A survey of 80 leading investor relations directors from across Europe published by international financial and corporate communications consultancy Citigate Dewe Rogerson pinpoints how companies have changed the way they communicate with investors and the challenges they face in 2009.
More than 40 percent of companies have increased their disclosure over the past year and 28 percent are planning to increase disclosure this year. Responding to investors’ concerns regarding the financial strength of companies and their ability to survive the recession, there was an even more pronounced trend for greater disclosure relating to banking covenants (50 percent of participants either have already or plan to increase disclosure here) and details of current financing (66 percent).
In view of the equity market’s increasing focus on issues more traditionally the concern of fixed income investors and credit analysts, such as downside risk, earnings resilience, debt servicing and financial strength, companies have to be prepared for in-depth questioning on these topics. They also need to consider enhancing their disclosure policy accordingly, to cover such areas as banking covenants and covenant headroom, debt maturity profile and refinancing risk.
Says Michael Berkeley, executive director of CDR and head of its investor relations practice, “With investors and analysts increasingly focused on earnings resilience, debt servicing and capital strength, companies need to shift the focus of their financial communications. In essence, the traditional equity story of growth has given way to one of reassurance on the downside, and traditional equity investor relations has to become closer to debt IR and the Treasury function, with greater disclosure of financing, banking covenants and downside stress testing.”
As a reaction to investors’ lack of confidence nearly a quarter of companies (23 percent) are providing more guidance in terms of future performance. Companies such as Unilever and GlaxoSmithKline may be dropping their financial targets and short-term guidance but only 5 percent of the CDR sample are doing the same. Interestingly this increased guidance focuses not necessarily on specific financial targets, but in providing additional information on the main performance drivers, such as industry trends, to help analysts and investors come to their own conclusions.
This may be because some of the investor relations professionals (26 percent) said that they have seen a decline in the quality of analyst coverage, mainly due to analyst turnover, analysts having to cover more companies and a decrease in the analysts’ level of experience, but also because of the increasing focus on short-term trading rather than long-term fundamentals.
Nearly half of companies have seen the range of analyst estimates for their company’s earnings widen, potentially resulting in greater share price volatility. There was criticism that amidst all the market uncertainty, some analysts were not updating their numbers frequently enough, with the result that their forecasts were rapidly becoming unrealistic. There is a clear need for more accurate and up to date earnings consensus numbers.
CDR director and survey author Catriona Cockburn explains, “The tendency we found towards greater disclosure and companies providing more guidance – despite some recent high profile moves to scrap this for 2009 – is healthy. At the same time the trend of widening analyst earnings estimates, whilst understandable, is not helpful. As a result, it is becoming ever more important to have a thorough understanding of the underlying assumptions behind each analyst’s numbers, and to ensure that analyst consensus estimates out in the market are up to date and drawn up on a consistent basis.”
Although there are signs of improvement in market sentiment, uncertainty remains. The biggest challenges facing investor relations professionals are to ensure investors have sufficient information to put a floor under their downside assumptions whilst ensuring that positive messages are clearly communicated and, more importantly, understood and accepted by the investment community, and to encourage them to recognise the longer term growth potential.