Sunday, July 24, 2011

The Annual General Meeting (AGM) Part 1

After attending more than my fair share of AGMs, I thought it strange that I did not write a generic post on how I usually prepare for an AGM, or how I go about extracting information and conducting due diligence during an actual AGM. It’s interesting because the process often involves not just being ready with the questions which you have prepared, but one should also carry with them the willingness to warmly engage Management in discussions on the Company’s prospects and strategies. It’s as much a human relations exercise as it is an exercise in financial and corporate (business) analysis. Of course, it can be argued that one gets better over time as one attends more of such AGMs and gets to meet their fair share of interesting and varied personalities, ranging from the downright unfriendly to the exceptionally warm. This post serves to highlight the preparatory efforts which I undertake before an AGM, an account of what to do during the AGM, as well as the follow-up required after the AGM to verify facts, collate information and glean valuable insights.

Part 1 will discuss mainly on the Annual Report, how to go through it, and what information to glean from it; as well as the preparation of questions and pointers to be brought up during the AGM. Part 2 will focus more on the AGM itself, including the proper decorum to observe, things to do and people to approach. Part 3 will wrap up with a discussion on the aftermath of the AGM and any follow-ups required, as well as how to analyze, collate and make sense of the information gathered in order to glean knowledge from it.

Preparatory Work – Receiving the Annual Report

Obviously, one could argue that the very first step towards preparing for the AGM proper consists of reading and downloading the Company’s latest full-year financial results from SGXNet. This is usually within a window period of 60 days from the date of year-end for the Company. For example, in the case of Boustead, their year-end was March 31, 2011 and results were released on May 26, 2011 (within 60 days) on SGXNet. The AGM, though, is usually held about 2 months after the release of the results; in this case for Boustead it will be held on July 29, 2011 (Friday). This means that four (4) months would have elapsed from the date of release of the full-year results till the actual date of the AGM. Note too that the AGM is almost always held on a weekday, therefore in order to attend, one must take leave if one is engaged in full-time employment. I try to do so as much as I can as this is a once-a-year affair.

For the Annual Report, however, it will usually be issued two (2) weeks before the date of the AGM. In my case, I received Boustead’s Annual Report in my mailbox on July 18, 2011 (Monday) but the online soft copy version was already available on the Company’s website as early as July 15, 2011 (Friday).

Obviously, one will not have the luxury of time to peruse through the Annual Report, as there are only about 12-14 days between the time of receipt of the Report, till the date of the AGM. Below are some pointers on the salient aspects to look out for in the Annual Report to cut down time taken for analysis.

Preparatory Work – Digging Deep into the Annual Report

The Annual Report (AR) is usually perceived as a rather daunting document, as thick as a small encyclopedia and filled with glossy pages lauding the Company’s achievements. Essentially, though, it has two main sections. I call them the marketing section and the financial section. Marketing section consists of full-page, mostly glossy photographs of the Company’s projects, products or premises, while the financial section is chock-full of numbers, tables, explanations and (obtuse) accounting facts and estimates. Most people who are not accounting-trained would tend to shift their focus almost exclusively to the marketing section, as the pages there are easy to read, usually in full-colour, presented in columnar format (for easy comparison) and the English used is not too archaic. For example, using Boustead’s FY 2011 AR as an example, the Group’s four divisions are clearly segregated and explained, and tables are used to summarize major projects and milestones for each division. There is a Chairman’s Statement which is 4 pages long, as well as a financial summary showing five years of revenue, profits and dividends. While I do not deny that this section can be used as the basis for questions, it is usually the stuffy numbers in the financial section which should be scrutinized up-close, and for a person without accounting knowledge this task would seem like a mammoth one. Therefore, I would strongly encourage readers to acquire a basic understanding of accounting by reading books such as “Value Investing for Dummies” which explains the key concepts involved in the three financial statements, as well as some other accounting concepts.

