Timeliness of annual reports

BY EDDIE RAZAK


In general, Malaysian listed companies take about four to five months to publish their annual reports. However, a few listed companies have put in extra effort to publish their annual reports within the first three months after their financial year-end.

Public Bank Bhd took 89 days, barely three months, to produce its 2003 annual report. Whilst this is already a good achievement, it has since then reduced the turnaround time to a mere 34 days to produce its 2008 annual report. Bursa Malaysia Bhd, which commenced listing in March 2005, has significantly reduced its turnaround time, from 123 days for its maiden 2004 annual report to 70 days for its 2008 annual report.

Boustead Holdings Bhd, NCB Holdings Bhd and Malayan Banking Bhd have consistently released their annual reports within the third month of their financial year-end. Interestingly, these government-linked companies (GLCs) are among the leaders in pursuing best market practises in annual reports.

Some of the related companies in the same group are as equally efficient, notably LPI Capital Bhd, a related company of Public Bank Group, and Boustead Heavy Industries Corporation Bhd and UAC Bhd, which are subsidiaries of Boustead Holdings Bhd. This is a reflection of the quality of their group’s management and how its efficiency in reporting permeates the group.

These companies are role models for other listed companies in terms of annual reporting. They have demonstrated that it is possible to release a complete record of the company’s full-year activities and performance within a short time frame, although the window of time given to do so is much longer (see chart).

Under Bursa Malaysia’s securities listing requirements, a listed companies must issue its audited accounts and lodge it with the exchange within four months (unless it has released its annual report) and its annual report no later than six months after its financial year-end. This provides a window of four months to get the accounts audited and another two months to complete the annual report.

As it is, listed companies are required to announce their financial results within two months of the quarter’s end. For the fourth-quarter results announcement, listed companies have to ensure the announced profit after tax and minority interest does not deviate by 10% or more from the accounts that are eventually audited. Otherwise, an explanation is required. Therefore, most companies would get their auditors to work early to ensure that the fourth-quarter results announcement is as close as possible to the final audited accounts.

That being the case, if companies brought forward the audit process, or even commenced the audit before the close of the financial year, it is possible to complete the audited accounts within the two month deadline of financial results announcement. This would pave the way for them to be able to release the annual reports within the third month of their financial year-end or even sooner.

With a proper execution plan put in place well ahead of the financial year-end, and with the will of management, companies can set an internal deadline to publish their annual report early. It is not just the content of the annual report that is important, but also the speed with which the report is made available.

Take Berkshire Hathaway’s annual report – it has no pictures or graphics but it comes out consistently in February, two months after its financial year-end.

The longer it takes for the annual report to be released, the less relevant it becomes, as much of the information it contains will become outdated. Business performance may change drastically in today’s rapidly changing economic landscape. Shareholders, analysts and investors may already be anticipating the company’s first-quarter financial results before the annual report comes out and the company may have foregone the opportunity to allow investors to study the company’s business in depth through the annual report. Although long-term investors welcome the annual report to help them understand the company better, short-term investors are more concerned with timely information to help them make spot investment decisions.

Efficient market hypothesis advocates that timeliness of material information is crucial to determining the true value of a listed company’s share price. This implies that all publicly available information, including management’s discourse on the company’s prospects, will be factored in towards determining the company’s share price. Therefore, the longer the annual report takes to be issued, the less complete the information would be for share valuation and price discovery. Any information gap would only benefit insiders who have access to exclusive information that is not yet publicly available.

Securities laws and regulations in developed countries require the annual report, or an equivalent comprehensive full-year disclosure document, to be filed with the regulators within a shorter time frame than in Malaysia. For instance, the deadline is three months in Japan, four months in the UK, and 60 days for companies with large market capitalisation and 75 or 90 days for smaller companies in the US.

A shorter annual reporting deadline requires greater management discipline by listed companies, but does not add much to the company’s cost of compliance. It makes for a more efficient capital market as information is disseminated sooner and is therefore more relevant.

The investment community desires information that is not only comprehensive, but also timely.

This article was published in The Edge Malaysia on 27 April 2009.

