QUALIPORT
Get The Best From RNS

By Maynard Paton (TMFMayn)
July 10, 2003

The Fool's new Company Announcements Service is an essential tool for every share investor. All 'regulatory' company updates -- results, trading statements, directorate changes and so on -- are shown on the site in real time.

Until last year, every company statement had to go via the Regulatory News Service (RNS) of the London Stock Exchange (LSE: LSE). These days, listed companies can disseminate their regulatory news through six Regulatory Information Services, though the LSE's RNS remains the dominant channel.

Like most things to do with the stock market, there's an art to reading regulatory statements, with the major factor being clarity. Generally speaking, better companies tend to provide clear and concise updates. Boardrooms that produce statements that are long on wind but short on facts should be treated with caution.

Here's a quick rundown of the main points to watch out for.

Show me the money

Annual and interim results statements should immediately tell the reader what happened financially in the period under review. Those firms that leave the major accounting details towards the end of the statement have good reason -- the numbers stink.

British Airways (LSE: BAY) is a very good example of how listed firms should present their figures. The airline's last set of preliminary results kicked off with a summary of the profit and loss account, followed by the full profit and loss account, which was then followed by a big table of operating and financial statistics. The statistics weren't pretty, but at least BA wasn't trying to hide the bad news. Engineer Renishaw (LSE: RSW) is another that presents its full accounts before the chairman's statement.

Most companies though do something similar to Capita (LSE: CPI). The outsourcer provides a financial summary right at the start of its annual results...

                       Year ended      Year Ended         Change
                   31 December 2002  31 December 2001

Turnover                  £898m          £691m             up 30%
Profit Before Tax         £98.2m         £72.1m            up 36%
Earnings per share         10.5p          7.7p             up 36%
Total dividend per share   3.0p          2.25p             up 33%

... which is followed by a statement describing the financial performance in more detail, then culminates with the full accounting statements.

So beware of the company that does not provide any initial financial highlights or does not refer to changes in its financial performance. For instance, this year's final results from Cable & Wireless (LSE: CW.) gave the following headline summary:

RESULTS FOR THE YEAR ENDED 31 MARCH 2003

Group revenue                            £4,391m
Loss before tax, exceptional items       £(224)m
and goodwill amortisation  

Total operating loss*                  £(6,000)m
Exceptional items and                  £(6,149)m
goodwill amortisation

Loss for the financial year            £(6,533)m
Net cash                                 £1,619m
Capital expenditure                        £731m                                                                               

Dividend for the year                  1.6 pence

But why no comparisons to the year before? Because group revenues fell 24%, losses before tax, exceptional items and goodwill widened from £14m to £224m, the total loss went from £4.9b to £6.5b and the dividend was slashed by 90%. Not pleasant.

Then consider Torotrak (LSE: TRK). Investors have to look hard for signs of financial life at the innovative gearbox developer. The first monetary reference in the company's full-year statement came in the 33rd paragraph. Those figures weren't good either.

Have I got bad news for you?

The more significant the news, the greater prominence it should be given in a regulatory statement. But some boardrooms do their best to put a positive spin on bad news and again leave the nasty stuff towards the end. Such an approach to regulatory statements does nothing for management credibility.

Today's trading update from construction group Carillion (LSE: CLLN) shows how it should be done:

 "Carillion plc, the business and construction services company, is providing this update on trading for the six months ended 30 June 2003, in advance of its interim results announcement on 10 September 2003.

Profit in Construction Services for the first six months of 2003 is likely to be £10 million lower than expectations due to difficulties relating to the delivery of the Nottingham Express Transit ('NET') PPP project."

The company tells investors immediately what has happened and the resultant impact. Contrast that announcement with an update last week from Goshawk Insurance (LSE: GOS):

"Goshawk's wholly-owned specialist reinsurance business, Goshawk Re, has continued to enjoy very favourable trading conditions in 2003...

Capital and surplus in Goshawk Re at 30 June 2003 is expected by the Board to be comfortably in excess of $250 million, an important threshold in attracting catastrophe business...

The rating environment for all classes of business written by Goshawk's wholly-owned Lloyd's business, Syndicate 102, remains very good and in some cases exceptional. Rate rises have flattened out and in the case of the war account fallen from historically high levels associated with the Iraq war.

However the Syndicate has suffered from adverse developments on certain specific lines of business.

The failure of The Accident Group is likely to have a negative impact on the overall loss experience in the legal expenses account, although a number of factors that may have a material bearing on the final outcome are still uncertain..."

The Syndicate has also seen deterioration in its Cargo account...

As a result of the problems faced by Syndicate 102 the Board currently expects that the profits for the full year will be below current market expectations"

So, lots of good news followed by lots of bad news (some of which contradicted the good news), eventually ending with investors being told how profits would be affected. Goshawk shareholders could be forgiven for thinking their company wasn't being totally upfront with the problems.

Read between the lines

Even when companies are upfront with unpleasant news, investors still sometimes have to work out just how bad things are. An update from Unilever (LSE: ULVR) last month began like this:

"Despite a tougher business environment, Unilever has re-affirmed it expects to meet its earnings outlook for the year 2003. This is despite a slower than expected first-half sales performance and a revised outlook for leading brand growth of some 4% for the year."

Okay, the term 'slower than expected' indicates the 'revised outlook' actually means 'lower outlook', but just how much lower? Not surprisingly, Unilever didn't admit to the original outlook for 'leading brand growth' in the June statement. Investors had to go back to February's full-year statement to find that out (it was 5-6%).

Don't believe the hype

Finally, be suspicious of companies that issue spurious or over-the-top regulatory statements. The RNS and other channels should be for important investor news, not used as a mechanism for free advertising and promotion.

Ryanair (LSE: RYA) is a regular culprit. In April, the airline used the RNS to reveal "a new daily route between London-Stansted and Clermont-Ferrand, France with fares starting from €19.99 including taxes." The same month, Ryanair also announced to shareholders a "massive Spring seat sale with 1m free seats now available".

Finally, who could forget the statement from Sharon Carmel of Emblaze (LSE: BLZ) (formerly GEO Interactive), who declared in 2000:

"Our competitors mostly create PR hype and future promises - GEO has actually delivered on a world's first ever video cell-phone. This phone demonstrates the opening of a new era in human communication. History will remember GEO and Samsung as the companies that turned Star Trek fiction into a daily reality. This is the most exciting moment of my life."

Since then, revenues at Emblaze have plunged about 80%.

More: The Fool's Company Announcement Service

The author owns shares in the London Stock Exchange.