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8/3/2019 2012 FinCom Session 3
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Reporting and financialcommunication - 3Skema - MSc Finance - 2012
p ! r convaincre vos pa " enair e message d’entreprise
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Skema 2012 - Reporting & Financial Communication - Session 3
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Agenda
Main targets, expectations and impact
1. Main targets and expectations
2. Periodical communication : case study
3. Impact of analysts forecasts
2
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Main targets
and expectations
3
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The public involved and its expectation
Skema 2012 - Reporting & Financial Communication - Session 3
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Funds Managers
Will take the final decision
Financial analysts « buy & sell side »
Recommendation to Fund managers
Individual shareholders / Employees shareholders
Banks
Rating agencies : credit, SRI
Press agency, journalists
Important source and relay of news
Internet sites : chat and forum
To have an eye on them : « watch for the rumour »
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Decision process
\ A large combination of investment types : value, growth, LT, ST,event driven, yield, SRI, index driven, generalist, sector specialist,geographical allocation, stock picking, midcaps, largecaps …
\ Stock selection process
\ Choose the right momentum
Expectation
\ To maximises the Total Shareholder Return
➡ Dividends
➡ Valuation
\ To understand management decisions / strategy\ To anticipate market reaction
Fund Managers
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Investor
Relations
Analystssell or buy side
FundManagers
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An unavoidable market !
\ AUM US$170 billion in 1994
\ vs US$ 1,900 billion in 2010
Investment types
\ long/short equity, global macro, eventdriven, merger arbitrage …
\ Short selling process
Issuer interests
\ Different type of questions :more « direct to the point »
\ Could be more aggressive, dynamicdiscussion
\ To adapt the message in line with theinvestment type
\ To reduce the volatility on the stock
\ To limit the number of rumors
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Focus : Hedge Funds
Hedge Fund Assets Under Management ($ billions)Source: HFR Industry Reports © HFR, Inc., Fourth Quarter 2010,
www.hedgefundresearch.com
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ID
\ Market: ~ US$ 3,800 billion1 AUM in 2009
\ Highly concentrated :Top 10 have a 80% AUM market share
\ 75% are from Asia or Middle East
\ Directly or indirectly supervised by their respective government
\ Implemented to improve the return of StateReserves
Investment case
\ Bonds : 30%
\ Shares of listed stocks : 50/60%\ Others : 10/20%
Issuer interests
\ LT investment
\ An indicator for potential value
\ Passive shareholder / usually : no take over bidprocess
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1 Source : FMI, OECD, FED / 2 source : Les Echos, Thomson One Banker, Fund
GIC - Singapore
Norwegian
Abu Dhabi
Samegeographical area
80%
50%
23%
Large cap.
55%
90%
80%
Focus : Sovereign Funds
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Focus : SRI
ID\ European Market: ~ € 3,000 billion AUM in
2010vs € 1,033 billion in 2005
\ Active funds management
\ Mutual funds management
\ Management of employees profit sharingplan
Investment case
\ Exclusion strategy / social, environment or corporate governance theme
\ Rating agencies (Vigeo, Innovest, Eiris,
SIRI, trucost,…)
\ SRI index : FTS4good, DJSSI, Aspi, Ethibel,….
Issuer interests\ Specialised funds
\ LT investment
\ Brand name recognition
\ A different process : to fill in annualquestionnaires or dedicated presentation
0
1 500
3 000
4 500
6 000
2002 (EU 8) 2005 (EU 9) 2007 (EU 13) 2009 (EU 14)
Growth of SRI European Markets 2001-2009
B i l l i o n €
Source: Eurosif
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Fund managers: main concerns
Level of visibility / Level of risk
Market liquidity and market cap.
