Category Archives: Insights

Insight about IR – Equity Story

diagram

 

A weak Equity story equals Information discount

In IR Nordic Markets 2014 we saw a strong correlation between a company’s equity story and the information discount. Of companies graded high on equity story (9-10) only 5% have an information discount, while companies with a lower graded equity story to a much higher degree have an information discount. This is what made us look at the Equity story in more detail 2015.

Perceived quality of Nordic Equity stories

Overall the grades on Equity story 2015 improved over 2014, but comments from sell side show that there is still a lot to improve. 1 of 5 companies receive a grade lower than 7, and the same ratio, only 1 of 5 receive top grades.

As the equity story has such a direct impact on the information discount it is crucial that it creates an impelling and clearly understandable and believable picture. In this picture there has to be openness, clarity, trust and education about both the company and the market/sector including the competitive landscape.

Breaking it up in parts

The equity story is complex, detailed and takes time to understand. And before you understand something, how can you believe in it? Details and facts doesn’t’ necessarily clarify the picture, they may just as well make it more complex and difficult. To hopefully get some clarity and deeper insights we decided to break up the Equity story into six concrete parts.

Never underestimate the value of a good story

It goes without saying that all parts are important. The parts make up the complete picture. But same as with all communication, we don’t control what picture the recipient get in his or her head. And without proper context, numbers and facts become obscured as it becomes too difficult to understand how they impact and work together (try putting together an engine without the blueprint).

When asking sell side about importance of the parts Trust is number one, but closely after comes “The story”. It is actually as important as the company’s strategy and more important than finance and value drivers. As much as we all appreciate a good story, it is not that simple. The reality is that the story easily gets clogged and complicated with facts, figures and details that are squeezed into it. The story’s main objective is to be the spine of the Equity story and as such it also needs to be intriguing and believable, and still not get “lost in translation”.

 

When talking to analysts we listened to them say that companies suffered from unclear positioning and therefore unfairly got affected by macro economical situations that shouldn’t be a major issue. Or that the equity stories too often were complicated and tangled which made it difficult to understand synergies and value drivers or even to actually believe in the story. Comments also showed a wish for clarity on where the company was going. Where will the company be in 5-10 years, and how are today’s and tomorrow’s actions contributing to that?

What needs to be strengthened?

IRNM 2015 shows that close to half of the respondents that put a low grade on the equity story want strategy and value drivers to be strengthened, or maybe we should interpret this as clarified?

With the story and positioning coming right after, and in the light of the story being the second most important part of the equity story (previous chart) it might be a situation where the three pieces need to be better molded together. If the strategy presented doesn’t align with the story it becomes confusing and if the value drivers are unclear because of this they might become… less valuable. To shed more light on the equity story we have looked at the analysts’ grades and comments and following hereafter are some insights about the different parts of the equity story:

The story

Much in line with the grades there are many comments about the equity stories being too complicated, and not that easy to understand. It is clear that while there is a lot of attention and clarification about value drivers and strategy, the story itself is possibly at times overlooked. And maybe the general short term focus on quarter end results takes away from seeing the whole picture and a longer perspective. In the end, regardless of what story the company puts out, it will be interpreted and retold over and over and during this process influenced by people, press and many other factors outside the company’s reach and control. The more complicated a story- the easier to misunderstand.

“The story is not too easy to understand, you have to listen to it carefully. Others see this as difficult, but they don’t simplify the story.”

 “Needs to simplify. Too much “management consultant slides”. Needs to be “dummed down”. Must look simpler.”

“Their equity story is very clear but I feel like the market doesn´t feel the same.”

 

Two things stand out from data and comments:

1. The story is not that easy to understand and understanding is a must to create belief.

2. Where is the company going? Too much short term focus which creates uncertainty about the future.

Strategy

In IRNM 2014 almost every comment about CMD had the word “strategy” in it. Explaining, clarifying, renewing, updating and validating the strategy. Strategy seems to be a suitable mantra for top management and typically the company’s strategy is interpreted as the CEO’s strategy even though it naturally is a brew made from many ingredients. Regardless, this brew needs to be clear, concise and credible.

Despite strategy being top of the list, it is striking how many comments that mention an unclear strategy or that a new strategy is needed.

The strategy should leave little or preferably no room for more than one interpretation. And that means having a strategy that is crystal clear in every situation, and in every language it is explained in.  Another area where “lost in translation” could mean great implications as well as costs.

