IR Insights

Investor Relations Society Award winners demonstrate the growing importance of using the corporate website to communicate their investment proposition

Many congratulations to BASF, the winners of the IRS award for ‘Best use of a website to communicate and support a company’s investment proposition’ and our commiserations to the finalists: Adidas, Centrica and Kingfisher. This is an area of particular interest to Citigate Dewe Rogerson as we believe a well communicated investment proposition, based on rigorous analysis, that engages investors, is a prerequisite for a strong IR programme.

From the work we do with our clients, their analysts and investors, an investment proposition should include:

• A clear outline of group strategy
• Key performance indicators
• Risks and sensitivities
• Funding structure

A carefully crafted investment proposition should not only include these elements, but convey them coherently and consistently in a way that supports a meaningful dialogue with investors to strengthen the relationship and build trust. Rather than using the website merely to assemble and broadcast relevant information, companies should present the information in a way that engages investors by explaining how these factors affect the investment case.

As a channel for communicating the investment proposition the corporate website remains an underused resource. A survey of European investors by Rivel Research Group revealed that 69% of respondents found the corporate website helpful in prompting decisions to invest. While cited by over two thirds of respondents, the website was only the seventh most important source in a list headed by sell-side research, meetings with senior management and buy-side research. However, the same research found that the importance of the website is rising and concluded that it is resurfacing as a differentiator for companies seeking to broaden their shareholder base. A growing sense of frustration with the quality of sell-side research revealed by our survey of investor relations professionals suggests the burden is shifting towards companies to communicate their investment case more directly.

A clear outline of group strategy

The strategy should be used as a narrative to underpin the investment story and it should be supported with a perspective on the competitive landscape and macro environment to enable investors to evaluate strategic choices and actions. An honest assessment of the challenges the business faces also helps to build trust. Unfortunately, the strategy section is often executed poorly, if at all, with companies volunteering only high level strategic statements that appear to be isolated from other information on the website and lack sufficient detail to inform a sophisticated audience of analysts and investors.

Drilling down on the links on BASF’s website reveals a good amount of detail on its strategy. Its strategic priorities are set out, and clicking on these links reveals substantial background. Three subheadings under profitable growth explain how it is positioning itself in growth markets, optimising its portfolio and organising itself to innovate. The strategy is supported by relevant financial data and case studies, and describes how actions taken by management are in line with the strategy. As well as clearly stating the strategy to investors, the level of disclosure helps build trust with investors and enables them to form an educated view on strategy before approaching management with their own questions.

Key performance indicators

KPIs provide an essential link between performance and strategy and help investors judge a company’s progress. Under its seven point ‘Delivering Value’ plan, Kingfisher makes a clear link between its strategy and KPIs. For each point it reports progress for the first half of the year and details key milestones for the second half. For example, it lists a number of measures to build B&Q’s retail margin to 7% under one of its seven points and talks about store revamps, staff training, product and service offerings, and its efforts to squeeze costs through direct sourced shipments, efforts to reduce shrinkage and other cost controls.

BASF and Adidas do not provide KPIs as such, but both provide detailed guidance on a range of financial metrics. Adidas, for example guides on sales by segment, gross margins, operating margins, operating working capital as a percentage of sales, capital expenditure, net borrowings, and net income attributable to shareholders as well as a list of product launches in the forthcoming year.

On the subject of guidance, we suggest that companies provide guidance on factors under their control such as capital expenditure, advertising and promotion, interest costs as far as known, and the hedges they have in place. If the company is not operationally geared it could also consider margin targets. We believe companies should not provide guidance on factors outside their control such as commodity costs and interest costs, but provide sensitivities. BASF provides sensitivities on the exchange rate and oil price. We do not think that companies should provide guidance in the form of earnings per share. There is a risk that analysts will focus on short-term numbers rather than strategy and the company is likely to experience share price volatility if it misses its earnings target.

Risks and sensitivities

Companies should identify and explain the principal risks to show how they might derail strategy and outline how they are managed. Of the finalists, Centrica has clearly identified the risks facing its business under four headings: global economic conditions; external market factors; operational factors and financial factors. It has described its response alongside each risk. The vast majority of companies that do not explain how they mitigate potential risks are missing an opportunity to reinforce trust in management and show how their actions are helping to protect profits and generate reliable earnings.

For an analyst, the disclosure on risks and sensitivities for some companies can be surprisingly informative and in some cases provides more information on strategy than the strategy section. But if companies do not treat the various elements of the investment proposition in a consistent manner they can undermine their investment case. In one recent case, a company went to great lengths to outline the risk it faced from pressure on prices, but without enough background on how its efforts to reduce costs would maintain margins. In this case, a clearer link between strategy and KPIs with a management perspective on the competitive environment would reassure investors. As it stands, the company is in danger of creating a perception that it faces continual pressure on prices and does not have a credible strategy to deal with it.

In another case study, we have a client who could not understand why an analyst was attributing so much importance to a particular risk and, in doing so, undermining the investment case. It transpired that this theme was taken from the annual report where the influence of the company’s lawyers was apparent in the section on risks. The primary concern of lawyers is to limit liability and it is incumbent on the company to redress the balance, sometimes using other parts of the investment proposition, to explain risks in the wider context of the overall business.

Funding structure

Bringing together an overview of the capital structure is an essential component of a rounded investment proposition. The investment proposition should include the level of debt and details on interest rates. Some companies, particularly smaller companies which have to fight harder to get coverage, will provide a weighted average cost of capital and a range for the optimal level of gearing. Disclosure on areas such as interest cover, headroom for covenants, and maturity profiles, all combine to build confidence in a company’s investment case. On the equity side, details of the dividend policy and dividend coverage are essential components of the investment story.

Conclusion

For companies seeking to extend their base of shareholders, these finalists have demonstrated how a good investment proposition can accelerate the time it takes for analysts and investors to understand their business. Moreover, companies are also starting to appreciate the growing importance of communicating the investment proposition on the corporate website to help build long term relationships based on understanding and trust.




Written by

Sean Bride
Direct Tel: +44 20 7282 1044
sean.bride@citigatedr.co.uk