Volatility of share price
Understanding the business model\ How the company generates profit and cash
\ Which factors can impact the business model
Cash flow generation
\ Future cash flows condition the valuation
Management
Growth potential of the share price:is worth selling/ buying
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‣ Strategic
‣ Personal
‣ Highly professional
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Individual Shareholders
FINANCIAL
MARKET
Investor
Relations
Individual Shareholders
Highly segmented and heterogenous target
\ A dedicated team
\ Difficulties to identify shareholders
\ An expensive communication plan
A low impact and share price valuation
\ High stickiness
\ Employees profit sharing plan
Issuer interest
\ LT investors
\ Needed to reach a quorum at the AGM\ Management friendly in case of a take over bid
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Individual Shareholders: main concerns
Many different investment profiles
\ Long-term
\ Opportunist
\ Speculative
\ With a greater access to sophisticated
tools:SRD, warrants, trackers, graphic analysis…
Information sensitive
\ Wide access to infomation: tradingwebsites, corporate websites, media,road shows…
\ Sensibles aux risques de manipulation
Main concernes
\ Stock performance
\ Profitability
\ Reputation, fame
\ Business sector
\ Dividend policy
\ Strategy
\ Shareholders’ orientation
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‣ Pegagogical
‣Mass communication
‣Afectio societatis
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Low awareness of financial anmarket mecanisms
\ Need for a simple and dedicatedcommunication
\ In messages and in communication tools
\ Jointly managed by CFO and HR\ Specific regulation framework
\ Relationship with Work council
\ Corporate investment plan regulation
\ High risks of information disclosure /conflict of interest
Main concerns
\ Strategy and forecast for the group andfor its subsidiaries
\ Dividend policy vs Social and wagespolicy
\ Tax and legal papers
\ Employees representativity
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Employee Shareholders: main concerns
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‣ Pedagogy
‣ Specific tools: intranet, internal
letters, face-to-facecommunication…
‣ High probability of internal tensions
‣ Strong incentive for motivation andperformance
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Sell-side analyst : Fundamentalanalysis, market experts, valuationmodel, recommandation, targetprice, …
Marketing : an expertise for road-
show organisation, shareholderstargeting, best practices, marketbenchmarks, organisation ofconference …
Sales team : specialised / generalist
sales. The last link with the investor
Corporate : source of information for the trading activity on the stock
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Brokers : a close partner for IR team
‣Capitalise on brokersexpertise
‣Well placed to anticipatemarket trend
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A powerfull guy/girl
\ 1st contact between the issuer and the broker firm
\ 1st source of information for investors
\ Direct impact on the stock price (recommandation /target price)
Market & sector expert
\ An in depth knowledge of the issuer and its competitivemarket
\ Information on investors needs / will
\ A more and more regulated and complex market
Highly concerned by his/her own credibilitytoward investors
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Investor
Relations
FINANCIAL
MARKET
Sell-side
analysts
Brokers : Sell-side analyst
‣ To establish a win/winrelationship with the issuer
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Financial analysts: main concerns
Analysts missions
\ Analyser companies, sector, competitiveenvironment, prospects and results
\ Establish financial forecasts
\ Determine a fair value and compare itwith the actual stock price
\ Give an investment recommendation:strong buy, hold, sell…
\ Support marketing and dissemination ofthe analysis
\ Follow the company and the valuation
Main concerns
\ Sales and margin breakdown
\ Deep understanding of every accountingissue
\ Underlying hypothesis fof companyforecasts
\ Risks of failure
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‣ Technical and detailed
‣ Personalised
‣Ongoing and proactive
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Financial communication on debt
Why ?
\ To set up a fair and good relationship withbanks
\ To have access to a lower cost of debt
\ An interest for LT investors : liquidity risk ?Dividend level ?
\ To integrate a LT view in the valuation of thestock
\ HF needs : debt / equity arbitrage
Communication on :
\ Covenants
\ Liquidity : debt structure and amortizingprofile
\ Diversified financial sources (bond issue,bilateral credit line, …)
\ variable or fixe rate : sensibility to rateevolution / hedging
\ ratios (gearing, Net Debt/EBITDA, …)
Increasing interest from the marketin the context of limited access tocorporate funding
\ Rating agencies : S&P / Moodys / Fitch
\ The rating has a direct impact on thespread or cost of debt
‣ In the midst of a financial crisis :one motto : to be transparent
‣ Build a debt story along-side
the equity story
‣Deliver the same information tosell-side and credit analysts,equity or debt investors, creditrating agencies, banks
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Journalists : main concerns
Always in a rush and not alwaysexpert
\ Low financial background
\ Increased pressure due to media crisisand cost cutting among news companies
High impact, high risk
\ Journalists are totally free
\ They can make big misunderstanding or misleading resume
\ They can write even when you do notwant to talk to them
\ They prefer “late trains”
Main concerns
\ Competitive position
\ Strategic vision of top management,interview
\ Products and clients
\ Innovation\ Prospects
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‣ Proximity
‣Ongoing and pedagogical
‣ Proactive and positive
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Other audiences
Employees, management, recruiting
\ Employee shareholders, stock options...
