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.