Value drivers

Not too remote from the actual story we see that there is often uncertainty about the business model. Couple this to lack of transparency and there is a lot of uncertainty in what drives the value. When we looked at the CMD in IRNM 2014 we clearly identified “education about the company” as one major reason for a CMD. The companies that got high CMD grades had frequent CMDs and often had different CMD themes to give deeper insight into new areas of the business. This is important to explain and prove how the value drivers work. Understanding what the value drivers are is probably not the problem, rather to understand how they work and create the belief that they will work because of how they work.

When reading through comments about value drivers it is clear that these things complicate understanding the full value of companies’ value drivers.

  1. Not fully understanding or getting enough transparency on the business model.
  2. Not enough detail about the separate business units, such as performance, cost, profit or Capex, Opex etc.
  3. Market/positioning/competition

Positioning

Positioning is a big issue and it is often mentioned in interviews with analysts. Sometimes a company’s positioning, in the minds of the market and its consumers, differs from the company’s own view. In the worst situations we have seen companies where the market considers them evil when in reality they are doing good things.

“They are explaining the pricing of contracts on volume growth but not very much on price growth or price pressure within contracts. Their whole sector need to address this more.”

“Be more coordinated with how the market is in relation to market outlook for their business.”

“Their strategic position is not optimal for current market position.”

“The wider market are less aware how well the product they are delivering is regarded by its customers.”

An unclear positioning may cause macroeconomics to have an erroneous impact on how it affects the share. It is very wise to measure the “market positioning temperature” often, especially if the company has gone through major or many changes in a short period of time.

It might even be difficult for analysts that have been following the company since “the old days” to see and understand today’s company fully.

Trust

We don’t have to explain the importance and necessity of trust. Instead we want to raise the fact that we yearly see comments that most likely are costing the companies a lot because of lowered trust.

There are two major reoccurring subjects:

  1. Availability. Without contact, communication is very hard.
  2. Transparency, willingness to discuss and answer questions.

Despite the company’s (in many cases) internal opinion that top management is very available this remains a split view. In our data we see a very different tone in availability comments if we compare individual meetings or one-on-ones with availability related to AR or QR reporting.

Comments about trust that are a bit harsher mentions management’s need to be better prepared for investor meetings, answering in an avoiding manor and any mention of a “black box” in the business model is not building trust. For most companies, this is not the situation. But for the ones that these type of comments relate to, it is probably very costly.

At this point the importance of correct, and effect of, erroneous guidance is worth mentioning. We yearly see many comments about guidance and how being continuously too optimistic or too conservative both affect the company’s trust. Correct guidance is of course very difficult, but if the company has had a long period of either too optimistic or too conservative guidance, it might be worthwhile evaluating this going forward. An adjustment will most likely have an effect on the market. But thereafter the company might easier avoid to repeatedly disappoint the market.

Finance

It is a difficult area since it varies widely between companies, sectors and countries. And with the ongoing changes in reporting structures, needs will change too.

The things that stand out regarding cost, margins and profit per unit have been mentioned before. Segment reporting, clarity about working capital and aligning to competitors’ reporting structure is seen in comments. The latter is mentioned especially when these are located in other parts of the world. It all relates to openness, transparency and more details, something that often is close to impossible to provide for competitive or other reasons.

The companies’ reporting is very extensive and what will enhance one reports usability might have no improvement effect on the other. From what we can see in the study, other areas will have a greater impact on improving the equity story.

So, how about rebuilding that engine now and then?

In the beginning we made the comparison about building an engine without the blueprint.

The reality is that companies are rebuilding that engine every day in investor and analyst meetings, on their websites, at conferences and during CMDs and basically in every contact with the financial market. Every time the equity story is communicated that engine is being built. So how about making sure that the blueprint is spotless? When we asked the IROs themselves how often their companies equity story is updated or reworked it showed a vast spread in continuity, from every three months up to every five years or more. And the scary part? 18% of the IROs didn’t even know if their equity story got updated often enough.

Now, what effect might that have on share value..?

 

If you want to find out more about your company’s Equity story and see how it compares to others, don’t hesitate to contact us: johan.chasseur@regi.se

Written by Johan Chasseur, Director of Business @ Regi Corporate Services

Insight about IR – Information discount

How fair is fair?

In essence, all financial communication strives to achieve a fair valuation of the share. But how fair is fair really? You could argue that fair is what the market says it is. But what if the market doesn’t know or understand the company and its business well enough? The short answer to that is that the market never will understand it as well as the company would like them to, simply because the market is on the outside.

