Chem firms don't understand needs of investors or analysts

22 May 2002 12:50  [Source: ICIS news]

A new report from the professional services firm, PricewaterhouseCoopers (PwC) highlights the "significant" gap in understanding, or perception, between chemical industry executives and the investment community. One has the feeling that it has always been this way.

On the one hand, chemical chiefs cannot understand why their companies are undervalued. On the other, institutional investors, and financial analysts, just cannot believe why companies will not discuss with them what they see as vitally important valuation issues. Not only is there an information gap. It appears that after years of trying chemical companies have only scratched the surface of investor relations.

A PwC survey, part of its on-going ValueReporting project (see:, shows just how deep and wide the chasm is between investors and the people who run the companies they invest in. Investors want more information and they would like it in a timely manner. They don’t want cover-ups or widespread obfuscation. One extremely valuable piece of advice from PwC: chemical companies that communicate actively with the markets - directly and in innovative ways with investors rather than simply with analysts - and give them the information they desire may have a better chance of creating value over the longer term and of maintaining a market capitalisation that reflects their true worth.

It is deeply worrying that only 2% of investors think companies actively maintain dialogue with them. According to PwC, only 13% believe that companies actively seek them out when they have something to say. On the other side of the coin, nearly half the companies surveyed think they are proactive. Four fifths of investors and analysts think companies could do a lot better.

The PwC report exposes a lot and hides very little. The company has looked across a variety of industries and identified a general, overall, difference in perception between financial people and those who run large companies. Chemicals is similar but it is also different.

Executives in chemicals conform to the general corporate perspective, PwC says. Sixty per cent believe their company is undervalued - 14% strongly so. US business leaders are far more likely to think in this way. The perception of what drives value creation on the capital markets is vastly different.

Chemical company executive buck the general industry trend and appear to be in denial. They don not believe the market emphasis on short-term earnings generally discourages them from investing in long-term value creation. Investors and analysts believe the opposite. Also, very few senior executives think they have any discretion about the income they report in any one quarter. Close to 70% of investors and analysts believe this to be the case.

PwC has taken what it considers to be 28 indicators of value creation. Chemical industry executives agree on the importance of only seven of these - only 25% of the total. Investors have 15 such indicators and financial analysts 16. All three groups can only agree on the importance of six indicators but, not surprisingly, investors and analysts are more like minded.

So, the information gaps lie in areas like quality of management, capacity utilisation, the state of manufacturing facilities, response time to changing market circumstances, the revenue derived from new products and customer loyalty. Companies can do something about this. The top understanding gaps - the difference between what top executives and investors and analysts think are important - are not as easy to address.

Chemical companies should be worried that seven of the top understanding gaps are measures which investors and analysts think are important. They include revenue from new products, the impact of commodity prices, the weighted average cost of capital, response times to changes in the market, the state of manufacturing facilities, market share and capital expenditure. Surely, it is time for companies to work harder to address what they can do to lift understanding by the investment community. The value of their stock may then at least have a chance of being better appreciated.

By: Nigel Davis
+44 20 8652 3214

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