Compelling financial communications lies at the heart of every successful securities sale transaction. As the drought in developed credit markets spread to the local equity market in 2008, the competition for capital became much tighter. Now more than ever, it is vital for companies planning to raise capital to ensure that they are represented by a financial communications team that fully understands both traditional and new media channels with the contacts and credibility to initiate balanced coverage of the company pre- and post-IPO. Its goal should be to ensure that the value case for the transaction be made as clearly, succinctly and compelling as possible to the investment community. The initial public offering of Honeywell Flour, which opened on December 3, 2009, provides a good test case to examine how Nigerian companies are evolving their financial communications strategies in difficult market conditions.
Last year will go down in history as annus horribilis for investors on the Nigerian Stock Exchange. After years of heady growth, when public offerings succeeded more from momentum and frenzy and less on a clear understanding of the underlying business with its risks and opportunities, buyer’s remorse is the new mood of the times. Return is dead. Caution is new king.
When Oba Otudeko, chairman of the Honeywell Group, announced in 2008 that he planned to take Honeywell Flour public before the end of the year, the investment community scratched its head in disbelief. While most agreed that the company would have been a coveted jewel in investor portfolios in the 2003-2007 bull market, most questioned its timing. ‘Why now?’ was the question on everyone’s lips. A few months earlier, Union Bank, as blue a chip and recognizable a franchise as any, had pulled its scheduled N310 billion offering due to inclement market conditions. Who would dare go swimming in such cold weather?
During investor presentations, Oba Otudeko, who is also the President of the Nigerian Stock Exchange, read the lips of investors who had been badly burned during the market rout. A solid business with sound prospects was a good addition to the savvy investor’s portfolio was his oft-repeated response. According to the industrialist,
Our flour has good acceptance by bakers, our Semolina is being desired and we keep expanding. We have been making impact in the noodles market and our noodles market is going to start very soon. It is quite clear we are in a compelling business.
The fears of the investing public have been very well documented in the media before and during the IPO. In the philosophy of Warren Buffet, arguably the greatest investor of all time, ‘I fear when everyone is greedy and I get greedy when everyone fears.’ The truth is, we are pricing our stocks so competitively, so there is so much premium for anyone who buys at this time.
Buttressing Otudeko’s claim, Babatunde Odunayo, CEO of Honeywell Flour Mills said:
The prospects for the growth of the flour milling industry have never been better, with bread being the staple food in most Nigerian homes. The demand for flour and consumption of bread are expected to continue. As far as this continues, we will be highly profitable, as we have always been.
In support of management optimism at the attractiveness of the company to investors, leading members of the business community enjoined Nigerians to take invest in the IPO.
This is a very good offer that is coming to the market at this time. Food is one of the necessities of life, hence Honeywell will do well anytime, any day. - Goodie Ibru, publisher of the Guardian newspaper and a former president on the Nigerian Stock Exchange.
This is a good offer and the price is nice. – Pascal Dozie, founder, Diamond Bank and a former president of the Nigerian Stock Exchange.
We are sure of getting better returns if we invest in the company. Moreover, the food sector where it operates is essential to the lives of the people. The board and management come with good track records and we believe the offer would be a success. The company’s track record over the years had made the shares a good buy. Investors would be swayed to the offer because most of the products on the Honeywell stable are always in demand, and investing in the company is sure to bring consistent and growing returns. – Sunny Nwosu, national coordinator, Independent Shareholders Association of Nigeria (ISAN).
Throughout the pre-IPO and IPO period the company delivered a consistent message focused on its ‘operational excellence and customer satifaction’, guided by its lead issuing houses, FBN Capital and BGL Limited, and it’s media consultants, Biodun Shobanjo’s Troyka Holdings.
In addition, the company also stressed that:
Its products are staples and will always be in demand, which would assure ‘maximum returns’ for investors.
The valuation of the offer is at an attractive multiple compared to similar offerings by sectoral peers in the past.
The owners, Otudeko’s Siloam Global Services, want to diversify ownership of the company so that Nigerians could also partake of the Honeywell Flour Mills wealth creation vehicle.
