29 Dec 2016

Three ways to jump-start SME IR

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Our three-point plan is based on a firm belief that the objective of investor relations is not simply to raise your share price. This may sound counter-intuitive but it is a common mistake of companies’ investor outreach, small and large.

The objective of IR is to maximise the number of institutional investors who are aware of your story and strategy. Notice I do not say they have to be shareholders - if everyone who knows your story is a shareholder then you have run out of incremental buyers and your share price can only go down. Having a pool of non-shareholder investors who know you means that when your share price hits a bump, you have a group of knowledgeable buyers out there.

True, a higher share price should be an outcome of your IR programme, assuming you were undervalued in the first place, but blindly trying to push up the share price leads to distorted communication which good investors immediately see as a red-flag. Invariably we find that executives and boards who are frustrated with the market’s perception of their company are ignoring internal issues around the way they present themselves.

Maximising shareholder awareness means making it as quick and easy as possible for investors to get their heads around your business. Before an investor has met you or read your annual report, they will look at your IR website, your financial press releases, and your slide-deck collateral. 

1.    Publish your historical financial statements in a spreadsheet on your IR website

This is such a simple idea. Investors like numbers and they like to model what you might do in the future. They also have thousands (yes, thousands) of small companies to potentially invest in. Rather than requiring them to painstakingly input your recent half-year or quarterly results into a spreadsheet, make their life easier by doing it for them. Almost no companies do this. Make yourself stand out. This will immediately get the investor on your side.

2.    Design your IR website for a fund manager not a regulator

Invest your financial marketing budget in your website, not your annual report which very few investors will read first, and may never do if put off by your buried or non-existent IR site disclosure.  If your website starts, as so many do, with an AIM Rule 26 declaration, or a list of advisors and board members, or an unfiltered RNS list, then you have failed. This is not what an inquisitive investor is after.

Investors expect a well organised site that starts with an elevator-pitch of what you do, followed by access to your results press releases, results or roadshow slide decks, annual reports, any fund raise or listing prospectus and other relevant press releases. A short CEO/CFO video helps them to get a feel for what you do, but design the video questions and answers yourself to highlight what you want to say, as if in an investor meeting. Avoid the more journalistic private investor focused offerings that some service providers offer.  

3.    Clarify your disclosure and avoid red-flags

The first two points relate to arranging and presenting your content. This last one relates to the content itself. Red-flags are those actions or inactions in the way you communicate that a busy fund manager will see as a reason to cease further work on your company, because they will be given the impression that you are at best, financially illiterate or at worst, trying to hoodwink them. A starter red-flag list would include: failing to disclose organic growth, ignoring cash flow, inconsistent disclosure over time, and failing to explain negative indicators such as growth in share count, a widening gap between reported profits and cash flow, failing to reconcile adjusted numbers to reported, and most common of all, an over-focus on EBITDA as a profit metric. Investors are not fooled even if you prefer it because it’s a bigger number - google “EBITDA Warren Buffet” if you don’t believe me.

Management teams focused solely on raising their share price are often the ones that raise the most red-flags. They promote the most flattering numbers: such as EBITDA rather than net profit, and reported growth over organic growth. This behaviour is transparent to seasoned investors and they will walk away. Much better to explain your business fully, and built a long-standing, respectful, and loyal investor audience.