headline of the ASX 300+ Short description Sectors and themes Six priorities of opportunity and challenge Date 20XX kpmg.com.au

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1 Secrets Short, to success engaging headline of the ASX 300+ Short description Sectors and themes Six priorities of opportunity and challenge Date 20XX kpmg.com.au

2 Introduction Australian small-to-medium enterprises (SMEs), including organisations in the Australian Securities Exchange 300+ (ASX 300+), represent 65% of the Australian economy, and contribute over one-third of Australia s gross domestic product. These dynamic mid-market businesses, with up to $1 billion in annual turnover, also comprise 40% of all Australian business revenue, 25% of all borrowings and deposits, and 25% of all employees. This market segment encompasses countless industries, products and services, making it particularly susceptible to the challenges of today s technology driven and global business environment. However, the complexity faced by the ASX 300+ means it is a strong benchmark for governance and financial trends relevant to the broader Australian business sector, including the ASX top 200. Despite its significance, the deep insights that can be gained from the ASX 300+ are often overlooked, as larger organisations in the ASX attract most of the attention. In this new report, Secrets to success of the ASX 300+, KPMG Enterprise has rectified this lack of investigation conducting a comprehensive analysis of this dynamic market. Drawing on publicly available information and data, we have delved into six key priorities of change boardroom diversity, digital technology investment, acquisition strategy, funding arrangements, shareholder composition, and tenure and remuneration to discover the trends, challenges and opportunities for the ASX 300+ in each. We can see these companies are growing, looking for capital, and undergoing technology transformations as they strive to stay ahead in an ever-changing world. But how can they harness these six priorities to become the ASX 200 of the future? Throughout the report we share our key findings and perspectives on what the ASX 300+ can do to achieve more growth. Tony Batsakis Partner KPMG Enterprise Sarah Cain Director KPMG Enterprise

3 Methodology KPMG Enterprise analysed publicly available information and data on companies in the ASX 300+, aggregated it and derived a number of key insights about the opportunities and challenges that these entities face, and the priorities they have made to drive success. We define the ASX 300+ as the ASX companies by market capitalisation in June 2016 from 300 to We excluded companies that listed on the ASX in 2016 and companies that delisted from the ASX in Outliers in individual data sets that skewed the results were also excluded. "This unique review of the sector provides an insightful analysis and provides an accurate picture of how the mid-market sector is currently performing and contributing to the Australian economy.

4 2 Secrets to success of the ASX 300+ The ASX 300+ in numbers ASX 300+ Population by State NSW WA VIC NT SA TAS ACT Foreign QLD ASX 300+ Population by Industry Discretionary Staples Energy ETF/Fund Financials Information Technology Materials Telecommunications Services Utilities Heath Care Industrials

5 Secrets to success of the ASX Revenue growth ASX 300+ companies grew revenue at 0.7% in Many of the entities with strong revenue growth were listed in 2015, a period with significant IPO activity. In 2015 there were 72 companies in the ASX 300+ who listed on the ASX roughly 10% of the population. Strongest revenue growth was in QLD (10%) and NSW (7%) other states were either stable or declining. Overall 0.7% Telecommunications Services 33% Discretionary 17% Information technology 24% Financials 11% Health care 26% Staples 6% Utilities 18% Funds -42% Energy -15% Mining -12% Industrials -10% Employee costs There was a 2.5% increase overall in employee costs across the ASX 300+ from $12.2 billion to $12.5 billion. This is a key metric for job growth and creation. Largest employee costs in the following industries: Employee costs by state: Mining $1.9 bn Discretionary $2.5 bn Industrials $4.2 bn NT $135,768,000 QLD WA $1,649,950,252 $2,348,926,133 SA $93,220,933 NSW $3,420,288,672 ACT $18,271,000 VIC $3,249,690,180 Foreign $1,430,434,410 TAS $162,841,000

