Customs Street Advisors

This week on Street Talking in NEXT, I discuss the challenges small- and mid-cap companies on the Nigerian Stock Exchange face in attracting and sustaining investment community attention. I conclude with a number of recommendations.

Initial public offerings and listings are very exciting events in the life of a company. Endless consulting sessions with advisers, regulatory filings, travel logistics for road shows, analyst presentations and PR campaign vetting impress on insiders that the company is crossing an historic threshold.

For a CEO few things can rival the sense of accomplishment of ringing the trading floor bell under the adoring gaze of the Exchange’s leadership on listing day. Afterward, the company hosts stock brokers and the capital market correspondents to a sumptuous banquet in the large hall on the 11^th floor of the Stock Exchange building. The banter is optimistic and the mood is heady. It is the company’s day and it has every right to bask in the glory. By ‘tradition’, the company’s newly listed stock will rise on the first day of trading. The following day, the newspapers will all duly report the surge in demand under blaring headlines. ‘XYZ Plc’s rise maximum 5% as investors jostle for shares.’ ‘MNO stocks are the best thing to happen to the stock market in many years.’ Intoxicating stuff. Who would not want these halcyon days to last forever?

Unfortunately, like most honeymoons, the euphoria is usually short-lived. The company quickly realizes that the real race has only just begun in the competition for capital. The categorization ‘also-ran’ perfectly captures the fate that awaits most companies. Perverse as this may sound, for many companies, the spiral to irrelevance begins almost immediately. New levels, new devils.

Here, information or more correctly, the distribution of information across the investment community, is the key differentiator. Since markets are driven by information only those companies that have ‘rooms with a view’, in this case, analyst coverage and media visibility, can expect investment community mindshare. Companies which receive little or none of both are almost doomed from the starting block. Their sentence is confinement to a dank attic. These stocks which are covered by fewer than three analysts are derogatorily called orphans.

From the get-go, some companies, like silver spoon scions, have it easier than others. Large-cap stocks and companies with widely popular brands generally fare better than mid-cap and small-cap stocks for three reasons.

First, they are more likely to have institutional presence on their share registers, providing an incentive to investment banks and independent research boutiques to cover them. Second, they are more likely to have media visibility through product launches, promotions, executive thought leadership and high profile ad campaigns increasing the chances of their pickup on the investment community’s radar. Third, they are more likely to enjoy sell-side research coverage because there are higher chances of engaging investment banks for high margin advisory work, which in turn subsidizes research.

Faced with these inherent disadvantages, what options do these companies have?

In the past two years, some leading stock exchanges, notably the London Stock Exchange (LSE), NASDAQ OMX and NYSE Euronext, have come to recognize that they ought to provide more than just a capital raising and securities trading platform for corporate issuers, particularly ex-large cap stocks. These exchanges have moved in to fill the information breach between issuers and investors.

In May 2008, the LSE kicked off the trend by creating PSQ Analytics, a non-profit, moderately priced, intermediated research service, to provide ‘better information on a wider range of potential investments for investors.’

John Eade, president of Argus Research, one of the participant independent research providers in PSQ Analytics talks about the rationale behind the service in the following video.

Following closely on its heels, in May 2009, NYSE Euronext entered into an agreement with Virtua Research, the online research provider, to provide independent coverage to a pilot group of companies.

More recently, in January 2010, NASDAQ OMX expanded its June 2009 agreement with Morningstar, the leading research provider, to provide comprehensive analyst research reports on all listed companies. As a rule, these exchanges opted to work with independent research providers to limit the risk of conflicts of interest in recommendations.

However, simply preparing and distributing research is not enough since most independent research providers do not have a sales force nor their own captive internal trader audience for teach-ins.

To round the circle, the stock exchange in conjunction with quoted companies should also facilitate events that raise the profile of companies and their executives in shareholder-relevant contexts. Events like the ‘Facts behind the Figures’  where companies present their latest figures to the investment community should be compulsory, timely and given more publicity. On their own, companies need to provide greater financial press access to executives.

While research reports, informative corporate websites sections and media coverage all play important roles, nothing compares to the value of first-hand advocacy of corporate value creation by company executives. Companies must prioritize face-to-face meetings with investors in executive calendars. Until such steps are taken, many stocks will not benefit from the full heritage of a stock market quotation. Instead, they will continue to be treated like illegitimate offspring, neither seen nor heard.

The original article may be read here on the NEXT website.

Addendum:

Shane Smith, the chairman and CEO of Independent International Investment Research Plc (IIR), which runs PSQ Analytics, has graciously drawn my attention to innovative efforts by the Australian Securities Exchange (ASX), Bursa Malaysia and Singapore Exchange (SGX) to provide research coverage to ex-large cap stocks. These initiatives predate the launch of PSQ Analytics, the London Stock Exchange’s own after-market equity research coverage solution for this category of companies.

In December 2003, the SGX announced the launch of its Research Incentive Scheme (RIS) to promote research coverage on companies listed on its Exchange. RIS now has ninety-three participating companies. At launch, ten research providers agreed to work with the SGX, namely CIMB-GK Research, CLSA (Singapore), DBS Vickers Research, DMG & Partners Securities, Kim Eng Research, NRA Capital, OCBC Investment research, Phillip Securities Research, SIAS Research, Standard & Poor’s and Westcomb Securities.

In June 2009, Standard  &  Poor’s  Equity  Research,  the  world’s  largest producer of  independent equity  research, announced  that  it had extended its agreement with the SGX  to  provide  fundamental  equity  research  for the Exchange’s Structured Module of the new SGX Equity Research Insights (SERI) program. DnB Nor Markets, the Norwegian financial services group, also participates in the SERI program.

In June 2005, Bursa Malaysia, the Malaysian Securities Exchange, announced that it was launching the CMDF - Bursa Research Scheme to generate interest in smaller capitalized stocks.

In November 2006, the ASX announced a partnership with Finsia, the Financial Services Institute of Australia, to provide equity research coverage for ASX-listed companies. At launch, six independent and broker research providers agreed to participate in the program: ABN AMRO, Aspect Huntley Morningstar, Wilson HTM, Macquarie Bank, Property Investment Research, and E.L.&C. Baillieu.

The October 2009 edition of IR Magazine has an excellent analysis on the motivations of Asian exchanges that provide intermediated research, notably Bursa Malaysia and SGX, as well as investment community reception of the programs.

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