The distinguished business career of the company’s founder.
The bear market is the best time to buy since assets can be picked up at a discount.
In this post, we will assess the quality of that coverage based on the content of information available. Specifically, we will look at a number of areas where those responsible for the company’s financial communications omitted to provide helpful information. We also discuss the mainstream media focus of the marketing campaign to the exclusion of online channels, social media and guerrilla narratives.
In spite the success of the Troyka Holdings-led marketing campaign at attracting a lot of publicity for the offering, particularly in the difficult market conditions, there are a number of points that should have been further elaborated, and some that were simply not addressed at all.
Indeed, judged in terms of volume, traditional media coverage of the offering has been quite impressive. In fact, it would seem that this is the goal of the company’s communications advisers: to get as much coverage as possible.
Regarding the company’s financial communications, we found a number of omissions in two main areas: communications material and content. We list these omissions below:
Communications material:
A total disconnect between the offline media coverage and the company website. In fact, the Honeywell Flour Mills website seems to have been down for some time. The non-use of the company’s web assets to communicate the offering is evident on the Honeywell Group website where the only mention of the offering is on the home page. Neither the News section nor the Honeywell Flour Mills page on the group site contains any mention of the offering.
A print and online press release clearly stating the purpose of the offering, description of the business, products offered by the company as well as media and investor relations contacts. An example can be found here.
A Honeywell Flour Mills IPO microsite, that would have served as a repository for all offering material, media material, media coverage, post-IPO analyst coverage, media and investor relations contacts.
A detailed fact book or Fast Facts sheet on the company available on its site.
Q&A or FAQs booklet (PDF, HTML) on the Honeywell Flour Mills web site.
Content:
Expectations management. The company should have stressed that it is a value stock and long-term investment. The constant repetition on maximum returns and profits may have set the stock price up for speculator horde dumping when these expectations are not met in the short term.
A Honeywell Flour Mills (HFM) specific and exclusive investment thesis. The company does not have any exclusiveness over a single beneficial or attractive feature ascribed to it. Rather, they are sectoral attributes enjoyed by all companies in the Food & Beverages sector.
A corporate financing rationale for the initial public offering.
Media interviews on the company’s operations, strategy and competitive advantages with key executives: CEO, chief operating officer, finance director or chief financial officer, head of marketing or chief marketing officer, etc. These interviews would go a long way in giving credibility to the business projections, trading multiples and valuation as contained in the prospectus. The only interview we could find with a member of the executive management was the one granted Proshare, which was not syndicated. There is also an interview with Oba Otudeko, the chairman, in the Vanguard newspaper, which was syndicated in other papers. These are the only two interviews we could find with the board and executive management of Honeywell Flour Mills.
Governance concerns since current directors do not own shares in the company and Siloam Global Services will retain 75% of the company at the end of the offering. The presence of three family members on the board raises a number of concerns, which should have been addressed. The company should have described plans to expand or make changes to the board composition, to admit new share-owning directors at the end of the offering.
Correction of perception that the Offer for Sale is a high-priced means for the owners, Siloam Global Services, to cash out, and/or raise money for the Honeywell Group’s other business interests.
Agent incentives. No member of the executive and senior management of the company owns shares in the company. The company should have shed some light on its management incentive programs including equity grants for its staff co-operative or stock options.
The market share of Honeywell Flour Mills in each of its markets: flour, pasta, snacks; as well as the market share of its competitors.
The 3-year market share growth of Honeywell Flour Mills in each of its markets: flour, pasta, snacks; as well as the market share growth of its competitors.
The historic price margins of Honeywell Flour Mills in each of its markets: flour, pasta, snacks; as well as the historic margins of its competitors. Since its main competitors are already public, their financial results and operating margins should be available.
Changes in the historic price margins of Honeywell Flour Mills in each of its markets: flour, pasta, snacks; as well as the historic margins of its competitors. Since its main competitors are already public, their financial results and operating margins should be available.
Historic and projected growth figures for flour-based products including pasta and snacks consumption.
