Trésorier/Treasurer magazine - N°99 - Nov/Dec/Jan 2018 - 13

FOCUS

However, it remain crucial
to constantly revalue asset
performance to dynamically review

"If you aren't failing, you aren't learning, and if you aren't
learning, you aren't improving" (Janelle Maiocco)
François Masquelier,
Chairman ATEL

- NOV / DEC /
N°99

The objective must be to rethink investments and to allocate
capital in order to maintain competitive advantages while ensuring sustainable excess returns. It is of course easier to say
than to achieve... The highest possible ROIC should not be the
target. It could lead to over-allocating assets to a business
line or to only focus on riskier assets and ventures. A portfolio
of assets must be well balanced. Conversely, under-allocation of capital to a business line could also have negative
impacts. It is advised not to focus too much on ROIC level neither to search for highest average ROIC to create maximum
value. Of course the target rating will be the starting point to
assess debt capacity of the company. Rating level will condition gearing and capital allocation. Let's also keep in mind
taxes, which when reduced impact capital structures. We are
facing corporate tax reductions in some of the EU countries
(or at least intention to reduce them).
Share repurchases (SBB's) are common practices. In some
periods, they ware even exceeding dividends paid, what
seems odd. It has shown that it doesn't always mean higher
share price. Such SBB's should be considered with a medium
to long term view and not solely on their internal rate of
return. There are limits to such programs and the more you
launch them the less impacts they will have on your stock.
Investments can sometimes be less profitable. They may lead
to disinvestments. However, it remain crucial to constantly
revalue asset performance to dynamically review the whole
portfolio. The strategy is key and could push to keep underperforming assets. Market often expect moves that are not
necessarily the best ones or those pursued by management.
Being listed also means satisfying expectations from investors... even if they are not the best ones or in the best interest
of the company. The strategic element must be kept in mind.
Value remains a relative concept even if stock-exchanges are
always right when pricing assets. The law of the market is
unstoppable and demand / offer fix the fair and right price of
shares. Let's keep in mind that long term value doesn't mean
always metrics. Another important tip, the global group strategy also drives investments, and it can differ from financial
metrics. The capital allocation is a vital firm decision process.

The risk is to destroy value or to underperform. The sustainability of returns (over capital costs) is the objectives in the
long run. The paradox comes from the usual short term vision
of CFO's versus the long term valuation of a company. Their
goals are market oriented when it should be more long term
focused on value creation. The synergies of assets is also too
often overestimated and generate disillusions and underperformances. Top management should be well inspired to run
stress tests, to be more conservative on synergies, to reassess valuation regularly, to have a longer term approach of
asset allocation and to define accurate KPI's to monitor risks
and manage more dynamically its portfolio. These metrics
should be based on the group risk appetite and tolerance
declination and related financial targets. As for working capital management, capital allocation is an alchemy requiring
a precise weighting of components to succeed and generate
expected added-value.

LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE

Sustainable excess returns in the long run

JAN 2018

the whole portfolio.

Table des matières de la publication Trésorier/Treasurer magazine - N°99 - Nov/Dec/Jan 2018