What makes your Share price go up?

Wednesday, April 21, 2010 | Posted by: Grant Thornton
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What makes a share price go up?  Although ‘more buyers than sellers’ is simple and unhelpful, it also includes a grain of truth.  Other than the tail end of a bull market, share price appreciation requires a profitable, successful and growing business, but until this is communicated effectively, the company won’t attract more buyers than sellers.  Ultimately, this is the CEO’s responsibility.  While there are many (paid for) advisors able to help, success still depends on a CEO who understands the various stakeholders and knows how to get the most out of them.

At the end of March 2010, AIM had 1,258 quoted companies that were worth £62 billion in total.  Of these, 238 were international companies and 24 were Indian.  Specialised Indian and emerging market funds know this segment well, but represent a small proportion of the funds that invest in the London market.  Many other funds are not constrained by where a company does business and are just looking for good quality investments.  This means effective and timely communication, delivered via a clear and professional process, is vital.  Not promoting a company means it simply gets ignored, or at worst, orphaned.

As a minimum, management should expect to spend at least a couple of weeks each year meeting investors, analysts and the media.  Typically, this translates in to two trips per year to coincide with releasing full year and half year results.  However, further news flow and investor/analyst meetings between these fixed dates are also important to demonstrate that the company is making progress, growing and being successful.  Clearly a balance is needed and too much news, with too little investment content, devalues the entire endeavour.  With more and more AIM companies starting to publish an Interim Management Statement – effectively a first and third quarter trading update – the pressure is growing for all companies to provide flow of regular news.

The main stakeholders influencing a company’s share price are: investors, equity analysts, the house broker, the investment press and market makers.  Your PR company and Nomad clearly play an important role in helping communicate with these groups, but their role has been well described in earlier articles.  With all of these, three key rules exist: don’t promise what you can’t deliver; tell is ‘as it is’; and, consistency in content, conveyance and contact.  Get this right and you secure the trust of investors and analysts.  That alone is worth a ‘Buy’ recommendation.

The first and most important group is the investors.  Coming in many shapes and sizes, investors all look for slightly different things and aim to invest at different stages of a company’s life cycle.  Some like pre-IPO, some are event driven, others focus on value or growth or dividends, others want to provide expansion capital, and some just want cyclical beta.  As a result, the group of investors that fund an IPO should evolve over time and a prudent management is continually working to broaden the group of investors aware of its business, if only to avoid the risks from a forced seller.

 

In Religãre’s London office, we focus on institutional investors.  These are the professional investment managers that control the trillions of pounds invested in mutual funds, pension funds, life funds and hedge funds run out of the world’s main financial centres.  These investors typically have the most influence in your share register and are the most cost effective route for raising capital.  Although many CEOs find the IPO process and investor meetings challenging, it also introduces them to an investment community whose fund managers have many years of successful investment experience and meet (literally) hundreds of management teams every year.  All of these fund managers want you to succeed, but in the process of doing their own due diligence, management is often subjected to an intensity of questioning and scrutiny that few have ever encountered.  Good companies gain a lot from this process, but need to ensure their approach matches best practise.  Most investors are incredibly busy monitoring their own portfolios and tracking the many investment opportunities open to them.  As a result, they tend to be highly demanding and have little patience for a company unable to structure or focus its story effectively.  Your PR company and broker should help you develop the presentation and rehearse, but ultimately ‘clear, simple and precise’ are the watch words.

An important link to the investment community is your ‘house broker’.  AIM requires every company to appoint a broker, which is a securities house and a Member of the London Stock Exchange. Typically the broker acts as a conduit to the market and provides advice on the market and trading issues, as well as providing the company with feedback from shareholders and potential investors.  Apart from arranging investor meetings and keeping investors up to speed on your progress, one of the vital tasks the house broker should undertake is the publication of investment research.  If they don’t, it’s time to move broker.

Information is the lifeblood of any stock market and equity research significantly increases a company’s visibility.  It helps investors understand the business and keeps them in touch with performance.  Increased analyst coverage has a positive influence on liquidity and should ultimately cut the cost of capital, which increases the valuation.  Working with the equity research community is an important task and building a research following beyond the house broker takes time.