Historic and projected growth figures for fast food outlets across Nigeria offering flour-based products including pasta and snacks consumption.
Dedicated products distributor network.
Comprehensive overview of the condiments and spices market, which the company plans to enter, including leading brands, manufacturers, respective market share, Honeywell’s targeted niche and marketing strategy. Since the company is not a top three player in the the flour milling sector, it would need to provide compelling arguments why it can (a) become a top player in the condiments market or (b) explain why even if it does not become a top three player in this market, the margins are attractive enough for a niche producer.
Any foreign market initiatives planned, e.g. for the West African sub-region.
How the company will manage its exposure to the wider economy and the risks from the economic slowdown.
These are some of the issues that the Honeywell financial communications advisors should have paid more attention to.
We now discuss the mainstream media focus of the IPO communications plan. Without a doubt, the Troyka Group, Honeywell’s communications consultants, did an excellent job in buzz generation for the offering. However, its focus on traditional news outlets shows its unfamiliarity with the changes that have taken place in how a growing number of savvy investors in the 25-45 middle-class, urban-dwelling demographic use the internet to research companies.
Our own survey shows that investors who have access to the internet do an average of fifteen web searches of companies on the Nigerian Stock Exchange every month. On the face of it, this may not mean much until one realizes that due to the unbeatable search engine optimization of a lot of internet forums like Nairaland.com and StockMarketNigeria.com, a lot of key word searches with company names will return these forums in the top 2o search results.
Therefore, any transaction or financial communications strategy that ignores these cyberlocales and their members does so at its own risk. Companies cannot afford to ignore their propensity to serve as fertile ground for guerrilla narratives. These conversations are no longer taking place under the radar. Search engine optimization has bubbled them to the top of web searches, and it only makes prudent sense for those responsible for company communications at all levels, to devise strategies for participating in them. For instance, there are extensive threads on the initial public offering with quite a few repeat contributions by members on both Nairaland.com and StockMarketNigeria.com. In spite of this, the company’s voice is loudly absent in responding to guerrilla claims and plainly biased opinions.
The company should have leveraged on social media, particularly video, to push its core messages out to a much wider audience in more effective ways. It should have been easy enough to create a Honeywell Flour Mills IPO channel on YouTube, Viddler or Vimeo and upload videos of investor roadshows there, especially the Q&A sessions. Videos uploaded on these sites are embeddable across the web, which increases their distribution. Further, using a service like TubeMogul, the company can view receive reports of every other site where the video has been embedded as well as views on those sites. It can also visit those sites to see what is said about the video. In addition, viewer comments made on the channel can serve as good feedback to the company, in which in can participate as well, something which is not possible in a regular TV program.
Companies need to realize that the way people search and consume content has evolved, and they need to adapt in their turn. The economic recession has provoked investors to start asking a lot of hard questions, and they expect companies to provide the cogent reasons why they should become fiduciaries of their capital.
This sample contribution by ‘hispy99‘, a member of the StockMarketNigeria.com forums, is illustrative of the new interrogation style, that will only become more common as the competition for capital heats up. The contributor’s fourth and last point is illuminating:
Why should an investor put money down for an initial public offering at a higher purchase multiple when stocks with proven performance are trading at significant and attractive discounts on the secondary market? Companies coming to raise money on the market, need to define their communications strategy to tackle these sorts of questions.
No doubt, the enrollment of quack analysts in the financial press to write optimistic research like the one below will no longer cut it.
Analysts point to three areas as potential upside for the stock namely, its entry price, the company’s historical record of robust performance and enticing projections for the future.
At a price of N8.50, the price of the Honeywell Flour stock is five times less than the second most expensive stock in the Food/Beverages and Tobacco sector. This high price differential is indicative of how high this stock can go over time. It also immediately signals potential capital gains in the region of N36.1, a 424 percent in potential gains.
Independent analysts, Marina Securities, publishers of MarsResearch, value the stock at N14.90 per share thus putting a premium of N6.40 on the stock.
