Transparency still lacking
Cheah Chor Sooi 

GETTING to the bottom of listed companies’ financials to churn out informative research reports can be a daunting task for analysts.

There are usually two extremes here. While some companies are very eager to stay under the radar of research houses, others – especially family-owned businesses – are simply “too shy” or tightlipped to divulge financial information or even not bothered whether their share prices are heading north or south.

Such is often the preliminary challenges encountered by analysts in their quest to accord coverage to small or mid-cap companies.

Bursa Malaysia has to impose some rules or KPIs on IR-unfriendly companies, says Lee

These investor relation-unfriendly (IR) companies remain listed just because of corporate exercises, mainly for cash calls while ignoring shareholder returns over the long term, according to JF Apex Securities Research head Lee Chung Cheng.

“Bursa Malaysia has to impose some rules or KPIs [key performance indicators] for those companies in respect of IR activity, or even suspend or delist those with not much trading volume or fail to achieve certain minimum trading price or minimum market cap as what the Singapore Exchange did,” he tells FocusM.

Such tendencies of lying low contradict both the Bursa Malaysia’s Listing Requirements and the Malaysian Code on Corporate Governance which upholds the notion that transparency and disclosure are essential elements to facilitate decision-making by stakeholders, shareholders and potential investors.

On this note, Bursa says it has been carrying out advocacy programmes and engage with listed companies to encourage the disclosure of appropriate and quality information to the public – and not at merely meeting the minimum regulatory requirements.

To solicit the cooperation of companies which prefer to stay under the radar, it is not uncommon for analysts to resort to ingenious methods. “We promise them that we won’t pen the ‘so-called’ sensitive figures in our report but just for our house keeping purposes for financial modelling,” Lee points out.


Breaking the barrier

To Wilson & York Global Advisers Sdn Bhd managing director J Charles Wilson, the biggest challenge faced by research houses dealing with small- and mid-sized firms centres on the gathering of company and industry data.

He says that Bursa’s Mid and Small-Cap (MidS) Research Scheme has benefitted smaller companies which attract less media and analyst coverage “by sponsoring research that would enable them to see the light of day”.

“Perhaps, it would be helpful for media players to set aside a special small and mid-cap section for the purpose of profiling these companies,” suggests Wilson.

The MidS scheme which encompasses 100 companies is envisaged to unveil some undervalued stocks which would otherwise have been overlooked or unlikely to be discovered by retail investors.

According to Bursa Malaysia CEO Datuk Seri Tajuddin Atan, the MidS scheme has thus far led to 66 initiation coverage reports with a target of 100 initiation reports set for the year.

As to how best to gain the trust of companies reluctant to reveal sensitive figures, Wilson reckons that company owners will provide insights beyond the reported figures once they feel the research house has demonstrated mastery of their industry vis-a-vis the questions they pose.

“Moreover, company owners are more likely to provide additional data after they see the quality of the revenue and profit forecasts that are made,” he enthuses. “This process takes time and is essentially one of building trust up slowly.”

Echoing a similar sentiment, Rakuten Trade Sdn Bhd vice-president (research) Vincent Lau says companies which have engaged the services of an IR professional tend to be more open with analysts.

In the case of low-lying companies, the ability to ask the right question in order to piece bits of information together is vital, says Lau

“For those who are willing to meet but not divulge too much information during the first meeting, we will have to prod them to know them better, perhaps over a few informal sessions [ie lunch] to subtly stress on the importance of communication to the investing public,” he says.

In this regard, Lau stresses the need to ask the right question in order “to gather bits of information and to piece them together” as certain company owners would not be telling the whole story or the painted description may not be as straight forward as it seems to be.

“As for the ones that are keeping a low profile and do not wish to meet, there is nothing much we could do about it,” he laments. “But if we still like the company, we could only look at their numbers [based on their latest announced figures] and decide and make our own forecast and derive our valuation and target price.”


What’s expected?

JF Apex’s Lee does not see much difference between penning a research report on a blue-chip counter as compared to one for smaller firms as the ultimate aim remains attracting fund managers to invest in the featured company.

As to what type of financial information would appeal to retail investors as in the case of the MidS scheme, he observes that retail investors are more keen on technical analysis reports and seldom act on fundamental reports unless they are long-term investors or sophisticated investors.

“Retail investors are generally short-term investors, emphasising more on return rather than risk,” asserts Lee. “They are more willing to act on rumours and ‘speculative element’ rather than those ‘boring’ fundamental financial info.”

In the view of Wilson, reports are not valued by the page. “A concise report that provides an accurate profit forecast and a sensible valuation is nearly always more useful than a long report that contains a poor profit forecast and incautious valuations,” he says.

That said, the MidS format includes initiation reports and results reports. Investors would do well to read the initiation reports – which usually run 10-15 pages – in full. The results reports – typically three to six pages long – serve to update investors on the profit outlook and valuations.

“Investors would want to keep track of the profit and price targets to get an idea of which research houses make the most accurate profit forecasts,” adds Wilson.

What the MidS scheme entails

INITIATED in May, the Mid and Small Cap (MidS) Research Scheme is intended to accord coverage to listed companies that had no or very minimal coverage in the past. Hence, the companies may lack experience or exposure in dealing with research houses and/or investors.

In order to address this, Bursa Malaysia has and will continue to organise training and awareness sessions to expose the companies to best practices in investor relations (IR). In the first session held on Aug 1 and 2, Bursa invited industry experts such as the Malaysian Investor Relations Association (MIRA), IR practitioners and FTSE to engage with these companies.

There are currently 20 research houses participating in the MidS scheme. The appointment of the research houses was based on the following qualifications

• A licensed Capital Markets Services Licence holder for investment advice under the Capital Market and Services Act 2007;

• Licensed to display/distribute research reports to the public; and

• Demonstrates capacity and capability to undertake the assigned research and promotional initiatives on the listed securities.

In addition, the research houses are also required to fulfill the following obligations post-appointment:

• Cover at least one listed security from Band 2 (small-cap companies: market cap of RM200 mil to RM500 mil) for every allocated listed security from Band 1 (mid-cap companies: market cap of RM500 mil to RM2 bil). The allocation of the listed securities will be undertaken by Bursa Malaysia;

• Incorporate the Bursa MidS branding in their research reports, distribute all research reports generated, undertake SMS and email blasts for stock picks, and provide link to Bursa Marketplace for access to other reports;

• Organise at least two profiling initiatives specifically for the Bursa MidS listed securities; and

• Upload the Bursa MidS research report on their respective portals. 

Eight equity research report essentials

Basic information: A research report should begin with some basic information about the firm, including the company’s ticker symbol, the primary exchange upon which its shares are traded, the primary sector and industry in which it operates, the investment recommendation, the current stock price and market capitalisation, and the target stock price.

Investment summary: A brief description of the company, significant recent developments, an earnings forecast, a valuation summary and the recommended investment action.

Business description: A detailed description of the company and its products and services. Much of this information can be sourced from the company itself and via its regulatory filings as well as industry publications.

Management & governance: A review of the composition of the company’s board of directors should note whether it is sufficiently independent or if there is evidence or risk of entrenchment.

Industry overview and competitive positioning: An overview of the industry dynamics, including a competitive analysis of the industry.

Valuation: A thorough valuation analysis of the company using conventional valuation metrics and formulas.

Financial analysis: A detailed analysis of the company’s historical financial performance, and a forecast of future performance.

Investment risks: Potentially negative industry and company developments that could pose a risk to the investment thesis.

This article first appeared in Focus Malaysia Issue 255.