Getting on the right side of shareholders

BY EDDIE RAZAK


Since the outbreak of the financial crisis in the US, we have witnessed numerous global financial institutions needing to raise funds to shore up their capital base as they write down the toxic assets in their books. Those financial institutions that do not get bailouts from their governments have no choice but to turn to their shareholders for cash injection.

The systemic spread of the financial crisis has caused a credit crunch globally. Businesses are finding it difficult to get funding, as banks pull back on lending. Of late, not only financial institutions but also companies in other sectors have resorted to raising funds through their shareholders.

Suddenly we see many public listed companies competing to obtain capital from their shareholders through rights issues. More companies now see the importance of their shareholders and are hastily ramping up their investor communication to get shareholder buy-in.

The success of any rights issue is very much dependent on whether the listed company has substantial support from its shareholders and how strong its major shareholders are.

For instance, in the case of Malayan Banking Bhd’s (Maybank) proposed RM6 billion rights issue, Permodalan Nasional Bhd and its subsidiaries, which collectively hold a 55.7% stake, have undertaken to subscribe for their entitlements in full and apply for an excess allocation of 20% of the issue. Together with the Employees Provident Fund’s (EPF) undertaking to subscribe for its 13.7% entitlement, Maybank has effectively secured significant support from its substantial shareholders, with 89.4% of the rights issue taken up.

Similarly, in the case of TM International Bhd’s (soon to be known as Axiata) proposed RM5.25 billion rights issue, Khazanah Nasional Bhd has provided an undertaking to subscribe for its 44.5% entitlement plus another 20%, should the minority shareholders renounce their entitlements. Assuming the EPF and Skim Amanah Saham Bumiputera (with 16% and 8.5% stakes respectively) are willing to pick up their entitlements, TMI would secure an 89% take up of its rights issue.

Across the Causeway, Singapore-listed Chartered Semiconductor Manufacturing, which plans to raise US$300 million through its rights issue, has received an undertaking from its 59.4% owner, Temasek Holdings to subscribe for up to 90% of the issue.

With the backing of major shareholders who have the resources to support the rights issue, the exercise is sure to succeed, regardless of negative market commentaries, adverse analyst calls or declining share prices and in spite of any dissenting voices among the minority shareholders.

In contrast, if a listed company has a fragmented shareholding or if its shareholders do not have deep pockets, it will have a harder time with its rights issue.

First, the company will face an uphill task to convince its shareholders at the emergency general meeting (EGM) to approve the rights issue resolution.

Shareholders, who may have become accustomed to receiving constant dividends from the company, now have to consider the prospect of their stake being diluted if they choose to renounce their rights entitlement. Obviously, shareholders will thoroughly examine the rationale for the cash call.

Are the proceeds from the rights issue to be used to repair the balance sheet due to depleting shareholders’ funds arising from mounting losses? Did the continuous erosion of cash resources require additional working capital to be injected? Did mismanagement of the capital structure lead to a possible cross-default of debt covenants, necessitating a cash injection to pare down debt and improve the gearing ratio?

Whatever the reasons, the company now recognises that there is a lot to explain in terms of scenario and strategy in campaigning for support of its rights issue.

Second, even if the listed company garners enough proxy votes at the EGM to pass the rights issue resolution, it still does not mean the shareholders will dutifully put their money on the table.

If they cannot visualise the prospects for the company post-cash call, they are likely to walk away rather than invest further despite being offered a hefty discount on the rights issue price. Smaller shareholders who would rather conserve their cash in this economic downturn would be hard-pressed to fork out money to supplement their stake in the company. Moreover, there are many buying opportunities available at bargain-basement prices in today’s market.

Third, the rights issue exercise may fail altogether if there is insufficient shareholder interest or if there is a massive selldown and the share price falls below the rights issue price. This would not only derail the company’s recovery plan, but also further damage its reputation and confidence in its prospects.

Hence, if the listed company has had consistent investor communication over the years, it would probably be much easier to gain the support of its shareholders. Assuming that its long-term outlook is indeed favourable, if it had been vigilant in maintaining investor communication, the company would find its efforts paying off when it comes to fundraising exercises. The listed company’s investment in investor relations may not be explicitly reflected in its accounting books, but its invisible benefits begin to emerge once the company’s cash call receives the right response from shareholders.


This article was published in The Edge Malaysia on 6 April 2009.