The most expensive stock in the industry is N201.51. That such northerly prices can be achieved in the industry is indicative of the viability of the food sector and speaks to the pile of cash that can be starched from the sector. Indications are that Honeywell would quickly match the market potential having seen sporadic growth in the last four years. Growth doubled in the three years between 2004 and 2007 to N15.6 billion from N7.32 billion. It almost tripled at the close of business in 2008 at N20.9 billion. This is while consistently grossing over N2 billion in the last four years.
This pace of growth, which is also reflected in the company’s bottom line, suggests that investors would be putting their money on fertile grounds. Profit before tax vaulted in the period from N196.38 million to N988.76 million, a 403 percent rise.
Despite the hefty operations of the company, its cost of operation as reflected in profit before tax margin (PBT), has barely grown in the last four years; inching from 0.03 kobo per naira in 2004 to 0.047 per naira in 2008.
For financial management aficionados, this marginal rise in cost signals Honeywell Flour Mills as a cost efficient firm that is likely to maximize profit for investors who are discrete enough to invest in the stock. This much was said by the company’s managing director, Babatunde Odunayo when he remarked that ‘This is a sound company which has done very well over the years, and from all indicators, the company is poised to expand in line with the evolving economic landscape.’
However, it was the company’s performance and potentials on the marketing turf and positive outlook of the Nigerian economy that caught the attention of analysts, Marina securities, who in recommending the Honeywell shares said, ‘on the basis of our valuation and considering the ever increasing demand for major products of the company as well as favourable and stable macroeconomic environment in which the company operates, we recommend, HFM’s initial public offer for both medium and long term investment.’
Medium to long term gains for investors make up the Bull’s Eye of the company’s strategic intent giving that it plans to use its issue proceeds to create new product lines and improve on the existing products.
Little wonder then that it plans to acquire an additional plant to boost the milling capacity of the company. It is going to expend 52 percent or N3.58 billion of the net offer proceeds to achieve this. This will enable Honeywell take advantage of emerging opportunities in the local market for speedy growth and profitability.
It is worthy of note too that despite its cash awash status, it plans to significantly rev up working capital with the offer by an additional N1 billion. This is absolutely crucial in a market where cash is king and the payment cycle pretty much determines the level of trust and regularity of supplies from your suppliers.
15 percent of the net offer proceeds would go towards new business.
In targeting a larger market share in the oligopolistic flour milling industry, Honeywell Flour Mills projects hefty, if tempting returns in the next three years. The company projects N44 billion in Turnover in 2009 and hopes to double that figure by 2011 to N80.46 billion.
It would mean a direct impact of the proceeds of this offer, which partly targets plant capacity and a concomitant domination of the market.
The company also projects profit before tax to hit N10.88 billion by 2011 from N2.9 billion projected for 2009.
Such growth projections when they come through puts a company in favourable stead for investors who desire to fortify their portfolios. The fortification would come from the high returns and little risk in line with the old mantra of investment as propounded by the father of Modern Portfolio Theory (MPT), Harry Markowitz.
Giving verve to the company’s promise of top returns for investors is that the company parades a portfolio of products with plenty of upside potential in the highly competitive Nigerian foods market.
One can only wonder about the purpose of this gushing salesmanship. One thing is sure, very few investors would even bother to finish reading such imbalanced reporting and if they do, would immediately deeply discount its value.
Like previous offerings, the Honeywell Flour Mills financial communications strategy was focused on buzz and less on the quality of content. This ‘pump up the volume’ strategy worked very well when the economy was booming and investors bullish. If the Honeywell Flour Mills IPO had come in 2007, it would have been easily over-subscribed. On that score, and in those times, the ‘more decibels’ approach would have delivered a 100% success. No longer. That is now history. Companies seeking to raise capital need to revise their financial communications strategy. We hope that they have read the writing on the wall. These old dogs need to learn new tricks.
One cannot help noticing how Niyi Meka Olowola, Oando's Head of Corp Comms, is nodding in approval. Maybe Goldman Sachs can learn lessons.04:47:49 PM January 25, 2012from HootSuite
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