Many business owners are worried investors don’t want to inject money into their company while the world remains in a sustained bear market period. The same CEOs seem to think it’s better to keep a low profile rather than actually try to engage with potential investors. Well, one expert says this is a dangerous tactic. Here’s why.
The Global Financial Crisis experience from its early roots in 2008 has been a tumultuous period to endure in financial markets unlike any other period witnessed since the Great Depression. Australian companies have been faced with a barrage of global activity and contagion that has influenced our market through the effects of the European economic bailouts, soaring unemployment rates around the world and a fall in export sales caused by a high Australian dollar.
Despite Australia having a strong mining and resource sector and therefore weathering the storm better than most of the OECD countries we have not been totally immune. A dollar at parity and above coupled with relatively high interest rates have forced many businesses to contract and threatened industries with extinction in manufacturing, retail and tourism by forcing them to their knees. These local and international market conditions have convinced many Australian companies that they should put their investor relations ambitions on hold.
After every bear market in history the good times eventually return and the bulls rear their heads
Many CEOs are worried that investors don’t want to inject money into their company as long as the world is stuck in what appears to be a sustained bear market period. The same CEOs seem to think it is better to keep a low profile and play it safe rather than actually try to interact and engage with potential investors. Well, here’s the thing; the way the market is going, it is a dangerous tactic to ignore investor relations and I’ll tell you why.
Whilst the road to global economic recovery might still lie ahead of us, there are a number of positive signs that the market is starting to recover and that many Australian companies, especially small-caps have actually handled the financial crisis better than most of us thought they would. This could be because small companies in particular provide diversification from how the economy performs and their earnings growth is based more on increasing their market share, than on how the general economy performs. Companies have been forced to tidy up their balance sheet and cut unnecessary costs and be positioned ready for the growth that will inevitably be ahead of us when the real and sustained recovery kicks in. Nonetheless, the fact that they’ve come out on the other side in one piece and relatively unharmed means that they’re now well-positioned to capture any future growth and 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 from taking the investment plunge now.
The interest in share market investment at the moment is at record low levels not seen since the 1990s. Many professional investors know this and whilst the majority of us are reluctant to make any real investment decisions during these financially unstable times, they 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 to make money when the market finally turns around. So what message does that convey to the CEOs who have decided to ignore investor relations during this period? First of all, investor relations should always 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 look to attract additional investor interest.
Investor relations in not a science but an essential necessity
Attracting the interest of investors, analysts and client advisers and persuading them that they should find out more, is vital and that is where investor relations can help your company.
Even in difficult times, companies will want 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, and coordinate media relations and investor communications. Difficult times or not, for those investors who are looking to invest, it’s important to receive high-level information that can help them to decide whether to delve further and, perhaps, buy shares or recommend investment. 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 to be an essential 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’ of the share market
In my role as the Managing Director of Bourse Communications, I have worked closely with numerous small-cap and emerging companies for the past decade. 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 $20 million or $50 million, than if it is $1 billion. Whilst a large company with a market share of 50 per cent is likely to be defending its position, a small-cap can grow its earnings by increasing its market share from 1 per cent to 5 per cent. Any smart investor knows this and any smart investor will be looking to invest regardless of where we 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 as the larger ones. 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 is 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 being relayed is good or bad.
The investor section on a company’s website is a key focus and should include the latest information about the company. This might include recent company announcements, interviews of the CEO, exposure in the media or a recent or updated analyst report from a share broking house or fund manager review. Information that is 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 in 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 out when it could have been included in a company update or is required to be released from a continuous disclosure point of view. One cannot understate the importance of plain English, whether in written communications or on-camera interviews such as webcast presentations. It is important for the CEO to communicate to the market in a language it understands.
Make you message and communication really count
The aim is to get the company onto the radar screens, 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 which helps investors develop a well rounded understanding of the company and its strategies, a company can help achieve a fair market valuation for its securities, create a body of investor support and a climate of favorable opinion. The result is a loyal shareholder base which gives the company the ability to approach its capital management exercises with confidence. Ultimately, this will be reflected in the demand for the company’s shares and the ultimate price of those 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 percent to a valuation premium of Australian listed companies whilst poor investor relations could contribute to a maximum valuation discount of 5 percent or more
I believe that meaningful quality investor relations strategies can clearly influence the market’s understanding and P/E of a company and I don’t seem to be the only one holding that view. We have experienced some excellent results with some companies over the past 12 months that have engaged in an active investor relations strategy and have been rewarded with a much higher share price as a result. In one case, this meant a 150 percent return over a 12 month period. Another survey of ASX listed companies released last year by AIRA showed that these companies were likely to spend more time and money in 2011 on communicating with investors compared with 2010. Despite financial uncertainties, listed companies are now putting considerably more effort into communication with the investment market and they’re a right on the money to do so.
Whether you engage a professional investor relations firm to communicate with potential investor or you try and do it yourself, the benefits from investor relations shouldn’t be ignored, especially considering we have now seen the early signs of the recovery. CEOs might fear that investors are either too scared or cannot afford to invest but professional investors don’t just disappear and they could be looking to invest in your company. Even if that’s not the case you should still make sure to keep your shareholders fully informed. Either way, investor relations is a must have strategy.
