A term that investors will increasingly stumble across in the markets is a “capital markets day” — a voluntary event used by some companies to tell their story to the market. And make no mistake: in equities, the storytelling is half the battle won. With valuations driven by future cash flows rather than historical numbers, it’s all about getting the market to believe in the vision and the underlying economics.
Recently, Standard Bank and Pepkor hosted important capital markets days. It was difficult to miss the headlines in the press based on these events. But what do these capital markets days actually entail? And why should investors pay attention?
To understand the appeal of a capital markets day and the associated presentations, investors need to understand the nature and limitations of a normal release of financial results.
The typical results cycle includes a combination of tightly controlled financial statements (which follow defined formats), and results presentations that aim to add additional information for shareholders.
But even the results presentations tend to suffer from low levels of creativity, as analysts become accustomed to seeing specific slides in the presentation. It’s only when there’s a changing of the guard — either CEO or CFO — that you’ll see a meaningful change in the structure of the results presentation.
The upside is that this makes it easier for the market to do its research. If the market knows exactly where to find a number, particularly a number not governed by IFRS rules (for example, sales volumes), then it’s easier to do an analysis on the company.
In a market like South Africa, where institutional-level liquidity becomes thin as you head outside the top 40, management teams just cannot afford to make it difficult for analysts to do their jobs. The market is inherently lazy and loves being spoon-fed. This is why a company falls into a rhythm in its results presentations.
The downside is that this makes it harder for management teams to bring a new and exciting view to the market. Even if this is a purely additive experience (that is, none of the usual slides are removed in the process), there’s the risk of creating an expectation in the market that this view will be repeated in every presentation.
This creates a conundrum for companies. Management teams want to talk about the strategy and the goals of the company, but not in such a way that the market expects to see an update every six months.
The solution? A capital markets day — something that the market really appreciates in terms of transparency and access to management. One of the best things about these events is that they level the playing field, as management is sharing targets in the open instead of giving important breadcrumbs to professional analysts behind closed doors. This takes us away from “mosaic theory” and puts us firmly in a place where even small-time investors can put in the work and form a proper view.
The key difference between a results presentation and a capital markets day is that the former is backward-looking and the latter is fully focused on the future. Without a capital markets day, it will be rare to see management teams commit to medium-term growth targets that they will be measured against.
In truth, South African management teams get away with murder compared to their US peers. In the States, the expectation is that management will provide quarterly and annual forecasts of key financial lines such as revenue and earnings per share. Only a handful of companies can get away with not doing it, and they need to have very good reasons. But in South Africa, investors are lucky to get a vague outlook statement at the end of the management commentary in the financial results.
This doesn’t mean a capital markets day will boost the share price. If the market hates the story, or doesn’t believe in the targets, it could easily have the opposite effect. TFG is a perfect example, as the capital markets day did absolutely nothing to address the pressure on the share price. In fact, it only made it worse, as the results released soon after the event were so far off the medium-term targets that the market lost all belief in the forecasts.
Still, companies that undertake capital markets days should be applauded. They are putting themselves out there and sharing multiyear strategies, while giving the market access to the divisional executives who will deliver those plans. The more of this in the market, the better.
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