In Religãre’s London office, one of the first people any company meets, whether considering a listing or wanting to access our broking service, is the analyst covering your sector.  The analyst provides the expert opinion on the company’s potential valuation, and in conjunction with the broking team, its likely attraction for investors.  We only take on companies as clients that are independently endorsed by research, broking and corporate finance, to ensure the entire team’s wholehearted support and commitment to delivering the support your business needs.

The analyst should know your industry well and be familiar with its main drivers, along with the valuation metrics and rules of thumb used by investors in the sector.  However, a company still needs to provide some guidance on earnings, as sensible expectations need to be set for the market to assess a company’s performance.  Without this, no one knows if a company has done well or not.

Investing and listing on the stock market requires a long term view.  Building trust and confidence with analysts and investors is key, which takes time and effort.  One of our fund management clients has held one of its investments for over 17 years, while another warns against overestimating what can be done in one year, or underestimating what can be done in five years.  There is a difficult balance, between optimism and caution, to ensure the promoter maximises their value but without being so unrealistic that the market starts to distrust management.  Once trust has been lost, the market becomes the elephant that never forgets.

One area of potential conflict is the valuation and its associated buy/hold/sell recommendation.  While management often gets mesmerised by the recommendation and target price, these reflect a view on valuation, not the quality of the company itself.  Valuation is the analyst’s opinion and provided the data behind it is reasonable, we usually suggest companies don’t worry unduly.  The recommendation is often a mechanical function of the valuation and it is more important to ensure the analyst understands the business in detail and your expectations for the coming years.

Analysts at a company’s own broker may avoid the thorny issue of valuation with a corporate client and ‘leave it to the market’ by not publishing a target price or a recommendation.  However, without a valuation, most fund managers find the investment story lacks substance and the incentive for investing is obscured.  If a company is not happy to have the house broker publish a target price or recommendation, then perhaps the public markets are not the correct place for that business.

With markets currently cautious, it is essential that companies take care to set achievable goals, and clearly explain well in advance any deviation (good or bad) that may occur, as well as having a pro-active programme of meetings aimed at building the relationship with analysts and investors outside the house broker’s client base.  Effective CFOs generally manage to guide analyst forecasts – formally and informally – towards a sensible range and prevent expectations moving so far from reality that a dreaded ‘profit warning’ is required.  Bad news if handled professionally and quickly can avoid a run on the share price; in some instances may even help build trust in management.  Investors know business rarely runs smoothly and may worry if there aren’t any bumps in the road.

Research commissioned by a company – known as ‘paid for research’ – is often used by very small and illiquid businesses to help raise their profile.  We’re unconvinced that this adds much value for institutional investors, as they tend to discount it as biased and in our view, the money is probably better spent on retaining a second broker to generate some competitive pressure.

Market makers are often over-looked in the investor relations programme, although they play a key role in setting daily prices.  Their bid-offer spread – the difference between the price they will buy or sell at – often indicate the impact of news.  Although market makers can rarely spare the time to attend company meetings, a call from the CEO and copies of presentations can do wonders for their confidence in a business.  Similarly, they are often first to get wind of unusual activity and can guide you on what is driving the investors in your company.

A listing is a major undertaking and responsibility, but in joining the London market your company joins one of the most credible and important equity markets in the world.  These days, few investors distinguish between AIM and the main market, as both are run by the London Stock Exchange and share the same investor base.  If your business is well established and unlikely to need further capital on a regular basis, then the main market makes sense.  Conversely, if you are after genuine risk capital or expect to raise equity on a regular basis, then AIM is probably better.  Provided management commits the time and thought to building relations with its stakeholders, the share price should reflect this.

Share prices tend to go up with good investor relations, provided the underlying business is sound.  The market has a long memory and recognising that you need to build a long term relationship with all stakeholders means investing time and money.  Securing good research and broking support is a critical element, but only if you can recognise the needs of investors and analysts.  Religãre Capital Markets is a full member of the London Stock Exchange and is committed to helping Indian companies reach their full potential on the London markets.

Mark Thompson CFA

Environmental Technology analyst and Head of Research (London)
Religãre Capital Markets plc