1. 10 e Business OBSERVER | July 14, 2016
INTERVIEW
Why would a company pay to have research
done? And what value would it have
to investors if it is being paid for by the
company itself?
You are right. Companies being asked to
pay Edison to write a research report on
them was a novel approach and some
people – especially older chairmen – could
not understand. The argument was that
they got research done free of charge.
Traditionally, credit rating companies
which deal with the debt side are paid for
their reports. But research is usually written
because clients would want to know about
the companies. So Goldman Sachs would
send research out to Fidelity, for example,
with a ‘buy’ recommendation on a com-
pany, which would in turn pass it on. Gold-
man Sachs would get a commission and
they would also have an eye on adviser fees,
looking at future acquisitions and investor
outreaches. But that model has been af-
fected in a number of ways, particularly
since commission levels have shrunk to a
tenth of what they were.
In addition, Mifid II demands that fund
managers should demonstrate that the re-
search is adding value and unique informa-
tion. You cannot just put a short pager out.
So you then end up covering fewer compa-
nies. I know of a FTSE 250 company which
used to be covered by 26 analysts; they
came in to see us two weeks ago as that has
been whittled down to three.
Why do you need research? If there are
no forecasts, it is very, very difficult for in-
vestors to understand a company. What is
its growth trajectory? How much will it
make next year? Is the share price appropri-
ate in terms of how fast it is growing? What
are its plans this year and next year?
What we do is write research on
companies to get that message out there to
international investors.
I was invited to come out here by stock-
broker Edward Rizzo and we met a few
companies. It was fascinating that none of
them had any forecast numbers out in
the market.
I also visited the Malta Stock Exchange,
which is also looking at ways to generate liq-
uidity and interest in Maltese stocks.
Why would Maltese companies be of
interest to international investors?
Companies should be looking for in-
vestors in the countries where they derive
their revenue. If you look at FTSE100 com-
panies, their investor base matches the
footprint of their revenue.
Apart from Medserv, there are many
companies, such as hotels and IT groups,
which operate internationally, even though
they are based in Malta.
What we try to do through our research
and through our road shows is basically to
generate liquidity from new investors and
broaden the shareholder base by getting
that message out there. And this has an im-
pact on a company’s share price as a larger
investor base makes it easier to reflect the
company’s real fundamentals.
Why would this be of interest to existing
Maltese shareholders? Would the impact be
positive or negative?
If you add international investors to a
shareholder base, it adds stability as they are
looking at the long term. If you only have a
small number of shares being traded, you
have a very broad ‘bid-ask’ spread. The
small companies on Alternative Investment
Markets have this problem: one shareholder
sells his or her shares and there is a five per
cent reduction in the share price!
You also find that when you buy a stock
with a very broad spread, the company has
to perform 10 to 15 per cent better before
you make a profit because the point where
you can sell at a profit is so much higher.
What we would add by generating liq-
uidity is to reduce the ‘bid-ask’, making it
easier for Maltese shareholders to make
a profit.
Surely the amount of shares available in
Maltese companies would be too limited to
be of interest to international investors?
We have a range of investors from large
institutions like Fidelity, JP Morgan
and Black Rock which pay us to write
research on their investment trusts, but our
traditional audience has been private
wealth managers.
This is not for every single company and
we fully appreciate that.
The answer is that it would be harder but
when you are talking about, for example, a
businesswithassetsinLondonorintheUAE,
then investors take notice. Oil and gas assets
are international – and oil and gas services
companies operate anywhere in the world
and can be listed anywhere in the world.
Maltese companies are small but look at
GO: if you invested at 80c, you would now
be looking at €2.87 per share. You have
more than trebled your money. That is an
argument you could make to any investor in
the world. All people want is to generate the
best return.
The problem is getting the story out there
and with all the changes in regulations plus
the reduction in commission levels, it is be-
coming harder and harder, especially for
smallcap companies, to generatethat equity
research coverage from banks and brokers.
“We try to generate
liquidity from new
investors and broaden
the shareholder base”
Making a lot of noise
Five weeks ago, Medserv announced that it had appointed Edison Investment
Research to carry out analytical investment. Vanessa Macdonald spoke to
Edison director CHARLES COMBE to ask why.