 1H18
TOTAL 515 2,245
% OF TOTAL PIPELINE 31% 35%
(1) Contract revenue and values rounded to nearest $5m.
(2) Long-dated contracts are those with potential contract values exceeding 3.0x annualised revenue.
6
SPOTLESS INVESTOR UPDATE | MAY 2017
NEW PPP MOBILISATIONS ARE PROGRESSING WELL
Spotless has a proven track record in the social infrastructure PPP market with 18 PPPs with a total life time revenue of $10.8 billion. New PPP mobilisations are progressing well and we continue to win new PPP contracts.
NAMEMOBILISATION
COMPLETED
CONTRACT TERM TOTAL LIFE (YRS)
ANNUAL REVENUE
LIFE OF CONTRACT REVENUE
OPERATIONAL
NSW Schools 1 28 $
Headquarters Joint Operations Command 30 $$
South Bank TAFE 34 $$
NSW Schools 2 28 $
Orange Hospital 28 $$$
South Australia Schools 30 $
Royal Children's Hospital 25 $$$
Queen Elizabeth II Carpark 25 $
Wiri Prison (NZ) 25 $
Australia National University 30 $
Western Australia Schools 30 $$
Sydney Convention Centre Australia’s Best Infrastructure Project for 2016(1) 25 $$$
Sunshine Coast University Hospital 25 $$$
Victoria Schools 26 $
Bendigo Hospital 25 $$$
MOBILISING
New Royal Adelaide Hospital 30 $$$
NZ Schools (new win) 25 $
Tertiary education contract(2) (preferred) 30+ $
0% 100%
Key for annual revenue: = A$0–10m = A$10–30m = A$30m+Key for life of contract revenue: $ = A$0–250m $$ = A$250–750m $$$ = A$750m+
(1) Infrastructure Partnerships Australia, 2016 National Infrastructure Awards.
(2) Details yet to be announced.
SPOTLESS INVESTOR UPDATE | MAY 2017
7
LAUNDRIES TURNAROUND IS UNDERWAY
Cabrini Laundry Acquisition
• Acquisition of state-of-the-art health laundry facility in Melbourne
• Delivers a number of new multi-year healthcare laundry contracts, including an initial 10 year contract with
Cabrini Hospital
• Strengthens market-leading position and capabilities in Spotless’ priority growth market of Health
• Triples capacity in Australia’s strongest growing market, providing significant opportunities for expansion
• Will deliver efficiency synergies
Other Initiatives
• New leadership
• Technology renewal in priority (Health) laundry sector
• Operating footprint optimisation — Wellington rationalisation
• Investment in new equipment to drive productivity
• Implementation of tighter controls over laundry stock
• Energy efficiency initiatives
The Laundries turnaround is underway and the recent Cabrini laundry acquisition strengthens Spotless’ market-leading position in Health.
8
SPOTLESS INVESTOR UPDATE | MAY 2017
WE HAVE GUIDED TO GROWTH
Spotless has guided to growth in NPAT for FY18, with an outlook for continued growth in FY19 and the longer term.
FY17 FY18
$90m
$100m
$80m
$85m
FY17 and FY18 NPAT guidance Medium to long-term outlook
Key assumptions for FY18 NPAT guidance
• New business wins in FY18 of 17–25% of current
pipeline
— Compares with actual win rate of 21% in 1H17
— Potential upside if current pipeline
opportunities increase
• Renewals of 60–70%
— Compares with actual renewal rate of 72%
in 1H17
• Exit of unprofitable contracts and associated
overhead reduction in line with original contract
end dates
— Majority of contracts have terms ending in next
12–24 months
— Potential upside if contracts are exited early
or sold
• Working capital improvement of $40m in FY18 and
$40m in FY19
Directors are confident that the strength of
Spotless’ core business and contract portfolio,
together with the forecast business trends
and performance in FY18 will drive continued
growth into FY19 and the longer term.
This is expected to be driven by increasing
benefits associated with the strategy reset
including:
• focus on priority growth sectors and higher
margin contracts
• further implementation of the contract
book rationalisation and associated
overhead reduction
• continued improvement in Spotless’
leverage position
Source: Spotless’ Target’s Statement released on 27 April 2017.
Spotless Shareholders should refer to section 5.4 of its Target’s Statement which sets out the basis of the
preparation of FY17 and FY18 Guidance and medium to long-term outlook statement (including key assumptions
and sensitivity analysis).
SPOTLESS INVESTOR UPDATE | MAY 2017
9
SPOTLESS’ STRATEGIC VALUE HAS BEEN MADE CLEAR BY DOWNER
Downer has acknowledged Spotless’ strong fundamentals including earnings from stable businesses with resilient earnings and long term contracts that provide high certainty over revenues.
