Trading statements are eagerly awaited by investors and whilst it’s hoped they will provide plenty of detail to digest, what many people are looking for are those key magic words: “trading remains in-line with expectations”.
This might be encouraging, but what does it actually mean? And what if results are above or below expectations? More importantly, what were these expectations and how excited or disappointed should investors be getting?
For the majority of investors these expectations are completely unknown, so the statement is meaningless unless quantified with an actual number. The “market expectation” is generally the consensus of the forecasts produced by equity analysts and only FCA qualified or institutional clients of investment banks have access to these numbers.
There are two issues here: the first is that Small Cap and AIM listed companies are discouraged from giving specific guidance, and more specifically on publishing forecasts; the second is that private investors are deliberately denied access to the key information needed to measure success or failure in company performance.
Tackling the first issue it has always seemed strange that smaller companies don’t follow the example of larger FTSE 100 companies by providing published guidance on expectations. Rolls Royce recently advised investors that first half underlying profits are “expected to be between £390m and £430m”. So why can’t smaller companies do the same? There is nothing precluding them from doing so. AIM Directors often have it drilled into them that they can’t provide a profit forecast, but there’s nothing in the AIM rules stopping them from doing so.
The second issue is the availability of expectations and research.
Research notes contain a target price and a recommendation and the FCA protects retail investors from exposure to such financial promotions by denying access. As a result forecasts are only published for a private club and the FCA “protection” serves to disadvantage smaller shareholders.
But there’s nothing stopping private investors from seeing forecasts. A number of independent research houses produce research that is accessible for private investors but these need to be paid for by the listed companies themselves.
It’s high time that the FCA and London Stock Exchange recognise the disadvantage that having market forecasts available for a select audience and ensure that everyone has access to the consensus expectations.
New Zealand’s equivalent of AIM provides publicly available research and forecasts for all companies as a matter of course – perhaps it’s not just in rugby that the kiwis lead the way.
The only time when providing a profit forecast becomes an issue is in the case of a bid for the company or if a major acquisition is looming, in which case any profit forecasts need to be supported by a report from an independent accountant or auditor confirming the assumptions are consistent with the company’s accounting policies. This might not sound too daunting but many a corporate adviser has scared directors with the costs of such a report coming in at up to £200,000 (this would only be in the most complicated circumstances, but in simpler cases more likely to be tens of thousands instead). But cost aside, a cynic might wonder if institutional brokers also have a vested interest in only allowing their analysts to provide company forecasts to their institutional clients.