Guiding investors through tough times

Thursday, January 21, 2010 | Posted by: Alex Walters
Categories:

For the past 18 months, as world economies have slowed and the performance of many AIM quoted companies has been impacted, they have had to decide whether they should “batten down the hatches” in terms of communicating with their investors or continue to have an active promotional campaign and full disclosure.

For most companies, forecasting is difficult at the best of times but when markets are unstable it becomes almost impossible. So the question many managers and investor relations professionals ask is how to manage expectations knowing that investors don’t like surprises or to be kept in the dark.

For the smart companies the well worn phrase “don’t promise more than you can deliver” has always been the adopted attitude to avoid missing earnings targets, and profit downgrades; when these do occur the stock market always braces itself, knowing that downgrades usually come in threes. Paradoxically if the company always exceeds its profit targets, it’s not long before analysts start telling the company it’s become too cautious in its forecasts.

As a way of avoiding this issue, several companies during 2009 stopped giving any kind of earnings forecast at all, leaving investors in limbo at best and arousing widespread suspicion at worst. It is widely understood by investors that when visibility is limited a management team will be cautious – the question is how cautious?

Our experience suggests that telling it “as it is” wins the respect of investors and analysts and develops a sense of trust.  For companies which have been impacted by the downturn, and in the UK this means the majority, we normally find that they have actually performed exceptionally well considering the market environment. Being able to demonstrate this has become a key component of the investor relations programme.

For Indian companies listed on AIM, disclosure of information in a timely, clear and well managed process has never been more important. There are 1,353 companies quoted on AIM, 66% of which are in just four sectors – financials, basic materials, industrials and consumer services, so being silent and not promoting yourself simply means your company gets ignored at best and forgotten at worst.

The programmes we undertake for our Indian AIM clients, which include the Indian Film Company, Mortice Plc, Great Eastern Energy Corporation and Indus Gas have very clear objectives in terms of raising the awareness of the companies and highlighting the fundamental reasons why investors should buy their shares. This, we are constantly reminded by institutions, is almost entirely based on the quality of the management team and how they communicate.

Much of our work therefore is about developing trust between investors, the media and these clients, and helping them to communicate in such a way that it has a direct impact on the value of a company’s shares as well as its future prospects.

In practice this means maintaining a programme of regular meetings with the media and analysts and maintaining an almost transparent level of disclosure particularly as most of these companies are in no way dependent on the UK economy yet their share prices are often entirely affected by UK investor and market sentiment.

As a minimum we arrange meetings with the media and investment analysts twice a year on the publication of full year and half year results. In between we normally suggest publishing trading updates on a quarterly basis.  News flow is a critical component and we are constantly seeking important news stories which demonstrate that the company is making progress, growing and being successful.

Guidance on earnings is a key aspect on investor relations, and although the precision of forecasts varies in an unstable market it is important that some sort of earnings expectations are given to the market so that the performance of the company is benchmarked – otherwise no one would know if a company has done badly or well. Bad news if handled in good time can avoid a panic run on the share price or, at worst, profit warnings.

More than ever therefore,  it is essential that companies take care to set achievable goals, and explain fully well in advance any deviation that may occur as well as having a pro-active programme of meetings and communication activity with shareholders so that they emerge from the downturn ahead of their competitors and stronger.

Alex Walters
Director
Pelham Pr