Gulf companies' tryst with transparency

Dubai: Go back to March of 2007. Emaar Properties announced the shares-for-land swap deal with government-owned Dubai Holding without providing any details. The company kept delaying until it released a statement in Aug-ust that the deal had been dropped. For months there was a complete lack of transparency. The investors punished the stock severely.

Well, it seems, as some fund managers believe, Emaar has since improved its communication "significantly." It has recently appointed an investor relations officer, long overdue for a company considered to be a proxy for the domestic Dubai Financial Market.

Disclosure and corporate communication are essential for increased transparency, all across the board agree. Without minimising the importance of basic steps such as setting up a corporate website, publishing annual results in English, announcing the date of annual general meeting in advance and setting up an investors relations cell to improve both, it is the quality of information and communication that determine the degree of a company's transparency and investor friendliness, fund managers say.

In terms of disclosure - it varies from company to company - a lot of times there are no details behind the numbers, says Sharif Mahmoud Salem, fund manager, asset management group, National Bank of Abu Dhabi.

"They will give their costs but the details of the costs are not broken down. They provide the aggregate but do not the break up in terms of subsidiaries and international operations. And when you call them or schedule meetings, sometimes they are reluctant to share those numbers," he says.

As examples, we know that Emaar and etisalat do not provide any specific numbers on their international operations. Also, during much of the IPO boom a couple of years ago, banks did not break down their deposits into IPO and non-IPO money. First Gulf Bank, which came third in the BASIC (Behavioural Assessment Score for Investors and Corporations) score, was an exception.

Certain disclosures relating to financial statements seem to be a bone of contention among some fund managers. For example, the way some companies in the real estate sector book their profits is not acceptable and it is important, they say, to look very carefully into the details. Companies in the same peer group such as Aldar Properties and Sorouh Real Estate calculate their profits based on "fair value" unlike Emaar which calculates on the basis of "cost".

"Part of the reason that Aldar and Sorouh went down was because of the worries the investors had on revaluation gains, and, for whatever it was, the Morgan Stanley report pointed out that the net profit figure of Aldar was actually much less," said Haissam Arabi, managing director of asset management, Shuaa Capital.

The companies, however, point out that it is not illegal to favour the "fair value model" over the "costs model," as the former is allowed under the International Accounting Standards.

Disclosure

Also, financially, disclosure in terms of giving guidance for the future or, what is known as earnings alerts from the company management is largely lacking here, fund managers point out.

"So, if you have such updates, when the results come out and it comes slightly above or slightly below, it's pretty much priced in - you don't see this massive fluctuation," Arabi adds.

Last month, Tamweel, the largest mortgage provider in the country, suddenly came up with a future profitability forecast after corruption allegations against its former CEO surfaced. "But it was more to prop up investor confidence with such a forecast," Salem says. "They were reacting, but they were not reacting to what people wanted to hear."

It is the quality of corporate communication that makes companies open or closed in the eyes of investors and analysts. It is not just setting up an investor relations cell with an officer that suffices but the way in which the officer and his team answers queries and deals with doubts, fund managers say.

"Things have improved a lot," says Rami Sidani, head of Mena (Middle East and North Africa) funds, Schroders Investment Management Limited, Dubai. "Most of the companies, even two to three years back, didn't conduct analyst conference calls on their quarterly or annual earnings. Now many of them do and provide insights into their results. And this has to do with the influx of foreign investors."

There are several companies - Tabreed, being one of the first in the UAE - which organises Investors Day, when the management gives a presentation and people are invited to attend and ask questions.

But even on such occasions, "a lot of questions remain unanswered and make it difficult for you to forecast the growth in terms of revenue and the increase in costs," Salem says. To improve, Arabi suggests a quarterly newsletter on ongoing projects, new hires.

However, sometimes, companies are not to blame for their lack of openness.

Blame game

Sidani blames the government and regulators to some degree for the way the companies behave or communicate, especially in the aftermath of some deals signed or wrongdoings by some executives. He points to the regulators in different sectors, especially in real estate, who have to be more proactive and transparent with the rules and regulations they have set.

"In some cases where the government is involved, as was in case of the Emaar land deal, there is lack of communication and transparency," he says. "We used to call up Emaar and they said, 'We don't have an answer for that. It is above us'."

And in recent months, when there are a few listed companies under the scanner as their former officials face allegations of embezzlement and fraud, it is the lack of transparency in the ongoing investigations that bothers fund managers and investors.

"We are very pleased with the government's action to fight corruption. However, lack in their transparency of the investigations and showing exactly what these people have done wrong and what would the impact be on the public companies [is important]," Sidani says.

And the need for an immediate reaction to any sort of negative news from the stock exchange, the regulator and from the company itself is essential, Arabi says.

"You need to see engagement. You don't want to leave room for speculation and rumour."

And finally, it seems in some cases of companies, which are government or family-controlled, the reluctance to share information exists because of obvious reasons. mashreq is a prime example. A well-run bank with good fundamentals, but with hardly any trading activity, and majority ownership being the family, it really doesn't need to open up.

"Because some of the stocks that are government or family owned, there is no need to offload their shares or offer any more to their shareholders and hence there is no interest in opening up," Salem says, adding that government-owned listed firms are gradually opening up more.

Study: Back tobasics

In a region that is marked by poor corporate governance and lack of transparency, leading to weak trading activity, a recent study by The National Investor (TNI) and Hawkamah, the Institute for Corporate Governance, titled 'Back to BASICs: An alternative look at liquidity, volatility and transparency', pointed out that GCC-listed companies could take some "basic" steps to become more investor friendly, thereby allowing the investors to value the companies better.

The study devised a BASIC score by which GCC-listed companies were ranked and it measured 43 simple parameters across three categories - trading history, corporate communication and disclosure (see the chart for top 10 Dubai and Abu Dhabi companies).

According to the study, Dubai and Abu Dhabi are weakest in disclosure compared to corporate communication and trading history. The good news is the two emirates topped the chart in corporate communication in the region.