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.”
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