6 4 Secrets to success of the ASX 300+ Profitability ASX 300+ companies overall are delivering significant losses in overall financial results of $6.1 billion in 2016 (increased from $5.4 billion in 2015). Telecommunications Services 86% Mining 37% Industrials 31% This is being driven by impairment charges and restructuring expenses in the Mining, Discretionary and Energy sectors. Overall -13% Discretionary -1925% Energy -104% Staples -95% Funds -83% The 10 companies with the highest losses account for 61% of the total current year loss, incurring $3.7 billion in losses. These were primarily driven by: Health care -57% Information technology -47% Utilities -19% Financials -15% Impairment of mining assets Impairment of intangible assets Restructuring provisions. Profitability is volatile in this group of companies with percentage change in profits shown here. Tax Overall the ASX 300+ companies paid $1.1 billion in tax (decreased from 2015 of $1.4 billion tax paid). Foreign entities listed on the ASX in the ASX 300+ paid $235 million in tax in 2016, significantly higher than many other Australian industry groups. Mining $332 mn Financials/ Banking $302 mn Industrials $146 mn Top tax paying industries:

7 Secrets to success of the ASX Cash Cash holdings of $15.9 billion amongst the ASX 300+ (increased 8.3% from $14.7 billion in 2015). Financials/ Banking $4.5 bn Energy $2.1 bn discretionary $1.4 bn Highest cash holdings in: Mining $3.4 bn Debt Total debt levels of $41 billion across the ASX 300+, predominantly held in Financials / Banking and Mining sectors. Funds 84% Discretionary 27% Financials 19% Health care 12% Debt levels increased 8.7% since prior year. The top 10 borrowing entities account for 70% of ASX 300+ debt these are primarily Mining and Financial / Banking companies. Top 10 companies with debt have a 50:50 split on current debt versus non-current debt. Overall 8.7% Mining 7% Staples -6% Telecommunications Services -24% Information technology -5% Energy -21% Utilities -5% Industrials -15%

8 6 Secrets to success of the ASX 300+ Priority 1 Diversity "Businesses with women on their Boards are achieving better financial performance and shareholder returns. Key findings Gender diversity is a key topic of interest for organisations of all sizes in Australia, and is often debated in the media and public forums. However, rhetoric does not appear to be translating to action for the ASX 300+, with our research showing an average of just 9% of female directors on Boards. This pales compared to the 23% average in the ASX 200, which many argue is still far from enough. Just 21 companies in the ASX 300+ (3%) have a female Chief Executive Officer (CEO). But the financial benefits of gender diversity have shown through. Our research indicates that companies with females on their Boards have grown their revenue at a higher rate than those without, where companies with female CEOs in the group delivered a 9% increase in revenue in 2016, compared to the remaining group-wide average of 0.5%. The overall profitability of ASX 300+ companies and returns to shareholders (measured by earnings per share) are also higher at companies that have a diverse Board, yet 65% of ASX 300+ companies don t have a single female on their Board. Opportunities and challenges Gender diversity (and also diversity of age, culture, experience and other factors) can help fuel more robust and innovative discussion at the Board table. This can lead to stronger governance, improved critical decision making and a more robust organisational culture. In today s fast-moving, digital and disruptive world, a diverse Board can also help facilitate a nimble approach by being ready to adapt to change and embrace innovation. It can help an organisation to retain a broad array of talent, assist in establishing ongoing relevance, and a sound reputation. To seize this potential, ASX 300+ organisations need to ensure their Boards represent greater diversity. The Australian Institute of Company Directors (AICD) is calling for all Boards in the ASX 200 to ensure that 30% of their directors are female by This figure could be harder for ASX 300+ organisations to reach, however they can take steps to implement measurable objectives for performance against a diversity policy, including measuring and reporting on the number of females on the Board and in senior management roles. 1 The Australian Institute of Company Directors (AICD, press release dated 09 April, 2015)

9 Secrets to success of the ASX Currently there is a small talent pool of female directors with pre-existing experience as a director or executive, which presents a challenge in sourcing, attracting and retaining talent at the director and Board level. Companies need to identify the people who could support their strategy and culture with fresh and relevant experience, then help them to prepare for these senior positions. They need to nurture that talent to help fulfill their strategic aims. % of female directors on ASX300+ vs. ASX200 9% 23.4% ASX 300+ ASX 200 % Female Directors by Industry 16% 14% 12% 10% 08% 06% 04% 02% 0% Discretionary Staples Energy ETF / Fund Financial Health care Industrials Information Technology Materials Telecommunication Services Utilities

