When it comes to the evolution of guidance, there is a great divide between UK and continental European practices. UK issuers are generally more cynical when it comes to feeding the sell side’s voracious appetite for EPS estimates and tend to tailor their guidance to suit their current business strategy. On the continent, where half of EU countries mandate quarterly reporting, companies generally follow US practice – here, the focus is on traditional quarterly EPS estimates.
What’s driving change in this area is increased demand from investors for guidance on intangibles, according to Mark Hynes, managing director of investor relations services at PR Newswire. ‘There is quite a change in the way investors are looking to companies to provide guidance in non-financial areas,’ he explains. In April, international funds managing around $4 tn signed up to the United Nations Environment Program’s principles of responsible investment (PRI). This committed them to incorporating environmental, social and governance issues into their investment decisions.
Despite more demand for this type of guidance, the forward-looking nature of most non-financial reporting will create an obstacle for many issuers, notes Hynes. But apprehension might lessen among UK issuers if the Company Law Reform Bill provides ‘safe harbor’ language to protect issuers providing forward-looking information.
When thinking about what sort of guidance to give beyond traditional EPS figures, a sensitivity test is essential. ‘You have to be aware that you’re not giving anything that is too sensitive and damages your position in the market,’ advises Lynda Ashton, head of IR at J Sainsbury and chairman of the UK’s Investor Relations Society. ‘We have to make sure we aren’t giving Tesco something we don’t want them to have, for instance.’
Ashton’s philosophy is that guidance should suit a company’s growth strategy, not the market’s demands. ‘Because, no matter what we do, I doubt most of the sell side would change their view on our outlook,’ she comments. The UK supermarket chain provides underlying profit before tax guidance but no EPS. It also gives an outlook on sales and costs but stays away from net margin, despite analysts’ demands forthis particular figure.
Cable & Wireless’ guidance strategy is also based on the current status of its business rather than sector benchmarks or analysts’ preference. ‘Given that we are in the early phase of our turnaround plan, we wanted to give analysts a sense of where we would be able to get to in the next year,’ says Craig Thorton, manager of investor relations at Cable & Wireless.
Guidance practice in the UK is clearly influenced by the distinct broker culture there and the fact that companies are not required to report on a quarterly basis. It’s like on what suits their strategy rather than mirroring competitors or trying to satisfy the demands of the sell-side. Continental European companies, on the other hand, will likely branch out into different types of guidance given on a more frequent basis.
