Communications must be upgraded
• Ratings downgrades highlight the need for sustained activity in keeping key stakeholders fully appraised
It is a generally accepted principle that investors are not comfortable with uncertainty. South African listed entities and those accessing debt markets can therefore expect somewhat of a backlash given the ratings downgrades that appear to be pushing the country over the economic cliff face.
This sounds rather dramatic, sensationalist even. But the swift reaction from ratings agencies to President Jacob Zuma’s cabinet reshuffle in March this year places the economy in a precarious position. Add to this the surprise contraction in firstquarter growth that places SA in a technical recession and company executives have every reason to be nervous.
Those nerves would naturally be around prospects for business growth and sustainability, although the country’s reliance on foreign investment into capital markets should also be setting off alarm bells. But are they though? Alarm bells, after all, are a warning of impending danger. It is how one reacts to such an alert that ultimately determines the outcome.
This is a point taken up by Chris Gilmour, chair of the Investment Analysts Society of SA (IAS). “The best time to establish relationships with investors, the media and other interested stakeholders is when you don’t need them. Don’t just try curry to favour in the good times, because in the bad times you’ll really need them,” he suggests.
This is a practice he recommends that local companies and their executives adopt in light of the recent turn of political and economic events in SA, to provide some level of protection against the panicked flight of investors.
“I think the likelihood of us emerging from recession quickly and moving onto a strong sustainable growth path is improbable,” he says.
“With that in mind, how companies respond to that is going to be difficult.”
CHALLENGES
These challenges may present difficulties, but in no way are they insurmountable.
He points, for example, to relative newcomer to the JSE, Stor-Age. Gilmour says what impressed him about the company’s recent results presentation was its leadership’s willingness to engage at length with investors and respond to their questions, particularly around the company’s projection of 9% to 10% growth in the coming year. Considering SA’s economic headwinds, such positive predictions would naturally raise doubt from investors.
“At this point in time it is even more important that companies realise they have partners in shareholders and that if you want them for the long term you have to be transparent and honest with them,” Gilmour says. “If you try to spin your way out of it, it’s not going to work, so it’s important to sustain those relationships with all constituencies, but particularly your shareholders.”
While SA’s current junk rating status, compounded by the economy slipping into recession, may be new territory for local executives, they most likely to already subscribe to Gilmour’s advice on keeping shareholders informed.
A look at the top performers in this year’s IAS Awards is evidence enough that the smart operators understand the value of communicating openly with investors.
Johan Theron, group executive for corporate relations at Implats, says the company recognises that its stakeholder communications strategy must contribute to enabling employees to create wealth.
“It is what the investment community expects,” he says. “Implats’ strategic and proactive response plan to the lower-forlonger PGM price scenario, introduced in February 2015, has shown positive results and the group continues to prioritise shorter-term cash preservation and profitability enhancement measures.”
The stakes for mining companies such as Implats has also been elevated by the recent amendments to the Mining Charter after Mineral Resources Minister Mosebenzi Zwane announced the new ownership requirements.
The 30% black ownership level includes the requirement for 8% of equity to be held by employees, another 8% by mine communities and 14% by black entrepreneurs. The 12month deadline to meet these levels will demand swift action by companies to meet these requirements, with stakeholder communication likely to feature prominently.
Theron says that Implats already has a comprehensive stakeholder engagement plan in place that aims to improve communications at the company’s Implats, Rustenburg, Marula and Springs Refineries operations. These activities extend to its investor relations programme that is designed to report on its mineral resources and reserves. This it seeks to do in a transparent manner, highlighting details that are considered to be material to stakeholders.
FORSEE RISKS
Standard Bank Group chief finance officer, Arno Daehnke, says it obviously important to inform investors on the bank’s views on the macroeconomic situation, also focusing on how it intends navigating through this environment.
“The possibility of rating agency actions was well ventilated in 2016,” he says. “Investors expect corporates to foresee risks and plan accordingly. We took steps in 2016 to position the South African business in a manner so as to minimise the impact should such downgrades occur.
“They will make assumptions around the potential impact based on precedents and will look for signs to support their theses.”
He adds that, as is often the case in the world of investing, shareholders may see the downturn as an opportunity.
This is obviously a gamble that investors need to weigh up against their risk appetite. And given the surprising resilience of the currency and the attractiveness of yields offered by local bonds, it appears the economic precipice might not loom as large as expected.
But there is no guarantee that this will remain the case. Gilmour predicts a long period over quite a few years of poor economic growth characterised by repeated recession and recovery, with this situation always under threat from the vagaries of the global economy.
For those tasked with managing their relationships with investors, this translates into the need for sustained activity in keeping their key stakeholders fully appraised.
“I have found over many years that if you tell the truth, then you will be rewarded. Sure, your share price may come off, but you’re not going to suffer reputational damage,” Gilmour says.
Being open and honest in its communications is a business imperative for dairy producer Clover, winner of the companies with market capitalisation below R5bn category.
“Our communication focuses on the most relevant and material issues that could substantially impact on Clover’s ability to create and sustain value for its stakeholders,” says the company’s chief financial officer Elton Bosch.
“Our communications aim to help stakeholders understand our business, the industry and growth potential. We are honest in our communications, giving both the positives and the negatives so that stakeholders can make informed decisions.”
SCRUTINY
Given the downgrades to SA’s economy, Bosch says companies will definitely come under greater scrutiny, especially those that operate locally. There will be an increasing focus on the financial health of the business and how efficiently it operates. The greatest scrutiny will, however, be an organisation’s ability to adapt to the changing environment.
In an attempt to counter negative sentiment, he says: “In our communications, we aim to provide additional information on the industry and macroeconomic impacts so that investors, especially international ones, can get a greater understanding of the market dynamics locally.
“We also reflect the impact the global macroeconomic environment has on our business to provide a transparent overview of performance.”