The Global Financial Crisis, from its early roots in 2008, has been a tumultuous period to endure – as the name suggests.
Australian companies have been faced with global contagion that’s influenced our market through European economic bailouts, soaring unemployment rates, and a fall in export sales caused by a high Australian dollar.
Despite Australia having a strong mining and resource sector, therefore weathering the storm better than most of the OECD countries, we haven’t been totally immune. A dollar at parity and above coupled with relatively high interest rates have forced many businesses to contract. Meanwhile, industries such as manufacturing, retail and tourism have been forced to their knees. Both local and international market conditions have led many Australian companies to shelve their investor ambitions.
After every bear market the bulls rear their heads
Many CEOs are worried investors won’t inject money into their company while the world is stuck in what appears to be a sustained bear market period. The same CEOs seem to think it’s better to keep a low profile; playing it safe rather than trying engage with potential investors.
Here’s the thing: the way the market is going, it’s a dangerous tactic to ignore investor relations. I’ll tell you why.
Whilst the road to global economic recovery may still lie ahead, there are a number of positive signs that the market is starting to rally. What’s more, many Australian companies have handled the financial crisis better than we thought they would. Organisations have been forced to tidy up their balance sheet and cut unnecessary costs. Today, they’re positioned for the growth that will occur when real and sustained recovery kicks in.
This is where the investors come into the picture.
Investor sentiment and interest in shares is at the lowest level since the 1990s
The history of financial market performance clearly shows us that those who are smart enough to buy shares when investor sentiment is still negative are the ones most likely to benefit.
The current interest in share market investment is at record low levels not seen since the 1990s. Whilst the majority of us are reluctant to make any real investment decisions during these financially unstable times, professional investors continue to search for companies with the greatest potential for growth in the inevitable recovery ahead.
What we see as an unstable market, they see as an opportunity. So what message does that convey to the CEOs who’ve decided to ignore investor relations during this period? First of all, investor relations should be an on-going process. The market may have slowed down but that doesn’t mean companies should forget about keeping their existing shareholders informed or attracting additional investor interest.
Investor relations in not a science, but it is a necessity
Attracting the interest of investors, analysts and client advisers is vital. Therefore, so too is investor relations.
Even in difficult times, companies need to:
- Stay visible and build relationships
- Be factual in tone and not too quick to make promises
- Focus on the long-term story and balance sheet strength
- Answer concerns of investors
- Coordinate media relations and investor communications
Difficult times or not, for those who are looking to invest it’s important to receive high-level information that can help them to decide whether to delve further. Without this information, client advisers and potential investors will have difficulty understanding the strategic or operational significance of an announcement.
In other words, an investor relations firm can prove a necessity in the establishment and maintenance of the vital relationships circling within the financial community.
Small cap and emerging companies can be big performers in the ‘Recovery Cycle’
In my role as Bourse Communications Managing Director, I’ve worked closely with numerous small cap and emerging companies. Sooner or later in the investment cycle, some of these companies will reach a point where they don’t think they can justify spending money on investor relations.
They don’t realise that many investors never stop looking for the next company to invest in, just as they don’t realise that they need to keep their current shareholders informed on a regular basis. Most importantly, they don’t always recognise the advantages that come from being a small company.
These companies need to remember that a small cap or emerging company is much more likely to double in size if its market cap is $20m or $50 million, than if it’s $1 billion. Whilst a large company with a market share of 50% is likely to be defending its position, a small cap can grow its earnings by increasing its market share from 1% to 5%. Any smart investor knows this and any smart investor will be looking to invest regardless of where they are in the investment cycle.
So what can companies do to attract potential investors?
A small company looking to attract new investors should not just focus on big shareholders. It needs the goodwill and support of small shareholders as well. New shareholders should receive a ‘Welcome Kit’ from the Managing Director when they join a company’s share register and all shareholders should receive regular communications such as quarterly newsletters and company updates.
It’s important for a company that all shareholders are kept informed at all times and the most effective communication is a regular and open platform, whether the news relayed is good or bad.
The investor section on a company’s website is a key focus and should include the latest information. This may include recent company announcements, interviews with the CEO, exposure in the media, or updated analyst reports from a share broking house or fund manager review. Information that’s out of date, infrequently updated or incomplete will alienate existing and potential investors as well as important stakeholders such as brokers, analysts, fund managers, institutions and the business media.
As with all good things, moderation is critical when it comes to investor relations. Communicating too often can actually work against the company. Journalists regularly delete emails before reading them from listed companies that are sending too much information. Similarly, one can’t understate the importance of plain English, whether in written communications or on-camera interviews such as webcast presentations. It’s important for the CEO to speak to the market in a language it understands.
Make your communication count
The aim is to get the company on the radar, boost liquidity in the stock, and ultimately enhance the share price by delivering a consistent clear message to the share market.
By providing information and analysis that helps investors develop a well rounded understanding of the company and its strategies, a company can achieve a fair market valuation for its securities, create a body of investor support and a climate of favourable opinion. The result is a loyal shareholder base that gives the company the ability to approach its capital management exercises with confidence. Ultimately, this will be reflected in the demand for shares.
For those who are still not convinced that investor relations makes a difference, surveys of fund managers and share broking analysts show that good or bad investor relations could affect the valuation of companies. According to the Australasian Investor Relations Association (AIRA), excellent investor relations practices could contribute more than 10% to a valuation premium of Australian listed companies. Meanwhile, poor investor relations could contribute to a valuation discount of 5% or more.
Whether you engage a professional investor relations firm or you choose to go it alone, the benefits shouldn’t be ignored. CEOs may fear investors are either too scared or can’t afford to invest, but professionals don’t just disappear.
Rod North has been working in the financial services industry for 30 years. He is the founder and Managing Director of investor relations and public relations firm Bourse Communications. Mr North is a regular business and investment commentator, being interviewed on numerous radio and TV shows. He is a quarterly contributor to the ASX Investor Newsletter and is also the author of three books, including the bestselling, ‘Understanding the Investment Clock-Your Road to Recovery’.