Investor Relations Advisory
Are your Board, your C-Suite and your shareholders satisfied with the current valuation of the company? It is easy to point to current macro and geo-political conditions as a drag on share price development. Often I read, “Just stay the course, engage with investors, communicate regularly and the share price will eventually take care of itself.” Falling back on “index beta” performance is not the answer. At JP Advisors, our investor relations advisory focuses on valuation discovery and optimisation. What does this mean? It is impossible to enhance your share price without understanding with certainty why the shares are trading where they are and what the investment community needs in order to make higher conviction investment decisions. Are your board and C-suite on the same page as your shareholders? It is often the case that there are key areas of misalignment in the way the internal stakeholders view the company vs shareholders. This results in a valuation gap to fair value that can be addressed through a well thought out and executed investor relations roadmap. Every company is different and requires a bespoke approach to valuation discovery and optimisation. JP Advisors’ investor relations advisory has a comprehensive tool box to create unique valuation enhancement roadmaps. This may include, but not be limited to, comprehensive investor perception research, investor presentation review and enhancement, advanced investor mapping and targeting, and capital markets day planning. Investor relations is a fast moving and dynamic industry. Often, it is difficult to map a 12-24 month valuation enhancement plan as results, roadshows, annual reports, corporate actions, activist investor situations, ESG and internal requests all demand immediate time and resources. This prevents an IR team with a fixed set of resources from adequately planning the best possible IR strategy and execution. JP Advisors investor relations advisory acts as an extension of the IR team with a laser focus on the valuation discovery and optimisation plan, providing experienced insight and bandwidth to help satisfy the demands of the board, c-suite and the investment community. To learn more and to set up an initial call, contact us today!
Perception Studies – Strategic tool or waste of resources?
I talk to many companies about investor perception research. Why do it? Is it worth it? Anyone can do an investor perception study….or can they? Let’s spend 3 minutes diving into a very misunderstood strategic tool. Creating the highest sustainable valuation must be a primary goal of every investor relations team. A perception research project done the right way can be a huge contributor to that goal. Conversely, done the wrong way it can be an expensive waste of money and resources. It is my strong view that any perception study must have the full support of the board and the management team. This is not an exercise to simply measure the impact of investor relations. It is a strategic project to identify specific areas of misalignment between the board, management, IR, and the investment community with specific actions to improve them. Misalignment is a value destroyer. The best management and IR teams that I have seen embrace perception research as an important tool to create certainty about how to improve and enhance their communication and ultimately their valuation. What if it makes me look bad? How can a detailed roadmap to better communication and valuation make one look bad? The right perception research project enhances the reputation and impact of investor relations, both internally and externally. The key of course is defining what the right perception research project looks like. It is a pointless exercise unless you have defined goals in mind and understand how you are going to leverage the results. Perception research done well is a dynamic tool to drive a well-thought-out investor relations strategy. That means working backwards from where you want to be. Are you planning a capital markets day? Do you want to re-work your investment thesis and presentation? Does the board need better information about how investors view the company? Has there been a management change and a desire to understand how best to communicate with the investment community? Be very wary of boilerplate perception studies conducted by anyone. The provider needs to understand the company, the sell-side views, the broader goals of the board and management and how IR intends to extract maximum value from the project. Sometimes I find myself discouraging potential clients from a project given uncertainty about any of the above. There is a time and place for perception research and done well, it is an invaluable tool for IR, the management, and the board. Let’s discuss when it makes sense for you.
It’s Lonely at the Top
It may not seem so, but the CEO has many masters. Managing expectations of the C-Suite, employees, customers, shareholders, broader stakeholders, and the board of directors can make for challenging sailing. Often, the Board of Directors focuses on the KPIs set out for the CEO and C-Suite in the remuneration report to gauge progress and success. Falling short of goals puts short term pressure on the CEO to implement initiatives to maintain board support lest he/she risk a loss of confidence. In parallel with this, the CEO needs to be focused on a clearly articulated and effective corporate strategy to ensure success and longevity over time. Creating buy-in and support internally may be easier given the medium to long term outlook of employees, but shareholders are far less patient. Shareholder structure has evolved over the past 20+ years, with passive index investors often holding 15-20% of a company. While not focusing on company financial fundamentals, these funds have a huge influence on governance and sustainability, with increasing influence on non-financial metrics that may impact optimal decision making that is in the best interests of all shareholders. The broader hedge fund community continues to punch above their weight, often taking a more active role in trying to influence capital allocation to drive short term shareholder returns, possibly at the expense of the longer term health of the business. Traditional long only investors, while regularly taking a longer term view of investments, will nonetheless often side with activist campaigns much to the surprise of management team who believed they had full support and strong relationships. Our recent research supports the notion that, while the broader investment community maintains a focus on ESG, ultimate investment decisions are still driven by company fundamentals. (The vast majority of investors say not meeting ESG targets does not prevent them from investing). This means companies must take a nuanced approach to how they integrate their ESG messaging into the investment thesis. Investors need tangible evidence of solid and improving growth and financial metrics that will drive cash flow and shareholder returns, first and foremost. So, where does this leave the CEO? It is crucial to ensure the best possible alignment between the board and C-Suite. Outside of the Chairman and lead independent director, the capital markets knowledge and understanding of the broader board may be limited. Conducting Board Alignment Research achieves three important goals. First, it identifies key knowledge gaps across the board that can be readily improved. Second, it builds greater board confidence in the CEO and C-Suite as a proactive initiative to create the best possible alignment. Lastly, it creates a more unified and consistent message to the investment community, creating a longer runway to execute on the strategy and drive investment into the company. I just don’t see how companies can ignore this critical piece of long term value creation.
Do the board and C-Suite understand what drives the share price?
Famed value investor David Einhorn recently suggested, “I view the market as fundamentally broken. As algorithmic and passive traders chase after price, overvalued portions of the market are disproportionately bought. Instead of stocks reverting toward value, they actually diverge from value. It’s a structure that means that almost the best way to get your stock to go up is to start by being overvalued.” What does this mean for fundamentally discounted value stocks? As passive funds flows continue to grow, these value stocks get left further behind, and the discount continues to grow. It is incredibly frustrating for disciplined value investors and for CEOs who remain at a loss as to why their shares are fundamentally undervalued. For small and mid-cap stocks, it is even worse. In my view, there are four potential outcomes. First, investors will press hard for share buybacks to help reduce the discount to fair value. Capital allocation becomes more challenging as companies must balance shareholder remuneration driven by stock buybacks vs M&A, Capex, leverage, etc. This can lead to misguided short term capital allocation. Second, as share price and valuation discounts extend for a period of time, a company can become a takeover target. This attracts special situation, short term traders interested in a successful takeover to capture M&A premiums. The board can end up in the unenviable position of accepting a discounted offer or declining to engage in the hope future results based on the current strategy will ultimately drive enhanced valuation, often frustrating existing minority shareholders.. Third, the perception of a value trap occurs. Cheap valuations over time lead investors to assume there are fundamental issues that can or will not be addressed and the stock becomes orphaned. It is a downward spiral from there. Lastly, a company can “re-IPO” the company through an enhanced / rebuild / remake of the investment thesis, aligning the board, c-suite and investors with an effective, compelling and credible strategy combined with a new investor engagement plan to drive renewed interest in the company. It is not easy and takes commitment and resource. However, the alternatives to standing still will only get worse over time. I agree with Mr. Einhorn. The markets are fundamentally broken and the traditional process of investor relations requires a re-think. Companies have to take greater control and earn and own their place in the capital markets.