top of page
Western Arthur Range Tasmania.jpeg

Protect. Then Grow.

Why it pays to read the Account Notes

“As the man once said the harder you work, the luckier you get”

- Ted Lasso

Warren Buffet was once asked how he became so successful in investing and his response was “we read hundreds and hundreds of annual reports every year”. Despite the Oracle being the most emulated investor of our time, for a host of reasons we are certain the accounts aren’t as widely read as they should be.

As part of our ESG focus, we analyse remuneration reports of research library companies and compare them to that of their peers. From this exercise, we have stumbled across plenty of useful insights. The "rem" report is a well-understood area of insight. We have written in the past about information content that can be gleaned from insider transactions in Why it pays to follow the insiders.

In the lead up to the FY2022 reporting season, we look at information content that can be gleaned from the account notes, particularly a less well-understood area of insight, the impairment testing note.

Prior to my time in funds management, I spent four (long) years as an auditor at KPMG (2006 to 2009). In this role, I was a first-hand witness to the endless hours invested in preparing, reviewing, auditing, correcting, editing and submitting financial reports. Given that time was headlined by the GFC, there was increased audit focus on analysing a company’s cash flows and balance sheet, including testing intangibles for impairment in accordance with Australian Accounting Standard 136(1). “An entity shall assess at each reporting date whether there is any indication that an asset may be impaired and test goodwill acquired in a business combination for impairment annually…”

In most cases, the above exercise was performed considering value in use, determined via discounting future cash flows based "on the most recent financial budgets/forecasts approved by management and (which) cover a maximum period of five years…” Hence in some cases in the annual report, for companies with goodwill we can infer the internal budgets of an organisation for up to five years.

Below are some examples of annual report notes that provide this information.


Starting the examples with diversified services company Downer, we found the information contained within its FY2021 accounts quite informative as it provided a three-year compound annual growth rate (CAGR) for EBIT of Cash Generating units (CGUs) that comprise the key segments.

Source: Excerpt DOW FY2021 accounts (Note C7 of page 93)

In August 2021, this information was particularly useful given DOW didn’t provide any formal quantitative guidance for the market and the accounts were complicated by the transition to an Urban Services business and hence included: 'Core' and 'Non-Core' operations, businesses in wind down, businesses to be sold and acquired amortisation.

Below we have extrapolated these projections out to FY2024 and sampled three (sell-side) analyst reports from August 2021 to contrast internal views at the time to those of the market. Notably, these projections are likely to have changed materially since then due to 10 months of challenging performance and deteriorating labour markets, but we feel it provides some interesting comparisons, nonetheless.

Source: Chester Asset Management, Various anonymous sell-side reports, DOW FY2021 annual account information.

For the three key divisions we make the following observations:


  • Analyst C’s projection was almost identical to that computed from our analysis however analysts A and B were more than 15% higher.

  • The key reason for this is potentially due to recency bias, with the Transport Division beating expectations at the FY2021 results.

  • Fast forward six months and the Transport Division actually increased by 16% in the 1H FY22, but Analysts A and B have updated their projections for the division to $272 million and $295 million.


  • Looking at Transport, we suspected that Analyst C may have been a fellow account note enthusiast. But Analyst C's (and B’s) projections were 9% below the EBIT implied within our analysis.

  • The reason for this is probably also due to the recency bias given the recent declines in the division from the runoff of NBN capital contracts.

  • Fast forward six months and the Utilities Division actually decreased by 27% in the first-half of FY22 due to a deferment of work as a result of COVID and a change in mix away from higher-margin capital projects. Notably, $20 million of FY21 EBITA has been reclassified away from Utilities, which now makes the comparison even more complicated!

  • Including this reclassified ($20 million) of EBITA, Analyst A’s updated projection is around $100 million, Analyst B’s projection is $86 million, and Analyst C’s $87 million.


  • The market was projecting increases in Facilities but not to the extent DOW was internally. This saw the average FY24 projection for Facilities 11% below our implied calculation

  • This could be a function of a few things, including the impacts of COVID, the expected recovery being hard for the market to comprehend, the growth potential of Defence being underappreciated by the market or a range of other factors.

  • Fast forward six months and the Utilities Division actually increased by 7% in the 1H FY22 and Analyst A’s updated projection is around $214 million. Analyst B’s projection is $212 million and Analyst C’s is $198 million.