Today we are continuously force fed the importance of communication. And at the same time communication is overwhelming us in an almost tsunami like fashion. With a steadily growing impact from soft values and demand for transparency and education about macro situations from markets that the company is active in, quick analysis from a multitude of inputs is unavoidable. And identifying what actually has an impact on share value becomes harder and harder. Add a busier schedule than ever, and hard facts are more likely to be suppressed by gut feeling.

 

 

Tracking the information discount

For a few years Regi have been tracking the Information discount among Nordic public companies. We ask sell side if they consider companies they cover to have an information discount, i.e. if the company is undervalued because of lacking information or transparency.

 

 

Over the last two years we can see that close to 1 of 4 companies have an information discount according to sell side. We also ask what impact this discount have on share value, from no impact to very high impact. So what is that impact in numbers? Could it be a few percent, 5 or even 10%?

In 2014 this wasn’t clear as we didn’t get any numbers to clarify, but in 2015 the analysts started to comment with numbers. And the numbers were a lot higher than we had expected.

 

The numbers are in!

In our interviews with sell side we got both numbers and in many cases the reasons behind them, both general and company specific. Percentages started at 10-15% and reached 20-30%, P/E of 12 instead of 13 were mentioned or 20EUR on the share price as examples on the impact. Laying these numbers over a company’s market cap makes a huge difference. It could be debated how “exact” these numbers are and how relevant they are for a certain company, but that is probably the issue itself: These numbers are not exact, because they can’t be measured, only sensed. And still they could have a substantial impact on the valuation.

 

 

The reasons behind an information discount

To find out what contributes to an information discount we condensed hundreds of open comments and categorized them into specific areas. Five areas stood out and gathered the most comments:

 

With 35% of comments relating to clarity about the business structure it is clear that understanding the company and all its result units fully is key. In our in-depth look at CMD we could also see this area as the top reason to be for the CMD.

Guidance is often mentioned in IR Nordic Markets and although it is easier said than done, correct guidance is key. We see as negative comments for too optimistic guidance as we see for too conservative. The effect incorrect guidance has on the company’s trustworthiness is also very clear.

Openness in balance sheet and reports is of course more difficult to accommodate to the requested level since it can also mean giving away too much information in general and/or to competitors or even customers. But openness can be supplemented by being open about other things instead to make the financial market further understand and believe in the company and its business.

 

Where do the grades differ most?

We also looked at which criteria had the largest differences between companies with, and companies without, an information discount. The biggest difference was found in Quarterly report content followed by Continuous information (both areas are focus areas in IRNM 2016), followed by several “personal” criteria relating to CEO and IRO.

 

There is an overall difference in grades between companies with an information discount and those without. Not surprisingly better, more transparent communication does the job. This difference in grades was also obvious when we looked at the Equity story in IRNM 2015. Companies that received a high grade for their Equity story rarely had an Information discount. With a grade lower than 6 (1-10 scale) almost 50% of the companies had an information discount.

 

Some comments from sell side

“About 15% information discount. To reduce the information discount, the company could provide more details about the distribution of the division profitability “

10% information discount. More regular updates. CMD once a year.”

“Ambiguous guidance, information discount possibly more than 20 Euros if they meet this guidance.”

“P/E of 12 instead of 13.”

” Up to 20% information discount. Low evaluation (depends on weak communication and uncertainty in the market.)”

” Strengthen the strategy and stake clearer goals for the future. Where are you going? People see facts you present and draw the wrong conclusions because the facts are complicated and it’s not clear where the company is going.”

 

In conclusion

This area is a difficult one as it is very hard to prove the exact effect of an information discount. What is worrying though is that despite modelling the company and having close and frequent contact, there is such a big part of uncertainty in the picture. But it is understandable as we live in a world that seems to rotate faster and faster. The impact of communication that hits us every day is bigger than ever. And sadly it is growingly based more on opinion than facts. This development makes it very difficult to always be updated, filtering and digesting all the input we receive into concrete truths.

We are simply forced to add more and more gut feeling to stay with the development of things. And that puts even more pressure on companies to be more transparent and educate about all angles of their business, their markets, their sector, their customers and even their competition. But if all these efforts can achieve an ever so small decrease of the Information discount it is worth the effort many times over. Regarding Information discount it is clear that spending a little money to correct it will save (or earn) a lot of money.

 

Want to find out if your company have an Information discount, and how your Equity Story and financial communication rates compared to others?

Don’t hesitate to contact us.

 

Written by Johan Chasseur, Director of Business @ Regi

Mail:johan.chasseur@regi.se

Insight about IR – CEO communication

The CEO – a communicative performer

Of all criteria in IR Nordic Market 2015 CEO – Public Performance got the highest average grade. A strong public performance builds credibility and trustworthiness and therefore have a big impact on the financial markets view of the company.

