Tuesday, July 3, 2012

What ACE market companies should perhaps do to improve on perceptions

There are a total 113 ACE market companies in Malaysia and out of that, only a handful are of quality ones. We used to have more but some delistings and progressions to Main Board have caused this group to shrink. Over the last few years, number of newly listed ones has really deteriorated, which is a cause for concern as this should be a platform for smaller companies to raise funds and also to allow the building of the SME market.

One of the main cause for concern for investment bankers to carry these small companies is the lack of  quality companies, they say. This however defeats the main purpose of Bursa and SC having the ACE market, i.e. to groom small companies and allow entrepreneurship to bloom. You do not groom companies when you do not create avenue for them to raise funds. We however cannot blame these bankers as previous cases such as IRIS, FTEC and many others have caused retail investors to lose quite some money which also caused SC to be extra careful.

While I feel that being careful is good, this defeats the purpose of creating a nation with enough good entrepreneurs rather than just having obedient employees.

To improve on the number of listings, some things have to change. If the bankers are not helping, I feel that the onus goes to the listed companies themselves to help to do the selling. Here are what I find more ACE companies should take note of in trying to improve their saleability as relying on bankers would be a tough one. By improving on the perception, the investors will be back.

Add on the information and be truthful

It is not just enough to have a good business but yet few information is provided on the websites or annual reports. A common mistake that most Chairperson(s) or CEOs have done is to virtually copy what others have on their statements to shareholders. Whenever I wanted to know more about the company as well as trying to find out the opinion of the CEOs, I would "google" or read its Annual Reports. However, more often than not, either the Chairman and/or CEO would start the statement with the macro-economic condition of the country leaving only a few paragraphs (if we are lucky) with the micro-economic outlook of the company. What most of them missed out is that, if I want to know the macro condition of the economy I would read The Economists, WSJ or other related papers on economics. People like us who do not know much about the business or industry that they are in would like to know more, from the managers. It would help if there are time spent by the CEOs on explaining as well as providing their frank viewpoint themselves. Let shareholders evaluate you and your business. Continue with the engagement.

Even in IPOs, while information from companies such as Frost and Sullivan is helpful, it is just not what I seek. I seek the opinion of the CEO rather than understanding the business from the perspective of Frost and Sullivan. Even for example, the IHH IPO, I do not get the opinion of the CEO but rather statement from the MD of Khazanah. Why would I want to know the opinion of the MD of Khazanah for, someone who is not running the company? If we are interested to invest, we want to know the business and it should come from the person who knows.

ACE companies, most of them are even worse. After the IPO prospectus, they no longer engage with their shareholders. Annual Report should be a platform for them to convey their messages. By being very truthful on this platform, we will seek to read their annual statements yearly like many of the investment communities seeking to read Warren Buffett's annual statement to his shareholders! Just like it takes time to build the business, it takes time to build the trust of the investors group especially for small companies.

Drop the syndicates

Some small companies hire (as I would think) agents or stockists to support their share price. The legal ones are called market makers (or recently price stabilization managers) which companies like IHH, FGVH hire while the illegal ones are called syndicates - to me both are the same. They are used to support share price (or often meddle with the price) either way you call it.

The problem however, when these small companies hire syndicates, the syndicates are into making money for themselves as well. It will destroy the perception of the company. Whenever that happens, only retailers with gambling or short term mentality will follow your company. The trade on the company will be much more volatile. More often than not small retailers would be the one who lose as this is a zero sum game. It will just destroy what you would want for your company if you are in for the long term. To build a strong company, it is not just the business itself. In includes the corporate side of things. If however, you are in for the short term, then this article is not for you.

Have a smaller loose float

The SC may not agree with this, but small companies are prone to third party syndicates play with or without the involvement of the main shareholders. This is because it costs much less to control the share price as these companies are of much smaller market cap. If the float for the ACE market companies are too large, it can become a platform for third party control. Once this happens, the management of the company would probably be too busy fending off external parties than committing to the business - see previous management of GHL. Again the volatility of the stock could have gone higher and long term investors may lose interest.

Have a clear dividend policy if possible

While not all companies can do this consistently, it is quite important to convey the dividend policies to shareholders. One must understand, some shareholders are into dividends and by having a clearer message to shareholders, it could have built the trust of the shareholders. However, by giving out too much dividend, it could impact the growth of the company - you do not need to over commit. Start small.

Sometimes ignore the investment bankers

These people are called sponsors but their main intention is to make money from the listings (not wrong though) but yet they do not want to take risks. They are more afraid of needing to answer to the stakeholders (SC, Bursa) than anything else. They have checklists of what to do and what not to do - but most of the time these people lack experience and only concentrate on what not to do. You see, business people and bankers do not tag well. Business people are more of a risk takers while bankers are much risk averse people.
(However, this does not mean to ignore the SC's guidelines as I do not want to be blamed for directors' being reprimanded)


Anonymous said...

The usual suspect for ACE companies not paying dividends are because their cashflow are horrible. They depend on bankers and public investors to support their operations.

felicity said...

Quite right. But I am reaching out to the 15% or less :)