The 6th Investor Relations Awards

21 July 2016 | By : Dato’ Ahmad Fairuz Zainol Abidin, Deputy Chief Executive, Securities Commission Malaysia

Keynote Address

By
By Dato' Ahmad Fairuz Zainol Abidin

Deputy Chief Executive, Securities Commission Malaysia

at The 6th Investor Relations Awards

Thursday, 21st July 2016

Achieving Fair Valuation Through Investor Relations

YBhg Datuk Seri Tajuddin Atan, CEO Bursa Malaysia;

Mr Steven Tan, Chairman of the Malaysian Investor Relations Association (MIRA);
Members of the Board of MIRA;
Distinguished Guests,
Ladies & Gentlemen

I would like to thank MIRA for the invitation to deliver the keynote address at today’s Investor Relations Awards. This is MIRA’s sixth annual event since 2011 and it marks yet another successful milestone in MIRA’s commitment to facilitating greater communications between public listed companies (PLCs) and the investing public. I would like to commend MIRA for your continuing efforts in promoting and advancing excellence in investor relations (IR).
Notwithstanding the recent market pressures globally, the Malaysian capital market has remained relatively resilient, and continues to be a major source of financing for the economy. The total size of the Malaysian capital market sits at RM2.82 trillion, equivalent to 2.5 times the size of the domestic economy. By the end of 2015, the equity market increased by 2.6% to RM1.70 trillion from RM1.65 trillion in 2014, while the bond and sukuk market grew by 1.4% to RM1.12 trillion, Malaysia has the third largest bond market in Asia, the largest unit trust industry in Southeast Asia and a well-established Islamic capital market. The Malaysian capital market continued to be a major source of financing with RM90 billion raised through the primary market for the fourth consecutive year in 2015. A total of RM86 billion was raised through bonds while RM4 billion was raised via initial public offerings (IPOs). An additional RM17 billion was also raised through the secondary equity market.
In the present prolonged low interest rate environment, which has even declined into negative territory in some markets, investors are on a constant search for yield, looking for options and alternatives to fixed income investments. Equities remain a viable option, and investors looking for stability in returns tend to favour companies with a good governance record, a track record of solid earnings with potential for growth, and preferably, a favourable dividend policy.
Hence, investors’ ability to make an assessment of the valuation of a PLC to invest in becomes of paramount importance, taking into account the financials of the company, its business activities and the vagaries of the industry within which it operates, as well the capabilities of its Board and Management to grow the company further. Valuation being the key, if not sole, principle in guiding an investor’s investment decision.
At a Thomson Reuters event in London this year¹, the importance of valuation was illustrated by a statement that “the global financial crisis began in August 2007 when three French hedge funds limited dealings because of concerns about the valuation of their underlying investments in U.S. mortgage debt.” The growing realization that valuations were unreliable led to a seizing up of markets which, in autumn the following year, led to the fullblown crisis. Now this may be a rather dramatic and exaggerated conclusion to say that valuation was a cause of the GFC, but the murkiness that led to valuation failings helped to create the environment that led to the crisis.

Ladies and Gentlemen,

It is thus very pertinent that MIRA highlights fair valuation as one of the main objectives of the IR function, as reflected in the theme for this year’s event. The IR unit’s approach must effectively communicate the company’s strategy, financials and key milestones to enable current and potential investors to assess “fair valuation” of the company. Perhaps the key element in a sound IR strategy is disclosure of company information that is timely, accurate, sufficient and transparent. And in the spirit of balanced and full disclosure, risks to the company’s business must also be communicated, as well as prompt disclosure of events that may have a negative impact on the company. Hence the role of an IR officer is to facilitate FAIR valuation, rather than ensure the BEST valuation at all costs.
Corporations begin their life-phase of a public listed entity with an abundance of public information made available through their IPO prospectuses, with a view to provide the most comprehensive set of information on its financial performance, business operations, management team and prospects to attract investors to subscribe to its first public share offering. Sadly, once a company is listed, communication of a company’s developments to its shareholders in most cases is limited to merely complying with what needs to be announced under Bursa’s continuing disclosure requirements. Even then, there are cases when disclosure has been misleading or less than adequate, especially when reporting unfavourable developments.
We have even noted several instances last year that certain PLCs were plainly negligent, where typographical errors were made in decimalisation of a dividend declaration and incorrect earnings figures, causing a significant change in the nature of the company’s financial reporting! The companies rectified the errors and subsequent action was taken by the exchange, but carelessness may have adversely affected shareholders and unnecessarily exposed the company to risk of litigation.
A good IR programme must extend communications beyond compulsory disclosures, and should ideally be a channel for two-way communications between the company and its investors, throughout the year. Where this is done, investors get a continuous and clearer picture of the company’s operations and financial situation. 10. Disclosure and communications must be done meaningfully, and not just for the sake of meeting compliance requirements. The use of succinct and plain language must be the practise, avoiding legalese and mounds of irrelevant information. In this regard, the SC has urged corporates, through their corporate advisers, to be mindful of the need to use clear and easily understood language in all manner of disclosure documents and communications.
SC’s emphasis on simplicity of communications is one of the principles underlying our InvestSmart and “SC in the Community” investor empowerment initiatives, through which we engage with all investor segments in an effort to protect and address the concerns of stakeholders and investors in the capital market. Through our engagements and surveys, perhaps the most illuminating aspect gleaned from the feedback we receive is that our assumptions and hypotheses about investor behaviour are constantly challenged.
For instance, in the first half of this year, we began to engage minority shareholders as part of our outreach efforts, on the fringes of the Annual General Meetings of PLCs. Our initial objective was to raise awareness of their rights and responsibilities as investors, and take a dipstick survey on investor demographics, behaviours and knowledge. Some assumptions were borne out – many of the investors only held a few lots in the company, and 88% were above the age of 40, with 71% being 56 and older.
However, it was notable that the respondents displayed a relatively high level of investment knowledge and savviness. Far from attending the AGM just for the lunch and gifts, many of those we engaged with, hoped to seek clarifications on company matters from the Board of Directors during the meeting – the only time they are able to engage with company officials face-to-face. The companies whose AGMs we attended were accommodating to their minority investors, even extending the AGM past the scheduled time to entertain more questions. However, some respondents relayed anecdotes of other AGMs, where the Board was quick to conclude the meeting and cut short questions they deemed as frivolous. We noted that many of these small investors were retired professionals, some in the investing and finance line, so companies would do well to provide them with adequate opportunity to be heard. And exercise patience with them.