10 8 Secrets to success of the ASX 300+ Priority 2 Digital technology investment "Being able to access new horizons through technology is a fantastic opportunity for the mid-market sector and is no doubt on their strategic agenda. Key findings ASX 300+ companies are undergoing significant digital transformations. In particular, consumer-oriented businesses are investing heavily in software, websites, apps and omni-channel technology to capture customer attention and a greater share of market spend. In fact, the ASX 300+ investment in intangible assets, including software and new technology, increased by 18% to $420 million in Businesses that invested in these assets grew revenue at a faster rate than those who did not (4% growth compared to a -2% decline). Cloud based IT services have been a key focus, allowing the mid-market to jettison legacy technology and leapfrog the competition, all the while building cost effective, agile mechanisms into their businesses. The ASX 300+ are also enjoying the access that digital technology is giving them to new to domestic and foreign markets, and they are embracing data and analytics capabilities to provide insights for key decision making. Opportunities and challenges Investing in technology solutions is enabling the ASX 300+ to be more effective and efficient in the delivery of their chosen product or service, and in turn is improving revenue. There is opportunity for other ASX 300+ organisations to join this trajectory. They must review their existing technology platforms and operations, and embrace new ways of connecting with customers. There is potential to utilise more cloud-based solutions to gain the latest digital efficiencies, while effectively keeping upgrade costs in check. Of course, there are challenges with all digital transformations. For the mid-market, these include the cost and complexity of updating legacy technology systems, overhauling processes and retraining people. Another challenge with technology is that while it has made it easier to access foreign markets and new customers, companies need to be aware of the additional regulatory obligations and jurisdictional

11 Secrets to success of the ASX guidelines that this entails. These obstacles can be navigated, but breaching regulatory requirements can lead to repercussions at home and abroad. Technology investment can be expensive. For mid-market companies seeking to IPO, they must evaluate how they are perceived in terms of financial returns and value, identify the right technology to invest in, and have a sustainable funding strategy in place before they list. 90% of the data in the world today has been created in the last 2 years. Data volume is expected to grow 40% per year and 50 times by Intangible investment by industry 2016 vs Discretionary Staples Energy Financial Millions Health care Industrials Information Technology Materials Telecommunication Services Utilities

12 10 Secrets to success of the ASX 300+ Priority 3 Acquisitions "We can see a direct correlation that shows that when you acquire, you drive growth. The key to success is to ensure that short-term costs of acquisitions are offset by synergies and efficiencies. Key findings Acquisitions are a key method of driving growth, achieving cost efficiencies and synergies for the mid-market. In 2016, 119 entities in the ASX 300+ completed an acquisition. Unsurprisingly, the Financial, Information Technology and Discretionary industries are the largest hubs for acquisitions activity. Entities that completed an acquisition saw an 11% boost in revenue overall for the year, compared to a backward trend of 2% for companies that didn t. However, those entities that completed an acquisition also saw a decline in profits post acquisition. Our investigations found that acquisitions by mid-cap listed entities are fuelling revenue growth, but are not translating into profitability increases in the short term, in part due to transaction costs incurred. It appears that early synergies, typically expected from an acquisition, are being lost in the transition period. Opportunities and challenges Well-executed acquisitions have the potential to drive revenue increases, improve long term profitability and shareholder returns. For ASX 300+ companies looking to acquire for growth, they must have a strategic focus, carefully consider the right acquisition targets, and undertake due diligence to understand the potential synergies, advantages and risks. They should be searching not only the local market, but also internationally. Navigating an expansion into a foreign jurisdiction can be complex, but can often be the next major step to growth. While much focus is placed on the acquisition stage, sustaining synergies after the acquisition is where companies appear to be struggling. Work must be done to align organisations in terms of strategy, finances, operations and culture, long after the deal is signed. The effort to drive acquisition growth will be vindicated, with the data showing organisations that expanded through acquisitions are outperforming their competitors across several metrics.

