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A better approach to picking winners

INVESTING: Look for companies that actively manage for shareholder value

CHIRATAS NIVATPUMIN

Investment advisers generally agree that among different asset choices, nothing beats equity for long-term returns. Yet selecting winners from losers is no easy task. Among the nearly 400 companies listed on the Stock Exchange of Thailand, past performance clearly shows that the largest, best-known firms do not necessarily offer the best returns.

In the business section of your local bookstore you will find dozens of books touting the latest techniques, financial ratios and guides to maximising return.

Yet at the very core, shareholder return depends on two factors: dividends and capital gains. As a shareholder, what you receive on your investment comes directly from these two sources.

At the heart of both is a company's ability to generate cash, profits and thus dividends. High-flying dot.coms aside, the more profitable a firm, the more attractive it is, and the greater the potential for capital gains.

The L.E.K. Consulting/Bangkok Post Shareholder Scorecard aims to help investors pick winners by ranking listed firms by their total shareholder returns on a one-year, three-year and five-year basis up to the end of July this year.

While the events of Sept 11 and afterward have forced companies to re-evaluate their options and growth prospects, for investors, the past can offer some clues to the future. Companies that have coped successfully with the 1997-98 economic crisis and raised shareholder value are more likely than not to be better poised to handle any potential fall-out from current events.

J. Sharad Apte, a director of L.E.K.'s Bangkok office, said the scorecard looked at how different companies performed against their peers.

"The assumption is that each sector faces the same macro-economic risks. A whole sector might have gone down within a certain period. But if you go down less than others, that's a credit to the firm's strategy and management."L.E.K. has advised 30 companies in Thailand on how to identify what aspects of their business drive shareholder value.

Mr Apte said the first step was identifying what management believed its own company value to be, then comparing it with the valuation given by the market. "After that, the question is how to close that 'value gap'."In some cases, there may be a communications problem with the market. Analysts tracking a stock could be using different assumptions from those of the company, or the strategic goals of the company may be misunderstood by investors.

"That's relatively easy to address, and could be dealt with during quarterly analyst briefings, or a change in how investor communications are handled," Mr Apte said.

"But in other cases, it will be something deeper, say where the market simply doesn't believe in the strategy taken by the firm."Knowing what investors look for can give managers a key tool in setting their own strategies to create and actively "manage" for shareholder value.

Top foreign institutional investors were very sophisticated in choosing their targets, Mr Apte said. Complicated models collate information from corporate reports and news briefs to deliver projections of shareholder value, which then form the basis of their decision whether to invest or not.

Bob Neapole, another director with L.E.K.'s Bangkok office, said it was part of the challenge for growing firms to develop the right "story" to gain attention from the global market.

"Yes, Thailand might not be on the global screen now, owing to the macro-economic environment. Yes, portfolio weightings for the Thai market have been cut," Mr Neapole said. "But companies should position for the future. When the money comes back, you want to be first in line."Aligning operations to shareholder value means analysing and prioritising the different aspects relevant to value creation, whether it be in business growth, production efficiency or maximising financial returns and minimising costs.

"Management generally knows what to do. The question is how to channel it effectively," Mr Neapole said. While a value audit by L.E.K. can be completed within eight to 12 months, an overhaul can take three years. Mr Apte said that establishing the basis for communicating goals took much of the first year, with the second year focused on implementation and the third on refinement.

"The biggest challenge in implementation is always coming up with an internal consensus within management. So education is crucial, not just between management units, but also between management and the board," Mr Apte said.

Changing management perspectives to focus on performance and value creation often involves a change in how staff pay and rewards are handled, to better tie-in incentives to shareholder returns.

For many Asian companies, management and owners still are one and the same. In many cases, this makes the importance of managing for shareholder value all the more important.

It can be a challenge for many firms to adjust to the growing call for good governance and professional management separate from the shareholders.

"You can appreciate the difficulties," Mr Neapole said. "You have a company that has been successful for a long time under its family-style management. Now, all of a sudden, people are asking for change, as globalisation takes hold. Without change, the risk of getting marginalised just increases."Governance is crucial. "The lack of transparency poses a risk, with investors demanding a higher return in compensation."

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