x Abu Dhabi, UAETuesday 23 January 2018

Untangling investor relations

Ask Oliver Schutzmann why investor relations is such a big deal for GCC firms, and you will not get a glum lecture.

Staying in the news: Emaar, the developer of Dubai Marina and Burj Dubai, has beefed up its investor relations to improve shareholders' access to information.
Staying in the news: Emaar, the developer of Dubai Marina and Burj Dubai, has beefed up its investor relations to improve shareholders' access to information.

Ask Oliver Schutzmann why investor relations (IR) is such a big deal for firms in the GCC, and you will not get a glum lecture on what might seem a dry subject. How companies communicate with their increasingly diverse base of shareholders, he says, lies as much at the centre of the region's economic fate as issues such as corporate board reform, breaking down barriers to foreign ownership and the diversification of industries away from oil.

"You not only have regulatory obligations to fulfil in terms of disclosure, but you also have shareholders who are owners of the company and want to know why they should hold, buy or sell your stock," said Mr Schutzmann, who heads up the IR department for Shuaa Capital, an investment bank in Dubai. "With the development of the market and the growing equity culture here, it has become a necessity to cater to these investors."

According to one estimate, there are only between 30 and 40 fully fledged IR departments among the hundreds of listed companies in the GCC. That figure may increase, however, if more firms cotton on to Mr Schutzmann's argument that IR is an important ingredient in the recipe for getting foreign dollars in the door and profiting from the titanic shift in fortunes from West to East that appears to be well underway. Roughly 50 per cent of global economic growth last year came from China, India and the oil exporting countries, according to figures from the International Monetary Fund - a vast change from a decade ago, when the US, Europe and Japan dominated the scene. With investors worldwide salivating over the opportunities offered in the countries driving global growth, IR is becoming all the more important.

The primary function of IR, experts say, is to avoid movements in a company's stock price based on news and rumours that are not quickly put to rest with a response. In that sense, it is a key component of a company's overarching corporate communications strategy. Secondarily, it functions as a means for raising interest among potential investors and opening up operations to public view - to show, essentially, that it has nothing to hide. Ultimately, the hope is that increasing transparency and giving large shareholders access to executives who can justify the company's strategies will raise confidence and awareness among the broad investing community. That, in turn, should lead to a more efficiently priced stock and better coverage by analysts. It can also mean companies have cheaper access to borrowed capital.

"You hear this regularly - why is our share price so low?" Mr Schutzmann says. "Why doesn't the share price respond to earnings growth, dividend yields and other news? The reason is simple - shareholders cannot evaluate what they cannot see. Unless you give them a clear picture of what is going on in the company, investors cannot make reasoned decisions about their holdings. A lack of information is something you could be punished for as a company."

The past few years are littered with examples of companies in the GCC that have seen seemingly irrational stock price declines - and rises - accompanied by a lack of communication with shareholders. Perhaps the most glaring recent example was Emaar's ill-fated stock-for-land swap last year, sources in the GCC's IR community say. Last March, Emaar announced it had entered into a deal with Dubai Holding, an arm of the Dubai Government, to exchange convertible shares in the company for a massive grant of land. But it took weeks before making any further announcements, leading to speculation and confusion in the markets. One frustrated broker in Dubai was quoted at the time as saying "the lack of information on Emaar's land deal with Dubai Holding" was what was sending the stock's price haywire. The deal was then scrapped later in the year.

The performance of Emaar's shares since then has been poor, in spite of the fact that it has been the UAE's most successful developer, putting its name to signature projects such as the Burj Dubai, the Dubai Marina and Arabian Ranches. From January to its low in July, its stock price tumbled roughly 36 per cent, to Dh10 (US$2.72) per share. During the same stretch, other property firms with shorter track records have done better. Shares in the Abu Dhabi developer, Aldar, for example, lost a modest four per cent for the period.

While it is impossible to link stock performance definitively to anything but the fluctuations of a skittish market, last year's confusion over the failed Dubai Holding deal led, in part, to Emaar putting a greater emphasis on communications. Last October, the company beefed up its investor relations website and created a new service that automatically sends company news to shareholders. "Emaar is committed to lead the region in corporate work ethos including transparency, timely dissemination of information, corporate governance and other investor relations best practices," says Arif Amiri, the head of IR at Emaar. "On a continued basis, Emaar reviews the ways to improve shareholder access to information, and the communication between the company and the shareholders. Emaar adheres to immediate dissemination of important information relating to the company, to the Dubai Financial Market, media and all concerned stakeholders."

The efforts have begun to pay off. Earlier this year, researchers from HSBC wrote in a report that Emaar was one of the world's "most misunderstood" companies, and that investors had unduly punished it for corporate governance and communications practices it had already drastically bettered. "They've definitely improved their corporate communications," says Majed Azzam, one of the HSBC analysts who wrote the report.

What happened with Emaar exemplifies the way in which corporate IR is evolving in the GCC, industry experts say. As experience shows that IR plays a crucial role - especially for companies that, like Emaar, have a global reach and actively seek out foreign investors, who are used to solid communications arms - more firms are likely to spend more money on getting the word out. "There have been a number of pressures, both global and regional, that have come together in the last few years," says Michael Chojnacki, a banker at The Bank of New York Mellon, which has offices in Dubai and Abu Dhabi. "With the markets as they are, institutional investors are looking ever deeper for opportunities, and the Middle East has certainly benefited from this trend.

"Many of those investors have specific expectations when investing in companies. For example, they want access to critical information in a timely fashion and to have clear lines of communication into senior management. More and more companies in the Middle East are recognising this reality." Just this month, Mr Chojnacki teamed up with a former colleague at Thompson Reuters to form the Middle East Investor Relations Society, a non-profit group that is to promote the practice in the region. They signed up the likes of Mr Amiri and officials at the telecoms company, du, the energy company, Taqa, and the interior construction firm, Depa, to sit on its board. While the exact plans of the society have yet to be formulated, lectures, seminars, awards and surveys are in the works.

"The ultimate objective of investment relations is to ensure a fair valuation of the company is reflected in its price," Mr Chojnacki says. "Investors want to see past the distorting effect of rumours and speculation around a stock, and the best way to achieve that is to put in place an internal mechanism - investor relations - that acts as a 'face' for the company and tells its story to the outside world in a clear, concise and engaging fashion."

So will IR spread like wildfire across the Middle East? "There's a lot of change going on in this market with the arrival of the international investment community," Mr Schutzmann says. "They have a whole different set of requirements, and companies will be forced to meet them if they want that capital. Every company in the UAE is in growth mode, and if you want to grow beyond the country's borders, you're going to need capital."