13 Secrets to success of the ASX # Companies with Acquisitions by Industry Discretionary Staples Energy Financial Health care Industrials Information Technology Materials Telecommunication Services Utilities

14 12 Secrets to success of the ASX 300+ Priority 4 Working capital, cash flow, debt and equity "15% of directors have had to say to their shareholders and investors we have a problem. Key findings Effective working capital management and appropriate leveraging of debt is the key to successful growth for many ASX 300+ companies. Those who effectively managed their working capital outperformed their competitors in 2016 in both top line revenue and profitability growth. In fact, those with strong working capital positions grew top line revenue at 2%, compared to a general backward trend of 4% amongst remaining companies. The level of debt for these companies has grown year-on-year from $37 billion in 2015 to $41 billion in 2016 which is expected given the current low cost of debt in Australia and internationally. Some companies are using this to their advantage, particularly to execute acquisition strategies. However, our research found that 15% of the ASX 300+ is showing some signs of financial distress in their working capital positions. This is most prevalent in Mining and Information Technology, where there were multiple indicators of distress including losses and working capital deficiencies. Opportunities and challenges A strong working capital position allows businesses to invest and grow. The ASX 300+ businesses with access to a range of funding, an appropriate level of debt and working capital are better demonstrating better performance. Conversely, when they are constrained by a working capital deficiency, and are unable to meet obligations to creditors and suppliers, it can be almost impossible to achieve growth. Therefore, ASX 300+ organisations that wish to pursue growth can look to current low interest rates to seek alternative sources of funding and leverage debt. They need to determine the optimal mix of short and long-term funding to achieve their strategy. Boards of these businesses remain challenged in determining the right level of funding, as well as determining and adjusting their risk appetite for growth and associated levels of funding, including the right mix of debt and equity. They must ensure their debt strategy matches the financial position of the business. They should focus on making growth-orientated investments and expenditures, while not becoming caught by a working capital shortfall.

15 Secrets to success of the ASX Aggregate Debt by Industry 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Discretionary Staples Energy ETF / Fund Millions Financial Health care Industrials Information Technology Materials Telecommunication Services Utilities Current year Prior year ASX 300+ Companies in potential financial distress working capital deficient 15% Financial distress indicator No indicators

16 14 Secrets to success of the ASX 300+ Priority 5 Dominant shareholders and founders "There is an opportunity to learn from the dominantly owned companies and understand why they perform better and operate more effectively. Key findings ASX 300+ companies with a dominant shareholder (an individual shareholder who owns greater than 50% of the public equity) grew top line revenue at a total of 6%, compared with no growth on average for dispersedly held companies. Whilst companies with a dominant shareholder are publicly listed and owned, due to the nature of their shareholder composition they are effectively able to operate as private businesses in their operating and governance structures. There are 49 companies in the ASX 300+ with a dominant shareholder, including seven companies who completed an IPO in Our research found that both dominantly held companies, as well as more diversely owned entities, incurred net losses for 2016 overall, however, those with a dominant shareholder were better able to reduce their losses in 2016 compared to the previous year. The companies with dominant shareholders generally fall into two groups. The first is dominant shareholder companies that have been listed for many years. Dominant shareholder entities listed between the 1970s and 1990s are primarily in Materials, Industrial and Discretionary sectors. The second group are the newer listings, which are predominantly in Industrials, Healthcare and Information Technology. They typically comprised investors looking to exit or divest their investments following an IPO, or private equity companies that continued to own a majority of their equity. Opportunities and challenges A key reason for the success of dominant shareholder companies is that they can be more nimble and able to make quick, effective decisions to improve business performance. Since the dominant shareholders are often invested heavily in both a financial and emotional sense, they can view their decisions through the lens of spending their own money. A core challenge for these businesses is that they can be driven by the perspective of a single decision maker, without regard for the opinions of other investors and stakeholders. Where there is a dominant shareholder, the company needs to ensure that the decisions are made in line with the key strategic objectives of the business. Dominant shareholder organisations must plan ahead with clear succession strategies, to consolidate the future of the business beyond the eventual