Ladies and Gentlemen,

The demographics of investors revealed through our survey also highlight the need for companies to reach out and attract the interest of the next generation of investors. These are the groups who learn about the stock market and traditional forms of investments in their university courses, compete in stock-trading competitions such as the EdgeWiz Campus Investment Challenge that was supported by SC’s InvestSmart last year, yet still trade in unlicensed forex platforms. This group is looking for new and exciting ways to invest, through platforms that are convenient and can provide them information at their fingertips. However, they are sometimes misled by unscrupulous operators.
This emphasises the need for the IR function to not just focus on one investor segment. Institutional investors generally dominate market trade, and have a discernable impact on the price of a company’s stocks. It is a given that every IR programme should certainly address institutions, but it is important not to neglect other investor segments such as the retail segment, especially younger investors. 16. In attracting and reaching out to the younger set, traditional forms of outreach simply will not do. The website is essential, but must have an up-to-date and user-friendly interface else visitors will be frustrated. Even social media, which has long been seen as being the preserve of younger members of the public, is increasingly being used by sophisticated investors as a source of information.
In the last few years, we have witnessed a digital revolution in all aspects of commerce, including the financial sector. Digital is disrupting the capital market ecosystem as we know it. Innovative business models like crowdfunding and peer-to-peer financing, and digital capability like distributed ledger technology (or blockchain), advanced analytics and machine learning are disrupting our capital market value chain.
In keeping pace with the industry digital innovation and market demand, Malaysia became the first country in ASEAN to introduce a regulatory framework back in 2015 to facilitate equity crowdfunding, with six registered equity crowdfunding platforms expected to be fully operational this year. Three months ago, we announced the regulatory framework for peer-to-peer (P2P) financing, setting out the requirements for the registration for P2P platform. It is our view that the pace of digital innovation will continue to increase, making a wider range of investment channels available to investors, as well disintermediating transactions such as stock trading. In the latter case, as investors trade online without the assistance of remisiers and seek information to help them make investment decisions on their own. The presence of an effective IR programme will make the counter more attractive compared to those that do not.
Technology, although requiring constant adaptability of its users, has brought down the costs of undertaking IR programmes, increased convenience and enabled companies to reach out to wider segment of potential investors. In this regard, technology has levelled the playing field between the blue-chips and growth companies on the exchange, enabling effective IR to be within the reach of all.
To be truly effective, the IR function must have the full commitment and support of the Board and senior management. IR officers have the potential to be the eyes and ears of the company in the market, delivering crucial insight into market sentiment and investor behaviours.

Ladies and Gentlemen,

As I conclude my remarks, it is important to note that all stakeholders of the capital market, the SC included, would like to see greater informed participation in the market. While the SC develops policies to facilitate this, we hope to see companies playing their role by cultivating relationships with their investors. As corporates vie for funds in the current market environment, it is imperative that good governance and the development of good IR practices are undertaken by all public listed companies.
We look to MIRA to strengthen the relationship between companies and its shareholders, in order that investors are able to more efficiently assess the value proposition of the company in order to make an informed investment decision.
I would like to take this opportunity to congratulate all the award recipients in the various categories.

Thank you.

¹ “COLUMN: The value of valuation: do you need a chief valuation officer?”, Thomson Reuters Accelus, 23 June 2016