The analysts appreciate a CEO that is a clear communicator and give answers that the analysts can trust, e.g. who is not being misleading in any way. But what happens when the CEOs communication is not that strong or clear? Over the years we have seen that common complaints about public performance from dissatisfied analysts regards unclear communication, misguidance and low transparency / not answering questions. Sometimes it even raise concerns about the company hiding something. Not a good situation.

The CEO role is crucial for the company also from a communicative viewpoint, and the platforms are many and varied: individual meetings and conferences, phone conferences, breakfast- or lunch meetings, road shows, CMDs, site visits etc. Alongside all these demands for communication and interaction, the business still needs full attention.

So how good are CEOs on average in communicating?

We asked: To what degree do you perceive the CEO as competent and capable during presentations, interviews and other public appearances? A third of the analysts were very satisfied and gave a high grade (9-10) while 47% graded it as good (7-8). 15% indicated that the CEOs communication was not satisfactory (1-6).

 

Not every CEO (or person in general) enjoy the center stage. It is therefore important to find and develop the platforms that feel most comfortable for the CEO. If the big stage is not where the CEO comes across best, focus on breakfast meetings etc. If the phone conferences feel limiting, keep it short and supplement it with separate phone time slots afterwards or possible physical meetings.

While technology makes it possible to communicate long distance it narrows the experience of the communication simply because people are not in the same room. The trust and interaction a personal meeting accomplishes is very hard to create in other ways. Offering generous access to top management in conjunction with the CMD is both time effective and very appreciated as we saw in the CMD focus area in IRNM 2014.

 

 

 

 

Adjusting the communication channels to better suit the CEO’s communication style can be a very successful way forward, and it is important to succeed in this area. This is why:

Good communication builds trust.

When we looked at the importance of communication and public performance to build trust the picture was clear. As shown in the chart there is a strong correlation between the CEO’s communication, public performance and the trustworthiness. Same as with all communication it is not only what is being said, but how and when that affects how the message is received and interpreted. A strong communicator that delivers bad news in an honest and open way will most likely lessen the negative impact and help the company regain trust in a difficult situation.

The CEO owns the strategy.

When we looked at the Equity Story comments in IR Nordic Markets 2015 it was clear that for the financial markets the company’s strategy equals the CEO’s strategy. For the analysts there is little doubt who owns the strategy so whenever a new CEO starts there is a strong uncertainty which direction the company might be taking. So if the communication from the owner of the company’s strategy is not clear, the company’s strategy might be unclear.

Having the CEO talk about strategy and the bigger picture while CFO or IRO talk more details is also a way to add to the interaction. When we looked at the Equity story in IRNM 2015 it was clear that the actual story easily got overshadowed by details even though the story is so important for both sell- and buy side.  As one analyst comment:

“The story is not too easy to understand, you have to listen to it carefully. Others see this as difficult, but they don’t simplify the story.”

Letting people with “license to talk” focus more on what lies closest to their heart will make communication more passionate. And therefore more believable to the listener. Just make sure someone else supplements the picture with their parts, (preferably just as passionately).

As in all communication between people, what the company say and what the market hear and understand is not identical. Everybody’s own expectations and view of the information will distort the message. And the sender never “owns” the message after it has been communicated.

As one analyst puts it: “Their equity story is very clear but I feel like the market doesn´t feel the same.” So clear, concise and easy to understand (and difficult to misinterpret) information is key.

But that is of course easier said than … said.

If you want to find out more about your company’s financial communication and see how it compares to others, don’t hesitate to contact us:
johan.chasseur@regi.se

Written by Johan Chasseur, Director of Business @ Regi Corporate Services

 

Insight about IR – Reason to be for the Capital Markets Day

Reason to be for the Capital Markets Day

 

Every year Regi performs IR Nordic Markets, the Nordics largest sell side study about IR communication from Nordic listed companies. The analysts that evaluate and give their feedback are based anywhere in the world but with a lion share in the Nordics and the UK.

 

In 2014, one of the focus areas was the capital markets day (CMD). From many companies we met we got questions and concerns regarding the relevance of the CMD. Is it really necessary? Does it have to be yearly? How often is ok? Where and when is a good place and time in the year to hold it? What is expected? What are best practices (if there are any).

The evaluations and comments from almost 1500 sell side analysts that participated in the study and a large number of investors clearly showed how the companies should plan and conduct this strategically valuable event and have a lot to gain from doing it right.

 

Why a CMD?