17 Secrets to success of the ASX exit of the dominant shareholder. Likewise, family business owners of public companies need to consider the transition, future strategic direction and the ideal operating structure for the organisation. For companies with a dominant shareholder looking to list via an IPO, consideration of the composition of the shareholders model post IPO is important, as the type and concentration of ownership has an impact on the longer-term performance of the business. No. of Companies with a Dominant Shareholder by Industry Discretionary Staples Energy Financial Health care Industrials Information Technology Materials Telecommunication Services

18 16 Secrets to success of the ASX 300+ Priority 6 Tenure and remuneration "The key is picking the right person who can implement a longterm strategy and has the capability to help the business in not only year one, but year five and 10. Key findings Our research into tenure and remuneration trends in the ASX 300+ found that companies with a chairperson of more than 10 years tenure delivered significantly better financial performance in terms of revenue growth (7%) compared to the rest of the group. It is possible that these long-standing chairpersons are business owners in tightly held companies acting like private companies in the ASX environment, with advantages akin to the dominant shareholder groups. In contrast to the long tenure, there were a number of companies 163 with chairpersons who had been at the helm for 2 years or less. This demonstrates the fluidity of the sector, the fact there are newly listed entities following IPOs, and that emerging industries such as Technology and Healthcare are filtering into the ASX Our research indicates that Directors Remuneration is widely dispersed across the ASX 300+ from Directors receiving nil-to-minimal compensation of $10,000, up to those receiving multimillion dollar remuneration packages, including share-based payment arrangements. Many companies are utilising share-based remuneration structures for Directors and senior executives in a bid to align shareholder values and aspirations with those of the leadership and executive team. Opportunities and challenges The growth seen by organisations with long-serving chairpersons may stem from the chairperson s experience, history with the business, awareness of the strategy and where the company needs to go. There is a lesson for organisations to find a chairperson with a focus on longevity, who can deliver not only short-term goals, but grow the business over a long timeframe. A key challenge for businesses with a long-serving chairperson is the risk of becoming stale through a lack of diversity of thought and opinions. As discussed the in topic of Diversity, different opinions and backgrounds at a director and executive level are critical to sustaining long-term success.

19 Secrets to success of the ASX Remuneration approaches should also be reviewed in alignment with tenure. Inputs to remuneration in terms of the mix of cash, shares and bonuses will ensure alignment of strategic objectives and goals at both the Board and executive level. Range of remuneration for Directors from nil to $5,000,000+

20 18 Secrets to success of the ASX 300+ Harnessing the priorities KPMG Enterprise s analysis of ASX 300+ companies in the mid-market sector delved into six key priorities of challenge and opportunity boardroom diversity, digital technology investment, acquisition strategy, funding arrangements, shareholder composition, and tenure and remuneration showing how the ASX 300+ are faring and where potential exists to take the next steps. This report shows mid-market companies with boardroom diversity, a dominant shareholder, or a long-serving chairperson are outperforming the market average. A diverse Board offers companies a strategic advantage thanks to a suite of knowledge, experience and perspectives. A dominant shareholder and/or long-serving chairperson can offer organisations the ability to make quick and effective decisions. ASX 300+ enterprises looking to grow their businesses through investing in digital technology or acquisitions are outperforming their competitors. However, the need to fund those investments with well-conceived financial strategies is underlined by the performance of companies with effective working capital management. Those without a strong working capital and debt leveraging strategy can find themselves in financial difficulty. There are lessons to be learned not only for companies within this dynamic sector, but for other areas of the ASX who can use this engine room as a benchmark to shift their own priorities for greater success.

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22 Contact us Tony Batsakis Partner, KPMG Enterprise T: E: tbatsakis@kpmg.com.au Sarah Cain Director, KPMG Enterprise T: E: scain@kpmg.com.au kpmg.com.au Company information all data and financial information was taken from the publicly available Annual Financial Reports of the 700 companies these are available on by searching the entity and downloading the report. There were no other sources of information for the financial data. For most companies the information was from their 30 June 2016 Annual Financial Report, however a number of companies have different year ends and we have used the latest information for each company. The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise) KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. March VICN15281ENT.