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Why a lack of earnings calls should alarm GCC capital markets

04 October 2020  |  Oliver Schutzmann, CEO

 

“When in doubt, ask” is useful advice for anyone seeking information directly from the source. Therefore, it is no surprise that research analysts and investors often cite quarterly earnings calls as the most essential and efficient avenue through which they can obtain quantitative and qualitative insights into the performance of a business and its management team.

This year’s third-quarter results season may be one of the most dramatic ever. In the coming days, the world’s listed companies will start reporting how they have fared over perhaps the most extraordinary nine months in living memory. While some will have been beaten by Covid-19 - think airlines, hospitality, tourism - others will be better placed - healthcare, pharma, home delivery. One thing is obvious: analysts and investors will be clamouring for insights into the future direction of companies during this time of uncertainty.

Why should GCC companies worry about this? Because the confidence in public companies, in particular the credibility of their management teams, is most at risk in moments of crisis. Providing limited disclosure during these testing times and not affording it the importance it undoubtedly deserves, as is the case for the vast majority of regional companies, is likely to hurt market credibility and confidence.

How the market will react to third-quarter results, will depend to a large extent on how much information CEOs and CFOs make available to enable judgement on the direction of travel for listed companies.

For these listed companies, earnings calls should be an excellent opportunity to inform analysts and investors about how their business has dealt with Covid-19 disruptions, give an honest assessment of their performance during these testing times, and provide guidance on the most critical metrics that demonstrate their value creation and protection strategies.

Many times though, regional company leaders are worried that a public discussion of challenges facing their business could reveal sensitive information to peers. They are also concerned that it could generate too much transparency among retail investors, or create pressure to report information that is not readily available in their financial statements. Another fundamental problem is that journalists may dial into earnings calls and scrutinise management commentaries.

As a result, some executive teams decide to limit access to earnings calls to professional analysts and investors via private invitations. In effect, they exclude retail investors, employee shareowners and other stakeholders altogether, or they elect not to host any earnings calls at all, which leaves market participants to wonder what the company is hiding.

There are 645 listed companies trading on the exchanges of the six GCC countries. And yet between them only 48 of them made earnings call transcripts available after their second-quarter earnings cycle. Put another way, only 7.4 percent of Gulf listed firms gave the public access to their earnings calls from July to September this year.

Read our report on the subject:  The Risky Business of Earnings Calls

While it is a positive sign that the number of earnings calls in the Gulf has risen from just seven in 2015 to 48 this year, a declining trend was evident during first nine months of 2020, declining from 59 transcripts made available during the fourth-quarter 2019. This lower number of available Earnings Calls is particularly concerning because of the ongoing Covid-19 disruption.

It appears to indicate that some companies may have skipped and deferred calls in these unpleasant times during which analysts and investors have an even higher need for information and dialogue with senior management.

But companies cannot ignore this issue forever. Some market regulators have already implemented, or are in the process of implementing, guidelines that strongly encourage companies to host Earnings Calls. Failure to hold them could result in both regulatory sanctions, fines and public embarrassment.

And the risk does not end there: companies who conduct private or closed earnings calls or do not make call details or transcripts publicly available may risk breaching fair disclosure rules and, by extension, insider trading regulations.

But there is another perfect reason for the region’s listed firms to start making earnings calls publicly available: Investors love them. By not holding earnings calls, Gulf firms are not just running the risk of future regulatory sanction. They are upsetting the very investors who own them.

This column first appeared in Arabian Business (Link).