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The Importance of Investor Relations
12 Oct 2020

Communication with stockholders, better known as investor relations, has become of fundamental importance in assisting stockholders in their investment decisions. Companies have gone out of their way to continue engaging with investors amid the pandemic. The majority of Maltese companies have set up meetings to explain and provide reassurance on their position; however, only a handful of companies have provided tangible future guidance and visibility to investors.

The concept of investor relations is relatively new, more so in Europe. Investor relations started as a sales campaign for companies to sell their product, namely securities, to investors and gain trust in the company.

We, as investors and analysts, perceive investor relations as a tool to reduce the level of systematic and specific financial investment risk thanks to more visibility achieved by complete information on the situation within the company and its environment. It goes without saying that the information value and strategies of the company may differ from that of investors.

In Malta, this concept is still relatively new. Most local companies view investor relations as a regulatory tool which solely disseminates information about the company. Investor relations, however, should be viewed by companies as a tool that helps to increase and give a true picture of the company’s present and future value.

It is evident that certain Maltese companies only issue guidance and engage with investors in order to fulfil their regulatory requirements. A case in point is the requirement for companies listed in the Maltese bond market to issue a Financial Analysis Summary (FAS). In a nutshell, the FAS requires the issuer to analyse and comment on its last three financial accounting years and the forecast for the year following the issue, which needs to be updated annually.

An analysis conducted by ourselves, concluded that based on a three-year average, most companies listed on the local corporate bond market are accurate in their forecasts and provide reliable information for the next year’s forecast. In fact, the discrepancy between the forecast and actual EBITDA on a three-year average is in the region of 4.5 per cent. This shows that Maltese companies do have the capabilities and the visibility to provide investors with reliable information.

However, when companies issue their forecasts during the listing stage, it was noted that companies have less visibility in their expectations compared to the actual results. In fact, our results conclude that from a sample of 25 bond issues between 2017 and 2019, 17 companies missed their revenue forecasts by more than five per cent. If we had to analyse the EBITDA, then the results are even more contrasting with only four companies having their EBITDA forecasts in the five per cent variance region compared to the actual results.

Certain Maltese companies only engage with investors in order to fulfil their regulatory requirements

Investors and analysts are aware of the trends in a company’s forecasts, and will be able to gauge whether a company is being true and fair in its forecasts. Furthermore, the transmission of reliable information from the companies themselves reduces the risk of markets reacting based on unfounded information. We have seen this occurrence happen locally in December 2019 where unreliable information led to price volati­lity in certain local securities.

A company that provides frequent, reliable and fair information helps investors to start trusting, to separate facts from unreliable information and to build a rapport with the company, which will eventually lead to more inflows into the company, either through an increase in share price, or in the case of bonds, through more investments given the higher visibility in risk assessment. Inherently, the tightening in the information asymmetry gap will lead to a more efficient Maltese market.

Observably, in the local equi­ty market, those companies that engage with their investors on a frequent basis and are more transparent are the ones that are more trusted within the investor community, leading to a better share price performance over the medium- to long-term.

We are living in unprecedented times and the unstable and uncertain economic environment that the pandemic brought is equally challenging to companies and investors alike. Investor relations in these uncertain times is of primary importance as it allows investors and companies to exchange and provide information and different ideas on the future expectations of both the company and the general economic environment.

A company can use investor relations to influence an investor’s attitude towards it in this current economic environment. For example, a Maltese long-term investor who is seeking dividends is concerned that due to the current economic scenario, no dividend will be paid this year. A company can use investor relations in order to provide reassurance and guidance to the market, even if no dividend will be paid due to the current conditions. However, if dividend payments are still within the company’s long-term strategy then it should also be communicated, giving more visibility to the market.

This relationship would benefit both the investor, who would now have more visibili­ty in the company’s dividend strategy, as well as the company itself, as it would be reassuring the investor, who with higher visibility and conviction is more likely to keep his or her investments with the company. Both investors and companies have to understand that they need each other for their own successes in the longer-term.

Without investments in the company, the latter cannot guarantee its long-term growth strategies and achieve profit­ability. Whereas, on the other hand, investors need companies in order to manage risk and achieve financial success through their investments.

Investors can invest directly in the local equity market based on the knowledge of the company that they are researching; but a more simple alternative could be to invest in an actively managed fund, where one can benefit from the investor relations expertise that the fund manager would have built over the years, whilst also benefitting from a more systematic approach towards investing.

The author and the company have obtained the information contained in this article from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed.  

Stephen Sammut, Investment specialist, BOV Asset Management Ltd

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