It would be a good starting point to concentrate on the numbers which “stand out”, meaning any big changes in profit margins, revenues or anything which is an aberration and not quite “normal”. What these are will, of course, vary from report to report, but they generally centre on the following:-

1) Significant Events - These include acquisitions and divestments during the financial year, and their effects would have been described in notes such as Goodwill, Subsidiaries, Associated Companies or Investment/Investment Properties.

2) Receivables - Bad debts being written off, more being provided for. A note on Receivables will usually contain a summary of these by ageing profile, and under Risk Management the auditors will also assess the fair value of receivables to ensure no (further) impairment is required.

3) Debts - This note can be pretty detailed for a company with significant loans, and will include comprehensive conditions on each loan, repayment amount, interest rates (usually Cost of Funds + Spread), currency and repayment period. These can give an indication of whether the Company needs to refinance soon, as well as give an idea of the finance costs for the coming year.

4) Subsequent Events - These include significant events which occurred after the financial statements were released but before the printing of the AR. Some of these may have a material impact on future financial periods and may give rise to questioning.

5) Investments and Investment Properties - For those analyzing an asset play, this note would be very useful. The market value of properties may exceed their book value and thus hidden value may be present in the properties which a Company has.

6) Commitments (Contingent and Capital) - These include potential liabilities which have yet to crystallize due to uncertainties such as lawsuits or corporate guarantees; as well as commitments for capital expenditure in the next financial year which may give a sneak peak as to how much cash needs to be channelled to these purchases.

There are, of course, other aspects which need to be looked at on a case by case basis, but the above is a simple laundry list of the more important notes to look out for when browsing through the AR.

Preparatory Work – Taking Notes

As one peruses through the AR, one should continually jot down notes on a separate piece of paper (or type it out if you wish) in order to organize your thoughts on what you wish to be clarified. Structure and focus your questions to make sure you tackle the crux of the issue and not just to scratch the surface. For example, a question on debt may require you to query on why borrowings had to increase so much when cash flows were actually healthy and seemingly sufficient, and at the same time, one can also ask about the cost of debt if Management is willing to reveal the blended yield for the Group.

Formulating A List of Questions

After reading through the AR and making notes, I will usually compile a more detailed list of questions for the AGM. These are categorized into business strategies, business divisions, financials and plans/prospects; but readers are free to choose a format which they are comfortable with. The key is to make sure you cover the points you wish to raise systematically, and to ensure you organize your thoughts well. This is because you will seldom be able to keep glancing at your list during face-to-face interactions as it may be construed as rude (more on this and other etiquette in Part 2). Try to remember key information such as net margins, important debt amounts, and other numbers such as revenue growth, profit growth, projections, numerical forecasts and dividend yields. This is not so much to impress Management but it also allows you to flow more smoothly from one question to another should you receive a reply which allows you to do so. Since questioning and fact-finding can be a fluid affair it is important to have some facts and figures at your fingertips in order to make the process a whole lot more efficient and effective. Remember too that Management has limited time to interact with shareholders and may have to rush off for some important meeting or do what they do best – work to grow the Company to greater heights!

Part 2 shall delve into the AGM proper as you arm yourself with your list of questions. It also describes basic behaviour to be observed, dos and don’ts and what else you should bring along.


Chong Jun said...

Hey MW,

This post has certainly allowed me to gain more insights and tips on preparing questions be it on AGM or through email to the respective IRs. I look forward to the next episode of this series! (:

Musicwhiz said...

Hi Chong Jun,

Hey thanks glad that you like the post. It's actually quite tough to put down in words what I go through before each AGM - the preparations and the questioning etc are quite second-nature but to articulate it in words is something quite different. I am more used to narrating this to my wife who would listen to what I would do prior to AGM and my findings after AGM.

But she did mention it's a good first step by writing all this down. Hopefully this all makes sense though! So far you're the one and only one commenting on this post haha!


M.A. Wind said...

Hi MusicWhiz,

Thanks for your many insights, appreciated. I am based in Singapore, but write more often about Malaysia where I stayed for 15 years, care to link to my blog? I hope to also start blogging about Singapore shares. Thanks in advance.

Musicwhiz said...

Hi M.A.Wind,

Sure will link up with you, thanks!