\ Corporate Brand image
Business, industrial and financialpartners
\ Customers, providers, sub-contractants,real estate owners…
\ Banks, credit insurance , leasingcompanies...
Competitors and competitiveauthorities
\ Publicly traded or not
\ Listing creates a distortion of thecompetitive environment
Civil society
\ Administrations, NGO’s,
\ Trade unions, lobbies
\ Consumers associations...
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‣Anticipative
‣Specific
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Sell-sideAnalysts
Funds
Managers
Individual
Shareholders
S t a k e h o
l d e r s
Impact on the share price- -
- -
+ +
+ +
Journalists
Rating
Agencies
Who is really influent on the stock price?
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The targets of financial communication
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Financial analysts/rating agencies
Employees
Institutional investors
Private investors
eco/fin. media
News / professional media
Clients/providers
Banks
Communities
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Periodical communication :
case study
21
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Regulatory disclosure of financial results
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Issuers shall inform the market on a regular basis, about:
\ corporate performance
\ changes in operational environment since the previous release
\ short and medium-term outlook
And shall guarantee fair access to information for every audience\shareholders or not
\professional or retail
\ local or international
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Skema 2012 - Reporting & Financial Communication - Session 3
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Information is used by market players with thepurpose of :
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Adjust and update valuation models in accordance with actual corporateachievements and prospects
Assess what are the potential risks of the company not reaching targetedforecasts
Calculate the corporate / share fair value
Compare this value with the current share price
Make investment decisions:
\ purchase / sell, at which price ?
\ choose between the company stock and other comparable assets or other asset class
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Skema 2012 - Reporting & Financial Communication - Session 3
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Provisional FY financial results
Provisional annual results as approved by the Supervisory Board
\ Profitability: Group P&L
\ Financial soudness : Balance sheet and cashflow statements
\ Details : Group complete financial reporting
\ Outlooks and forecasts / guidance
Disclosure process
\ Press release: immediate and simultaneous dissemination
\ Analysts’ meeting: detailed presentation used as a key source for analysts’recommendationsPress conference: detailed presentation in order to get press coverage
\ Meetings with institutional investors:direct contacts to address every concerns and questions
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Skema 2012 - Reporting & Financial Communication - Session 3
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FY financial results approved by the AGM
Financial results become definitive once approved by the Annual GeneralMeeting of shareholders
\ Approval of financial statements
\ Approval to the management team
\ Approval of dividend distribution policy
Disclosure process
\ Annual Financial report : legal request
\ Annual report : communication to general public, brand image
\ Reference Document : not legally requested, but eases the procedures for AMf certificationin the case of a market operation
\ Annual General Shareholders’ meeting
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HY Group financial results
Interim results equivalent to the FY release
\ Same level of detail on financial statements as provided for FY consolidation
\ Except from Allocation of result (only once a year)
\ Outlook: generally an update on annual guidance and outlook previously released
Disclosure process
\ Equivalent to FY result process
\ With a lower “symbolic impact”
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Skema 2012 - Reporting & Financial Communication - Session 3
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Quarterly releases
Legal requirement: Quarterly disclosure on Turnover
\ As required by Transparency Directive:
detailed information per business segment
information on elements affecting business activity
\ Press release: immediate and simultaneous disclosure
\ Analysts conference call:allows to concentrate and share the answers on all questions at the same time
No requirement about full financial results
Although some companies do so
\ More complete image
\ Increased short-term prospective
\ Is correlated with best practises among the sector and the competitors
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Skema 2012 - Reporting & Financial Communication - Session 3
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Organisation and internal agenda
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Example of a disclosure schedule in he case of a company releasing interiminformation
J-60 à J-5(1st July / 22nd August)
Consolidation processAudit of financial statements
Consolitation team + CFO + CEOExternal auditorsAudit committee
J-8 à J-4(18 / 22 August)
Analysis of financial performanceConception of messages
Communication materials design
Training with management, Q&A sessions
IR teamConsolitation team + CFO + CEO
External auditors
J-1(Monday, 25 August)
9h-12h : Board meeting16h00 : information to Work Council
18h00 : press release disclosure
CEO + CFO + BoardmembersExternal auditors
IR Team, HR
J
(Monday, 26 August)
08h30 : press conference11h00 : analysts meeting
13h00 : investors’ lunch15h-18h : RV One2One meetings with investors /
journalists
CEO + CFOIR Team
Communication team, PR, agencyBroker, analyst
J +1 to J + 17(Friday 12 Sept.)
