Small-cap hall of fame (and shame)

Good investor relations can be tough at the best of times. Even those with generous budgets and mushrooming IR departments stress the difficulty of ongoing communication with a diverse investor audience. And it can be even harder for small caps, as they often lack resources and designated IR representatives.

Rok Group
Building company Rok Group is one firm that has enjoyed exceptional recognition for its IR efforts. In 2007 it was recognized at the IR Magazine UK Awards, where it earned third place in the race for the grand prix for best smaller company investor relations.

Prior to the global credit crunch, Rok’s share price increased by around 1,000 percent over six years. Like many firms, it has suffered in the market slowdown, yet its IR over the years is difficult to fault. ‘Crucially, through all of this, Rok recognizes that things don’t always go as planned, and it is happy to share with investors any issues that exist and, more importantly, what the firm is going to do about them,’ says Emma Kane, chief executive of UK-based Redleaf Communications.

Rok’s finance director Ashley Martin (pictured left) takes much of the responsibility for IR. ‘Investors and analysts prefer to speak to those responsible for setting strategy and running the business,’ he comments. ‘So we manage IR internally, and ensure that at least I or Garvis Snook, our CEO, attend every investor presentation.’

‘Rok provides in-depth presentations and a comprehensive website with a detailed investor relations section,’ says Kane. ‘The annual report has a comprehensive and clear strategy and business review section. The firm also distributes a magazine to all shareholders, and holds annual analyst and investor days.’

Employees are seen as valued stockholders, too. ‘We firmly believe having a large proportion of our employees as shareholders helps to drive the creation of value,’ Martin says. ‘Our employees are a key target audience and we have recently enhanced our Buy As You Earn scheme to give one free share for every four shares bought.’

Kyphon
Since its inception in 1994, Kyphon, a small cap based in Sunnyvale, California, has been developing therapies that restore spinal function with minimal invasion. Its corporate mission is to be recognized as the global leader in this field and, according to Julie Tracy, vice president and chief communications officer, investor relations is a key element in achieving this.

‘Our objectives are to communicate our long-term value proposition to shareholders, analysts and the investment community; to hold a clear and open dialogue between the company and external parties; and to provide regular feedback from shareholders and key constituents to the management team,’ comments Tracy.

A key part of that is being responsive to shareholders and investors. ‘I’ve heard about companies with large IR teams that do not return phone calls or are unable to respond to inquiries,’ notes Tracy. ’On the flip side, I’ve heard investors give rave reviews about companies where there is a single dedicated IR professional who performs the job very well.’

The company attends sell-side investment conferences and roadshows, conducts its own company-sponsored investor events and provides a comprehensive website. Tracy believes shareholder targeting, if done well, can pay big dividends for companies. She argues that as competition for investment dollars increases, so companies need to target those investors that are most receptive to their specific investment proposition.

There is clearly value to investing in a top-notch IR program. ‘Investors have told me that one of the ways they gauge a company’s commitment to its shareholders and investors is by evaluating how knowledgeable its IRO is,’ says Tracy. ‘The IRO must be more than just a gatekeeper to the CEO and CFO. Above all else, remember that size doesn’t necessarily dictate a company’s ability to conduct a successful and sophisticated IR program.’

Anite Group
Like many smaller companies, telecommunications firm Anite Group, which is listed on the London Stock Exchange, achieves its impressive IR primarily through in-house resources. No one individual handles IR; the chief executive, finance director, company secretary and group financial controller all play an active part.

Anite came second in the running for the IR Magazine UK Awards 2007 grand prix for best smaller company investor relations. ‘The company is very diligent in getting its announcements to the market, and does everything necessary to comply with regulations,’ comments Reg Hoare, director at Smithfield Consultants in London. ‘It is particularly impressive how the team breaks down the numbers: it breaks down its order book by division, and its revenue by type as well as division and location.’

Anite gives a very clear breakdown of research and development expenditure, too. ‘Not only does it show what it has spent, but it also gives a forecast for the next year,’ notes Hoare. ‘Given that R&D can be 10 percent of all costs at a company like Anite, investors like to know where it’s all going.’

‘It’s a complex company, so it’s very helpful that it presents its figures in such an analyst-friendly way,’ says Kevin Ashton, equity research analyst at Bridgewell. ‘I also find its analyst days very helpful. A little while ago I spent an entire day with the company and it was a great way to get to know all about the business.’

...and shame

Dev Property Developments
Dev Property Developments is an Indian company that listed on London’s Alternative Investment Market (AIM) in December 2005. It is one of approximately 80 property companies to have listed on the market since the start of January 2005. But according to Harjiv Singh, New Yorkbased international CEO of IR consultancy Gutenberg Communications, Dev Property Developments is not communicating with investors as well as it could be.

