PETALING JAYA: Companies should not discount restructuring when undertaking a transformation project, as firms that took transformative actions during the Covid-19 pandemic outperformed relative to its peers during the Covid-19 pandemic.
“Transformation is not just for companies in distress. We see companies that have been resilient during the pandemic have also undertaken transformative actions that helped to position them for long-term success. Transformation via business restructuring — be it an operational turnaround or a financial restructuring — can be a vital tool to preserve value for a company and its stakeholders. From refinancing and cashflow improvements, to the divestment of assets and management of liabilities, there are numerous ways that executives can maintain or create value in their organisation. Hence, when undertaking a transformation project, companies should not discount restructuring, which can be a way to turn adversity into opportunity,” said EY Asean restructuring leader Angela Ee (pix).
According to a recent EY-Parthenon report “Transformation in Southeast Asia: Four archetypes of outperformers”, amid the pandemic, broadly, there were two camps that emerged, namely: one which comprised of visionary leaders that saw an opportunity to disrupt their industries; and the other that chose to tread water and bide their time. It found possible correlations between the companies’ performance and their transformation approaches. Four archetypes of outperformers were identified — proactive transformers, serial transactors, active investors and holistic transformers.
Proactive transformers outperformed by 13 percentage points (pp) based on total shareholder returns (TSR) compared to reactive transformers which refer to companies with lower TSR relative to the industry from 2016-18. Serial transactors are a subset of proactive transformers which transacted more than their reactive peers by 13% on average in 2018-2021, and even more (by 23%) than their peers during the pandemic-driven economic slowdown in 2021.
Active investors are companies that invest more and this reflects in their outperformance. Outperformers have a consistently higher capital expenditure spending by a margin of 17%, compared to their underperforming peers in the period before and during the economic slowdown. Notably, companies that outperformed the industry in the years following their transformation also consistently had a higher investment rate from reviewing their capital expenditure to sales ratio than their counterparts through the years 2018-20.
Holistic transformers refer to all of the companies studied that undertook transformation on multiple fronts, on average across five areas. Nearly all companies pursued environmental, social and governance initiatives; 83% of companies invested in digitalisation (supported by investments in the right partnerships); and 51% invested in supply chain management.
However, there appears to be underinvestments in other key balance sheet transformation levers, such as cash release through working capital optimisation and financial restructuring.
Meanwhile, the study also highlighted that execution would determine the success of the transformation initiative. There are five imperatives that companies should note when undertaking transformative actions: Align CEO and board; set aspirational targets and incentivise success; set up execution rigor and get commitment from the top; calibrate the journey; build capabilities.
Asked on what should be the focus agenda for companies interested to make a transformation, Ee said it would be dependent upon the direction and long term objectives of the company.
“It really depends on the direction of the company, what the board and the CEO would like to achieve in terms of their long-term objectives, and with that, then comes the more focus and details in terms of what are the specific areas, that could support that agenda. It's not a one size fits all, it really depends on what the direction of the board is,” she told reporters during a hybrid media briefing today.
EY Asean value creation leader Sriram Changali observed that in terms of performance on the market, it is company-driven rather than sector-driven.
“It’s really company-specific, we see companies outperforming in sectors that are struggling and vice versa. We see companies that are struggling in sectors that are (outperforming). It’s really to a large extent, company-driven, especially significant outsized outperformance is really company specific, not sector-driven.”
The study looked at the top 70 listed companies by market capitalisation across seven sectors: advanced manufacturing and mobility, consumer products and retail, energy and utilities, financial services, health care, real estate and technology, media and telecommunications in Southeast Asia and reviewed their performance between 2018 and 2021. Of the 70 companies, 12 were Malaysian companies.