  • At the half-year, $38.6 million was reclassified towards Facilities (from Utilities and Asset Services).

Ultimately, the internal budgets provide no guarantees of achievement. The first-half performance is a prime example of that, and can be prepared and/or reviewed by a management team and board that are frankly more optimistic than other teams. But we believe it provides a good place to start when making our own projections.

As noted above, we think the near term environment remains challenging for DOW, particularly a labour perspective. This means higher near term earnings risk, but the longer-term view from August 2021, validated by internal budgets remains the achievement of around $500 million of EBITA from a core Urban Services portfolio. The success of these budgets (which may be pushed out by 12 months now) to us supports a share price target of more than $7.

Source: Chester Asset Management, IRESS


In trying to understand and develop projections for QBE recently, we asked ourselves a several questions around the rates of return achievable across operating and investment operations. This included “what is the appropriate long term investment return to assume for their investments portfolio?” This question was somewhat answered by management in the notes to their accounts.

Source: Excerpt from QBE 2021 Accounts, Note 7 Page 140

Projected returns

The key driver of an insurer’s investment returns is obviously interest rates. At 31/12/21 the duration of QBE’s portfolio was 2.1 years with 93.8% of the portfolio in fixed income assets and 6.2% in ‘risk’ assets. QBE are targeting taking risk assets to 15% which theoretically would increase returns of the portfolio, (by ~50bpts). QBE has traditionally earned a margin of ~50-100bpts above government bond rates. At the time the annual report was prepared the US 2 year bond rate was ~1.5% which has since risen to ~2.5%. Hence it reasonable to expect ~3.0-4% investment returns (assuming stable yield) in 2024+ for QBE. But what does 3.43% imply for investment returns? We have addressed that question in the table below and performed an analysis comparing the implied investment return to that of a handful of sell side analysts.

Source: Chester Asset Management, various analyst reports, IRESS There are a couple of points to make about this analysis.

  1. It was completed prior to QBE’s AGM update on 5 May 2022, in which QBE announced a 1Q22 exit total investment return of around 2% (hence we have already started to see the sell-side upgrade projected investment income)

  2. The above analysis assumes that there is no deterioration in combined operating ratio as a result of higher interest rates. For example, it could be argued that given the strong returns on equity available on investment returns, the underwriting margins are competed away

What's the edge or insight on the stock? We believe the market was potentially underappreciating the earnings benefit to QBE from higher rates, and there's a good chance of substantial valuation upside.

Healius (ASX: HLS)

The healthcare firm Healius is not a name I've spent much time deeply analysing and although it probably offers the least variance to market from our analysis, given relatively predictable revenue streams, we still found its FY21 Goodwill (B2) note more informative than most and have presented our analysis of it below.

Source: Excerpt from HLS FY2021 Accounts, Note B2 Page 91

This compared to a sample of analysts at the time:

Source: Chester Asset Management, various analyst reports

We can only see FY2024 as the outer year so have had to presume the revenue growth rate is reasonably consistent over the time period. The reality is probably more nuanced given the decline in PCR (polymerase chain reaction) testing from an elevated FY2021 base. Thinking about this another way, presuming industry growth rates stabilise at around 5% (pre-COVID levels) and discount back FY26 budgeted revenue ($1,627 million), this level implies FY24 budget revenue of $1,475 million, a level still 9% higher than the sample.

Since this release in August 2021, we have seen a half-year result from HLS and started to get greater clarity over the path of PCR testing in Australia to help shape our view of the future. We have probably not captured all the recent downgrades as Medicare data has come through, and HLS updated the market last week. But in late May, Analyst A was projecting FY2024 Pathology revenue of AUD1,466m while analysts B and C had both lowered their projected revenue by a few percent.

At the very least, HLS's Goodwill note will be one worth keeping an eye on in August.

CLEANAWAY (ASX: CWY) The waste management firm Cleanaway is the original of Goodwill notes for us and it probably represents the most detailed of the impairment testing notes we see in the market, providing a wealth of useful information. It should be apparent by now, but we’ll repeat that CWY’s note uses board approved budgets. In CWY’s case, the coming years should provide a better forecast of future earnings than any external parties (including ourselves) can conjure.