Source: Financial media, company filings.
(1) Downer disclosure, Offer for Spotless and Equity Raising, ASX and NZX release dated 21 March 2017. Emphasis added.
(2) Media article, “Downer launches $1.3bn bid for ‘solid’ Spotless”, The Australian, dated 22 March 2017. Emphasis added.
(Spotless has) “long-term government and private sector contracts and recurring revenue.”
Downer (1), 21 March 2017
The Australian(2), 22 March 2017
“[Spotless has a] higher proportion of earnings from stable services businesses with resilient earnings”
“Spotless’ portfolio includes long term contracts providing high certainty over revenues”
“Spotless has a diversified contract portfolio across a high quality customer base”
“This is a very solid business”
10
SPOTLESS INVESTOR UPDATE | MAY 2017
DOWNER WILL BENEFIT FROM MATERIAL SYNERGIES
Downer has adopted a conservative approach to estimating potential synergies.
• Downer has conducted its synergies analysis on the basis of external information
• On this basis, Downer conservatively estimates that approximately $20-40 million
per annum of cost synergies will be realised through the combination of Downer
and Spotless over time
— Synergies expected to be realised predominantly through reduction in head
office and corporate costs
• A review will be undertaken on completion of the Transaction to validate Downer’s
synergy expectations and ensure that Spotless’ business and assets are operating
efficiently and competitively
Downer(1), 21 March 2017
Synergies
(1) Downer disclosure, Offer for Spotless and Equity Raising, ASX and NZX release dated 21 March 2017. Emphasis added.
(2) Downer disclosure, Bidder’s Statement section 2.2(b), dated 21 March 2017.
(3) In early stage merger discussions that took place between Spotless and Downer in June 2016 (and which progressed no further), the companies discussed
the potential for the combination of their respective businesses to generate up to $60 million in potential synergies in a preliminary base case analysis.
(4) Values presented in this chart are prepared on the basis of, and subject to, the matters set out in the relevant footnotes referenced in the chart.
(5) Calculated by Spotless based on Gordon Growth Model, assuming synergies are fully achieved within 12 months, tax rate of 30%, terminal growth rate of zero,
illustrative Downer EDI WACC of 10.4% (average based on most recently reported WACC for six available brokers) and 1,106.0m Spotless shares on issue.
$20m
Low end ofDowner's
conservativeestimate(2)
June 2016merger
discussionsestimate(3)
$60m
High end ofDowner's
conservativeestimate(2)
$40m
$0.11(5)
Low end ofDowner's
conservativeestimate(2)
$0.33(5)
June 2016merger
discussionsestimate(3)
$0.22(5)
High end ofDowner's
conservativeestimate(2)
Estimate of potential annual synergies to Downer
Approximate value per share of estimated annual synergies to Downer(4)
11
SPOTLESS INVESTOR UPDATE | MAY 2017
SPOTLESS’ DIRECTORS UNANIMOUSLY RECOMMEND SHAREHOLDERS REJECT
DOWNER’S OFFER
Spotless’ Target’s Statement dated 27 April 2017 (as supplemented by the Supplementary Target’s Statement dated 23 May 2017) outlines the key reasons Spotless Directors unanimously recommend shareholders REJECT Downer’s offer.
Downer’s Offer is opportunistic and timed to take
advantage of historical Spotless share price low
Management and the Board have a clear plan to
deliver earnings growth and long term value to
shareholders under the strategy reset
Despite Spotless only recently implementing its
strategy reset, early signs of success are evident
and demonstrate its growth potential
The Offer does not reflect Spotless’ strong core
business
Spotless has issued earnings guidance for growth in
FY18 and provided an outlook for continued growth
into FY19 and the longer term
The Offer does not recognise the strategic and
financial value of Spotless to Downer
The Offer is hostile, highly conditional and not
certain to proceed
Coltrane Asset Management has accumulated a
relevant interest in up to 10.64% and a total interest
(including economic interests under cash-settled
equity swaps) in 10.64% of Spotless Shares on
issue(1) and IF it was to request delivery and be
delivered the shares that are the subject of those
swaps, it currently intends to REJECT the Offer at the
current Offer Price (although it has not made any final
decision and reserves any right to take any action it
considers appropriate in response to the Offer)
1
2
3
4
5
6
7
8
(1) Comprised of a relevant interest of up to 10.64%, and, as at 11 May 2017, a relevant interest of between 8.07% and 10.64%, with the difference between
the actual relevant interest and 10.64% representing an economic interest (pursuant to cash-settled equity swaps).
Reasons for Director’s recommendation to REJECT:
www.spotless.com
SHAREHOLDER INFO LINE
1300 963 991 available between 8.30 am and 5.30 pm