Investor Relations in Hush-Hush Culture
September 10, 2014
One of the things finance students learn in university is the characteristics of an efficient stock market. In 1970, economist Eugene Fama developed the Efficient Market Hypothesis (EMH) which argues that investors ultimately cannot outperform the market since all relevant information is already reflected in the stock price. In practice, however, not all markets can subscribe to this hypothesis simply because there isn’t really a level playing field for all investors in terms of access to relevant information. Hence, a strong, efficient market is one where everyone has access to the same level of information and where traders rarely, if ever, make gains on hidden information — simply because there is none.
Conversely, a weak, inefficient market is one where there is no level playing field and consequently there is ample opportunity for a trader to make a quick buck because he knows something everyone else doesn’t or before everyone did. When it comes to the Egyptian Exchange (EGX), we’re really not the experts to decide where it falls on the scale of zero (inefficient) to ten (highly efficient); we will however, point out some of our observations.
A quick sift through the websites of EGX-listed companies readily shows that what can constitute a big part of EGX inefficiencies is not the access to information, but the availability of information to begin with. While the majority of listed companies do meet a minimum level of disclosure and release their financials periodically — in line with the EGX’s requirements — only a handful have developed what can be classified as world-class investor relations (IR) material. Based on our experience in the industry and the amount of effort it takes us to convince Egyptian corporations of the importance of IR, we can comfortably assert that the deficit in information is primarily attributable to the culture of business in Egypt.
Most Egyptian companies, even ones that are now major multinationals, originally evolved from tightly-knit, one-man-show family businesses of the type that view financial information such as EBITDA margins and revenue constituents as top-secret intel. The misconception held by these companies is that if this type of information were to fall in the hands of competitors, their companies would be run out of business; this of course is far from the truth. Information such as manufacturing know-how and R&D developments should obviously be kept secret, but disseminating the greater bulk of your financial information actually works to your favor, for a number of reasons.
For starters, quality IR material helps your current investors better understand your company and supports your share price. It also opens up financing opportunities, whether debt or equity, as interested financiers would be able to readily asses your company for potential opportunities. A banker on the lookout for new clients would automatically put you on his target list if he could see that your free cash flow is sufficient to support a certain level of debt. Likewise, potential investors will not necessarily be too concerned about the drop in your top-line revenues if it is clearly communicated that the drop is due to a hiccup in operations in war-torn Syria and that your lines of business in Europe and East Africa are doing just fine.
It is not only investors and bankers who care about this sort of information: believe it or not, some customers actually do dig into as well. If, for example, a homebuyer were to invest well over EGP 1 million — the prevailing market prices for Egyptian real estate — with a property developer, knowing that the developer is financially solid and can deliver on time makes a world of difference.
A good investor relations program does more than allow a company to meet a requirement set by the stock exchange so it can boast high levels of development and efficiency: It is an intangible asset akin to your goodwill that can only strengthen your company’s position as a world-class business.