Source: Excerpt Cleanaway FY2021 annual report, Note 22, page 85

Analyst comparison - EBITDA

Source: Chester Asset Management, CWY FY2021 Annual report, Various analyst reports As we noted below, we have compared a sample of sell-side analysts in August 2021, following the company's results to the implied EBITDA of divisions. As we note below there are a couple of issues with this:

As we noted below, we have compared a sample of sell-side analysts in August 2021, following the company's results to the implied EBITDA of divisions. As we note below there are a couple of issues with this:

  • It doesn’t include value of the recently acquired Sydney Resources Network (SRN) from Suez, Waste to energy opportunities (presumably not generating earnings in FY24), Container Deposit Schemes (CDS) or other circular economy opportunities. We have adjusted for the first of these, noting SRN delivered net revenue of $193 million and EBITDA of $77 million in CY2020, assuming this level in FY2021, compounded at the same rate as Solid Waste Services

  • Similar to our comment for HLS the visibility on sell-side projections beyond the next 3 years is limited. Hence we assume a consistent level of compounding to compare to FY2024 levels rather than FY2026 levels

Despite these issues, the analysis implies that the sell-side (particularly analyst C) sat below internal CWY projections of earnings for a business that has a history of exceeding budgets. Interestingly now though is that FY24 consensus EBITDA is at AUD741m, reasonably in line with the FY24 EBITDA implied by the above analysis.

Analyst Comparison - Capex

Source: Chester Asset Management, CWY FY2021 Annual report, Various analyst reports

Chester has projected potential revenue for each of the segments in FY2024 including SRN, this is within 3% of FY24 consensus revenue. To segmental revenue, we have applied budgeted capex percentages. We have had to assume a percentage applied to SRN (assumed lower than Solid Waste Services) and an amount dedicated towards Corporate / Other comparable to FY2021 D&A.

The analysis suggests that CWY capex spend is potentially budgeted to be higher than market projections (not even including the added spend on Waste to Energy Projects).

Goodwill Headroom + Net Assets = Implied Internal valuation

Source: Excerpt Cleanaway FY2021 annual report, Note 22, page 87

Source: Chester Asset Management, CWY FY2021 Annual report, IRESS

The above table implies the market cap is at a premium to the value implied by the internal valuation calculation. There are a number of aspects that potentially account for this, including its failure to include the following areas of upside:

  • SRN Assets. The acquisition of these assets was completed on 18 December 2021, but the forecasts above do not include these assets or synergies from these assets.

  • Waste to Energy Opportunities. CWY’s first project in Western Sydney was blocked but they are still considering projects in Sydney, Brisbane, Melbourne (and elsewhere). Waste to Energy will be NPV accretive so likely provides upside to the value assessment above. However, it must be remembered that Waste to Energy earnings will also be used to replace landfill earnings (which have a finite economic life)

  • CDS and other circular economy opportunities. There are additional Container Deposit Scheme or circular economy (recycling opportunities) not included above

  • Some boards/management teams can be more conservative or optimistic than others, CWY may outperform budgets and the valuation could exceed that presented in the notes

As noted above the market potentially underestimates the capital investment required in the business over the next five years. The market is also prepared to pay a higher multiple for the utility-like nature of the assets than that inferred by a discounted cash flow valuation Closing While having insight into a company’s internal forecasts doesn’t guarantee results against those budgets, it is a meaningful reference point for anyone looking to prepare forward projections of a company’s earnings. Hopefully, this note has inspired more people to join us in analysing the accounts in August, for that little bit of extra luck going forward. (1) Or International Accounting Standard 36, (VIEW LINK) DISCLAIMER Past performance is not a reliable indicator of future performance. Positive returns, which the Chester High Conviction Fund (the Fund) is designed to provide, are different regarding risk and investment profile to index returns. This document is for general information purposes only and does not take into account the specific investment objectives, financial situation or particular needs of any specific individual. As such, before acting on any information contained in this document, individuals should consider whether the information is suitable for their needs. This may involve seeking advice from a qualified financial adviser. Copia Investment Partners Ltd (AFSL 229316, ABN 22 092 872 056) (Copia) is the issuer of the Chester High Conviction Fund. A current PDS is available from Copia located at Level 25, 360 Collins Street, Melbourne Vic 3000, by visiting or by calling 1800 442 129 (free call). A person should consider the PDS before deciding whether to acquire or continue to hold an interest in the Fund. Any opinions or recommendations contained in this document are subject to change without notice and Copia is under no obligation to update or keep any information contained in this document current.


bottom of page