First of all, is a CMD really necessary? To find out we needed to understand what the main areas of importance are for a CMD in general. We looked at open comments for 160 Nordic companies and it boiled down two main areas:

 

1. Education about the company

Top of the list is increased understanding of the company’s business, and on a deeper level. Often the respondents’ wanted to know more about the companies markets and market conditions. It could relate to macro-economic factors, competition, price pressure, positioning or simply to understand daily business on a deeper level.  Listening with divisional managers, heads of R&D or other second line managers was much appreciated especially when these were very enthusiastic about their part of the business. But as these persons not normally are licensed to speak, preparation and coaching are key factors.  To make sure expectations are met it can be wise to ask what people would like to see on the agenda (which also identifies possible question areas to prepare top management for).

 

2. Access to top management

This is the second most important topic. For many sell side analysts the CMD is the only time of the year that they meet top management and get one-on-ones. In general, access to top management has decreased steadily over 5 years, and there is no sign of this trend reversing.

With this in mind it is important that the company remembers that performance and impression made at the CMD, and access provided, will have a bearing on the analysts’ valuations throughout the year. This alone might be a reason enough to hold a CMD.

This is further confirmed by Regi’s data which clearly showed that companies that scored high on the CMD also got higher grades on top management trustworthiness.

When and where?

So, if there are enough reasons to have a CMD, how often should it be held?

The data showed that bad frequency was the main reason for low grades, followed by content. In the comments we saw that a yearly CMD is not necessary, 18 months in between is fine, but with more time in between, 2-3 years or longer, the grades start decreasing, effecting both the comments and overall evaluation negatively.

But when there has been new development, a new strategy, acquisitions, divestments, top management changes or other major changes (good or bad) in the company, it is very wise to hold a CMD and to shape the agenda around these issues.

This brings us to location. The CMD should be convenient for people to travel to, and if the location needs travelling to it better be worthwhile for the attendants.

As one analyst comments: “They had CMD in New York. It was a 3 hour CMD + social activities. Too costly in time and little value and news.”

Combining the CMD with a site visit is much appreciated as it both gives a deeper understanding of the business and gives an opportunity to interact with local managers and get a “feel for the company culture”. Putting the CMD in a certain location also makes a statement that the company is making itself more available to investors and analysts in that market.

 

It’s really about the equity story

In IR Nordic Markets 2014, the major focus area was information discount and a strong correlation to the companies’ equity story was clear. When looking at a possible correlation between the CMD and the equity story it was also clear that analysts that were satisfied with the CMD gave the company a much higher grade on the equity story than for companies with a lesser graded CMD or no CMD at all. As a common thread through all the comments, a need to be educated and understand the company on a deeper level is noted, and so is understanding value drivers and cash flows, market positioning, sector or market competition. Couple that with the access and trustworthiness of top management and financial statements and you have the equity story. So what the CMD actually boils down to is to live and breathe the equity story right there and then.

Summing up & Best practice

Adding to all of the above we can in general see that companies that hold frequent CMDs and address topics that are top of mind of the analysts receive high grades. In the cases where the CMD is more a “check the box” comments are very negative and harsh. And to be honest, probably a huge waste of money for the company.

 

Companies that score high might have themes for their CMD to put focus on new areas of their business. Any news are sent out in advance so attendees don’t have to monitor market reactions during the CMD and can be prepared themselves with relevant questions regarding any news.

Without major surprises for the attendees there will also be less surprising questions for top management.

Also, adjusting the length of the CMD to suit the agenda is better than adjusting the agenda to fill a full day. And most important of all: provide well thought out access to top management, it is probably the best investment (in top management time) that the company will do during the year.

 

A short checklist

  • Understanding the company: How does the development relate to the strategy
  • Access to Top management – For many attendees this will be their impression for the whole year
  • News in advance- answers at the CMD. People must not have more questions after than before the CMD.
  • Focus on specific areas/new developments
  • Adjust the length. If 4 hours is enough… 4 hours is enough.
  • Will the CMD clarify, amplify and verify the company’s equity story? And is it current?
  • Follow up. Don’t leave valuable insights out there, they will improve your next CMD.

 

Read more here (Swedish): http://www.vafinans.se/aktier/nyheter/Hur-maximerar-man-foeretagets-kapitalmarknadsdag-1000947430

Johan Chasseur is Director of Business at Regi Research & Strategy in Stockholm. Since 1997 Regi annually performs IR Nordic Markets, the largest sell side perception study in the Nordics which every year collects data for 160 Nordic companies. Read more about Regi here.