Road show program,organised with the broker Follow-up of press clipping
Follow-up of analysts’ publications
CEO + CFOIR Team
Communication team, PR, agencyBroker, analyst
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Skema 2012 - Reporting & Financial Communication - Session 3
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In theory, the market integrates any new information and re-assess hecompany / asset valuation (market efficiency)
\ Analysts update their forecasts and release new recommendations
\ Journalists put the information into perspective
\ Investors re-evaluate their investment position
In reality, sometimes, information may not have the expected impact
\ Confusing message, lacks of visibility
\ Lack of credibility of the issuer
\ Issuer’s newsflow is out of phase with the general or sectorial market environment
\ Information is hidden into a dense general newsflow
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What is the impact
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Case study
Zodiac presentation FY 2010/2011
ID Midcap Research note about Zodiac disclosure
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Impact of analysts forecasts
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Analysts ratios and financial focus
\ Turnover breakdown by segment
\ EBIT / EBITDA
\ Net profit : reported / restated
\ EPS / PER
\ Others : Capex, change in workingcapital needs , FCF, net debt ...
Sector specificities
\ Programming costs : for a TV channel
\ Order book for constructing, aerospace,capital intensive companies
\ Number of active subs /ARPU / SAC /Churn for telecom or pay TV operators
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Consensus
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Sell-side analysts and their impact on markets
Analysts are seen as financial experts and some of them are very popular among the media
Sell-side analysts and their impact on markets have been widely studied byacademics
Their impact on markets and prices\ Schipper, 1991: as information producers, thir main activity consists in analysing and selecting
companies and recommending their customers to sell/buy those companies
\ Womack, 1996: Analysts’ publications generate increases in transactions volume, namelywhen they change their recommendations
\ Easley, O’Hara, Paperman, 1998: analysts also have a positive effect on market liquidity as
they attract unsophisticated investors\ Brennan et Subrahmanyam, 1995: analysts’ publications tend to decrease asymmetry of
information for every market agents, even if these are not direct clients
\ Irvine, 2004 ; Jackson, 2005: thus, they allow the brokerage companies employing them toincrease their sales and profit
\ Brennan et Subrahmanyam, 1995: the consequence for investors clients is to reducetransaction costs related with the adverse selection dlemma
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What is the real efficiency of analysts ?
Analysts are supposed to be able to predict the future value of assets
In reality, their recommendations impact on the very price of the asset
\ Womack (1996): a change in recommendation generates a change in asset price and thischange is persisting over the time
1 month for an upgrade
6 months for a downgrade
\ Stickel (1995): the impact on market is correlated with the reputation of the analyst and hisbrokerage company
And their forecasts are generally too optimistic
\ Francis et Philbrick (1993): analysts’ forecasts on Profit per Share are systematically optimistic
\ Rajan et Servaes (1997): in the case of an IPO, analysts’ forecast on growth prospects aresystematically optimistic
\ Easterwood et Nutt (1999): analysts under-react to bad news and over-react to good news
\ Trueman (1994): analysts tend to herding behaviours and their forecasts are systematicallyinfluenced by the sum of previous available forecasts
\ Womack (1996): analysts are reticent about downgrading companies they follow and adopt
a SELL recommendation35
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Are the analysts irrational and inefficient ?
Some bias have been identified
\ Selection bias: as analysts are paid to make recommendations that generate increasedvolume transactions, they have an interest in following high potential stocks ie where theyare optimistic
\ Lim (2001): being optimistic is a way for analysts to have a better access to information fromcompany’s management
\ Michaely et Womack (1999): analysts are influenced by the necessity of corporate bankingto provide optimistic forecasts in the case of market operations (IPO…)
Companies may sometimes adapt their strategy in order to follow/ outperformanalysts recommendations
Financial analysts are quite not neutral in market efficiency and therelationship between companies and analysts is key