AIRA to Update Best Practice Guidance and Consult ASX / ASIC on Managing Analyst Consensus Estimates

9 October 2018

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  • 71 per cent of respondents believe ASX’s Guidance Note 8 should be updated to reflect sell-side structural changes and their impact on consensus estimates.
  • 46 per cent of respondents said the number of sell-side analyst reports about their company has dropped.
  • 38 per cent of respondents have experienced a decline in the number of sell-side analysts covering their stock.

New research from the Australasian Investor Relations Association (AIRA) shows 71 per cent of respondents to its recent study into the IR community’s perspective on sell-side industry structural changes taking place, believe ASX’s Guidance Note 8 should be updated to reflect these structural changes and their impact on consensus estimates. Guidance Note 8 states: “ASX does not believe that an entity has any obligation, whether under the Listing Rules or otherwise, to correct the earnings forecast of any individual analyst, or the consensus estimate of any individual market data vendor, to bring it into line with the entity’s internal earnings projections.”

“This is problematic given the research indicates sell-side research is increasingly incorrect or out of date,” said AIRA CEO Ian Matheson, commenting on the findings. 

A total of 61 per cent of respondents said out-of-date sell-side research causes issues when managing consensus. As a result, companies cannot rely on publicly available consensus figures as a reference point for calculating consensus estimates, with 70 per cent of respondents using company calculated numbers rather than external figures to derive this information.

Worryingly, a total of 75 per cent of respondents said their company consensus figures differed to publicly available consensus numbers. This is causing concern for a large number (43 per cent) of respondents, who are apprehensive about investors and the media relying on potentially out-of-date and incorrect publicly available consensus estimates.

While a majority of companies (58 per cent) provide some form of earning guidance, many (43 per cent) don’t believe this resolves the issues relating to managing consensus estimates.

Moreover, this issue appears to be worsening, with 40 per cent of respondents indicating the prevalence of out-of-date sell-side research and forecasts has grown over the last 18 months.

 “For some companies, providing earnings guidance resolves this problem. But not all companies publish guidance. Our understanding of the regulator’s view is that companies need to be consistent when it comes to providing guidance; they are not encouraged to provide guidance for one period and decline to do so for future results. This is one of the issues that should be addressed in any review of Guidance Note 8,” Mr Matheson added.

In total 91 per cent of companies don’t publish sell-side forecasts on their web sites and the results indicate regulatory uncertainty discourages companies from publishing this information. Altogether, 33 per cent of respondents who decline to publish sell-side forecasts do so due to regulatory uncertainty.

Other alarming trends are emerging in sell-side research. In total 46 per cent of respondents said the number of sell-side analyst reports about their company has dropped over the last 18 months. There has also been a drop in the number of analysts covering listed companies, with 38 per cent of respondents stating the number of sell-side analysts covering their firm has fallen over the last 18 months. This trend is most prevalent among ASX 100 firms, with 45 per cent of this group indicating a drop in the number of analysts covering them.

Moreover, survey results indicate the continuing ‘juniorisation’ of the research sector, with 25 per cent of respondents stating more than 20 per cent of the analysts covering their stock had been doing so for less than 12 months.

The changes taking place in sell side research are prompting activity among the growing number of independent research houses appearing in the market, with 40 per cent of respondents indicating they had been approached by one of these firms in the previous 12 months.

However, investor relations executives are responding to structural changes on the sell-side. Overall, more than half (55 per cent) of respondents are putting strategies in place for dealing with these changes. These include: increasing direct engagement with the buy-side; organising more investor meetings directly; and, utilising new investor targeting tools and, where available, multiple brokers to organise roadshows.

This is pleasing, and demonstrates a willingness among the IR community to adapt to changing market dynamics over time. For its part, AIRA will be updating and developing its own best practice guidelines to incorporate these industry changes around consensus estimates.

ABOUT THE RESEARCH

A total of 67 Australasian listed entities from ASX 300 / NZ 50 companies responded to the survey, which was carried out in August / September 2018.

Ends

For more information contact:

Ian Matheson, Chief Executive Officer, AIRA

T: +61 2 9872 9100
M: 0419 444 731        
E: [email protected]

ABOUT AIRA

The Australasian Investor Relations Association (AIRA) was established in 2001 to advance the awareness of and best practice in investor relations in Australia and New Zealand and thereby improve the relationship between listed entities and the investment community. The Association's 160 corporate members now represent over A$1.2 trillion of market capitalisation, over 80% of the total market capitalisation of companies listed on ASX.