THE NAKED FUND MANAGER - Corporates need to up their game

Afternoon all,

After a bunch of frustrating company meetings in recent weeks, this is an impassioned plea to many of the UK listed companies, particularly at the smaller end of the scale, to please up your game regarding the quality of your communication to the market.

Many companies do an excellent job in getting the relevant information that investors need into the public domain and in an engaging way. However, there are far too many that leave a lot to be desired.

Problem 1 - No presentation on website

Every company should have an up to date investor presentation on its website. That should be a given, but it amazes me how often it is just the regulatory filings that are available.

The presentation should contain all the key performance indicators that you as a management think are the drivers of the business, and these should go alongside previous performance and industry peers. It should lay out the risks and the opportunity as perceived by the management team. Most importantly, the slides should be concise and understandable to a layman.

Problem 2 - Boring, technical presentations in meetings

Please don’t come to investor meetings with a 2-inch thick, overly dense and technical presentation that assumes I am an expert in your sector and addresses mountains of detail, but none of the important questions of which an investor wants an answer.

Some key questions that should be addressed:

• What is the business model?
• What is the competitive advantage of the business?
• What is the track record?
• How do Porter’s five forces break down?
• What is the addressable market size?
• How big is the company’s market share?
• What is the 3-5yr strategy?
• How might margins evolve over next two years and long-term?
• What are the key risks to the business?
• What are the growth drivers?
• What is the dividend policy?
• What are capex expectations? 

Answering most of these questions should be easy for Management to do. These are the lowest of low hanging fruit and not addressing them just irritates investors who are likely to switch off within 10 minutes of a meeting, which is a waste of everyone’s time.

Problem 3 - Quantify! In good times and bad...

There are always going to be times when a company has to disappoint the market. Competitive pressure increases, hitting top line or margins. Contracts slip to the right. Management drops the ball. Marketing campaigns fail. There are many reasons.

The best thing you can do is own it and compose the RNS in a fully transparent way. Publish at 7 am so it gets full exposure and awareness will be greatest, leading to the most liquid and therefore fairest reaction from the market.

The worst thing Management can do is muddy the message, publish on a Friday afternoon, and neglect to include numbers, making it that much harder to quantify any impact on fundamentals.

Putting out bad news on a Friday afternoon is the typical tactic of companies seeking to hide bad news. It’s been happening for years, despite the fact it doesn’t work. Instead, the practice just serves to irritate market participants who end up dumping their shares at a time of low liquidity.

Problem 4 - Expectations need a benchmark

This issue is partly covered in the above section but deserves its own section as well. I have access to analysts and broker research, and so it is relatively easy for me to check on the morning of an RNS whether guidance has changed and to what extent. However, for smaller companies that lack broker coverage, this information is much harder to come by.

For most private investors it is nigh on impossible to quantify, and retail investors are the primary source of daily liquidity for a great many smaller and medium-sized shares.

It is highly infuriating when I see references to expectations with no mention of what the new and the old expectations were. It is a real pain having to dig through previous announcements to find what the guidance was in cold hard numbers, especially when you then find it wasn’t even quantified previously.

Companies should want the market to have complete clarity of how guidance has changed because when the waters are muddied the market discounts far more heavily, pricing in greater uncertainty.

Whenever expectations are mentioned, they should be supported by numbers. If there was previous guidance, this should also be quantified to allow the market to gauge materiality.

Finally, there should be a set of KPI’s that are included in every Trading Update and Results Announcement. These KPI’s should be relevant to the business and investment opportunity, and they should be tracked and displayed over time, ideally on the company website.

Conclusion

None of these are difficult steps for businesses to take. As I said, many are already doing this, but far too many are not. 

A company should be making it as easy as possible for investors to understand its business. Doing this helps liquidity and ultimately a fair market valuation. Not doing it and hiding behind obfuscation leads to frustrated investors, uninterested prospective investors, illiquid markets and lower valuations.

Examples of good communications from small, medium-sized and large-cap companies would be Sprue Aegis, Boohoo, Majestic Wine and Next. You would expect this of Next, but Majestic Wine have really improved the transparency of their reporting since the new Management, Boohoo provides excellent guidance ranges, and Sprue Aegis are an example of a small-cap company that clearly quantifies its guidance.

If you agree with my sentiments, then I would urge you to say so to the Investor Relations teams within offending companies. If you work in Management or IR at a listed company, then please take this on board, and help us all to understand your business better.

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To read a brief outline of how I think about stocks, and what I aim to achieve in this blog, please check out my first blog where I set out my stall.

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Please Note: To be clear, I do not and will not ever give any advice. I will rarely mention individual stocks but when I do these will not be recommendations, instead just my thoughts at that point in time.