Small can be beautiful
Small-cap and emerging companies can be big performers in the share market recovery cycle, but they don’t always recognise the advantages that come with their size. Sooner or later in the investment cycle, some 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 in which to invest. Nor do they acknowledge that they need to keep their current shareholders informed on a regular basis.
The CEOs or CFOs of these companies need to remember that a small-cap or emerging company is much more likely to double in size if its market capitalisation is $20 million or $50 million than if it is $1 billion. While 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.
Put out the welcome mat
So, what can companies do to attract potential investors? A small company looking to attract new investors should focus not just on big shareholders – it needs the goodwill and support of small shareholders as well. One way of cementing the relationship is for new shareholders to receive a ‘welcome kit’ from the managing director when they join the company’s share register. In addition, 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 provide the latest information about the company. This might include recent company announcements, interviews with the CEO, exposure in the media or an updated analyst report from a share broking house or fund manager review. Information that is obsolete, infrequently updated or incomplete will alienate existing and potential investors as well as important stakeholders, such as brokers, analysts, fund managers,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.
Make your message count
In communicating with the market, it’s imperative for the CEO and company as a whole to use language that is easily understood, whether in written form or as on-camera interviews, such as webcast presentations. 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 and clear message to the share market.
As with most 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 out too much information when it could have been included in a company update or is required to be released from a continuous disclosure point of view.
By providing information and analysis that give investors a well-rounded understanding of the company and its strategies, a company can help achieve a fair market valuation for its securities and 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 the company’s shares and the ultimate price of those shares.
The figures tell the story
For those who are still not convinced that investor relations make a difference, surveys of fund managers and share broking analysts show that good or bad investor relations can affect the valuation of companies. According to the Australasian Investor Relations Association (AIRA), excellent investor relations practices can contribute more than 10 per cent to a valuation premium of Australian-listed companies, while poor investor relations can contribute to a maximum valuation discount of 5 per cent or more.
Meaningful and quality investor relations strategies can clearly influence the market’s understanding and the price-to-earnings ratio of a company. Another survey of ASX-listed companies released last year by AIRA showed that these companies were likely to spend more time and money on communicating with investors in 2011 than in 2010. Despite financial uncertainties, listed companies are wisely now putting considerably more effort into communication with the investment market.
Clearly, there are benefits from investor relations and this is an essential strategy that shouldn’t be ignored, especially given the signs of economic 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.