‘The team members at Dev Property aren’t really doing much more than the regulatory basics,’ Singh says. ‘They don’t get out and talk to the financial media beyond issuing the occasional press release. There’s no major problem with them carrying on as they are, but they’re just missing out on such an opportunity to engage investors.’

Singh points out that unlike many of its competitors Dev Property Developments actually owns the properties it develops, and that many of those properties are in Mumbai. With such solid holdings in a city as prosperous and fast-growing as Mumbai, Singh believes Dev Property Developments has great potential, but is failing to get this message out to potential investors.

‘People just aren’t going to take the time to find all this out from the company’s website,’ he warns. ‘They will, however, read the financial press, so you need to make sure your story is in there. The problem is that Dev Property Developments isn’t even producing press releases that tell this great story, let alone proactively contacting the financial press about them.’

Dev Property Developments competes with property developers such as Trinity Capital and Hirco. All three are Indian firms listed on AIM, but Singh feels Trinity Capital and Hirco are having more success at bringing their story to investors. He believes that unless Dev Property Developments makes a real improvement to its performance in this area soon, the problems will translate to its broader financial performance.

Sports Direct
Mike Ashley, maverick boss of UK-based Sports Direct, is no stranger to controversy. While the firm enjoyed consistent success in the private realm, its foray into the public sphere in February 2007 has been less distinguished.

Sports Direct’s IR program has annoyed plenty of analysts, many of whom despaired as the stock shrunk to a third of its flotation price. By the time the company’s maiden results were announced in July 2007, shareholders had lost out to the tune of around £1 bn ($2.1 bn). The City has been highly critical of the company’s communications, and many observers believe poor IR has played a key role in the loss of that £1 bn. Among the gripes was Ashley’s refusal to publish like-for-like sales figures and a reluctance to participate in Q&A sessions.

‘Much of the criticism of Sports Direct has happened because the company has been inaccessible,’ explains Sarah Lindgreen, head of financial PR company MC2. ‘Analysts and journalists have gone on the record to complain that they were unable to get answers to their concerns, and that the company would not have a dialogue with them. The fact that chairman David Richardson, who is well regarded by the City, resigned three months after the float because he couldn’t engage with the management team was also a bad sign.’

Lindgreen further notes that, although the company has now appointed new advisers and is spending more time on investor relations, it will take a significant amount of time and effort to rebuild some degree of trust and engagement with the capital markets.

‘Companies coming to market should take a long-term approach to their relationships with investors,’ Lindgreen adds. ‘Those investors are more likely to give you the benefit of the doubt when the news is challenging if management has offered to spend time with them in the past and demonstrated a willingness to answer questions and concerns in a timely manner.’

Lululemon Athletica
IR magazine has it from a reliable source that Lululemon Athletica’s Hot Yoga shorts are the most comfortable and stylish available. That may be all that matters in the long term as the super-trendy sports apparel maker struggles to put behind it the controversy surrounding its seaweed-infused line of clothing.

Trouble for the Vancouver, Canada-based firm started when a short-seller, attempting to engineer a stock drop, began publicizing his discovery that Lululemon’s VitaSea clothes were no different from ordinary cotton, despite the company’s claims that its fabric contained significant quantities of a seaweed fiber with detoxifying properties. After a New York Times test substantiated the short-seller’s accusations, the US-listed company’s shares fell to $40 after previously trading as high as $60.

Investors haven’t had much time to judge Lululemon on its ongoing IR efforts; it just went public in Toronto and New York last summer. So far, though, the company seems to be holding up under the stress. Founder Chip Wilson said he couldn’t dispute the findings, as he hadn’t done an independent test – though he did say of a garment: ‘If you actually put it on and wear it, it is different from cotton.’

Within a day of the New York Times’ test, Lululemon carried out its own tests on its clothing, finding that the fabric actually had the fiber its labels claimed. Still, the company began removing references to the therapeutic properties in the marketing and tagging of the clothes. It also noted that the VitaSea line represented just 1 percent of sales, and that it would be reviewing its other products.

The moves sound simple, but they were apparently the right ones. As an analyst from RBC Capital Markets commented, ‘The garments’ form-flattering silhouettes will continue to attract customers, more so than any one particular fabric enhancement.’

On a conference call, another analyst – from Goldman Sachs – commended CEO Robert Meers for the company’s response to the VitaSea issue. ‘Good job, I thought, addressing it head on,’ she said.

Lululemon could perhaps have anticipated the controversy. But in the wake of this event, even the flakiest New Age company won’t be able to get away with dubious health claims. IROs can expect checks from increasingly inventive short-sellers who now have the ear of the media.

‘The lesson for any company going public, or currently public, is that the level of scrutiny by the buy side continues to escalate and management teams have to have everything buttoned down, or they will be exposed,’ says Joseph Teklits, senior managing director of ICR, an IR firm working for Lululemon. ‘And if a company wants a premium multiple, it will have to deal with being on many radar screens.’