written by Market Eye’s Eric Kuret.

On 1 July 2015 the ASX released an update to the continuous disclosure policy for ASX listed companies. Guidance Note 8 (GN 8), which provides direction on continuous disclosure listing rules 3.1 – 3.1B, was updated to provide expanded guidance on analyst and investor briefings, analyst forecasts, consensus estimates and earnings surprises.

The importance of understanding GN 8 cannot be under-estimated, as Newcrest Mining found out (they were fined $1.2 million by the Federal Court for selectively disclosing information!). While the essence of GN 8 remains the same, the ASX felt it needed to provide greater clarity as there was concern that entities were misinterpreting elements of GN 8.

Below is a brief summary of the key changes made to the new GN 8:

Earnings guidance

The ASX has emphasised that, all other things being equal, an entity is not required under Listing Rule 3.1 to release its internal budgets or earnings projections to the market and it is acceptable for an entity to have a policy of not providing earnings guidance to the market, subject to certain exceptions relating to de facto earnings guidance and market sensitive earnings guidance (discussed below).

De facto earnings guidance

The ASX modified its guidance to clarify that an entity that has a policy of not giving earnings guidance needs to be careful in its communications with security holders, analysts and the press to preserve the confidentiality of its internal budgets and projections. If a company’s internal budgets or forecasts cease to be confidential, they will lose the protection of Listing Rule 3.1A, and if it is market sensitive, they will need to immediately disclose it to the market.

Market sensitive earnings surprises

In relation to an earnings surprise, GN 8 clarified existing guidance in relation to a listed entity’s continuous disclosure obligations.

For companies that have provided guidance to the market:

  • ASX maintains existing guidance that an entity that has provided earnings guidance to the market should consider updating the market if it expects there to be a material difference between the actual or projected earnings for the relevant period and the guidance provided to the market.
  • An expected variation of 10% or more is generally considered to be material and requires updated guidance, and an expected variation of 5% or less is unlikely to be material.
  • An expected variation of 5-10% requires the Board of that entity to form a view regarding materiality. The new commentary also provides some examples of where there might be a convincing argument that a 5-10% variation may not be considered material.

For companies that have not provided guidance to the market:

  • ASX maintains the existing position that the 5-10% variation guidance does not apply to entities that have not published guidance for the current reporting period.

Correcting analyst forecasts and consensus estimates

ASX has added new guidance to the effect that it does not believe an entity has any obligation to:

  • correct the earnings forecast of any individual analyst, or the consensus estimate of any individual market data vendor, to bring it into line with the entity’s internal earnings projections; or
  • publish its internal earnings projections just because they happen to differ from an analyst’s forecast or a consensus estimate of analysts’ forecasts.

But that guidance is qualified by the principle that where an entity has not published earnings guidance, analyst forecasts and consensus estimates can be relevant indicators of market expectations and:

  • “an entity will have an obligation under the Listing Rules to make an appropriate announcement if it becomes aware that its earnings for the current reporting period are likely to differ so significantly from market expectation that information about that difference is market sensitive”; and
  • ASX expects that the entity will be monitoring analyst forecasts and consensus estimates so that it has an understanding of the market’s expectations for its earnings and “is alive to any potential market sensitive earnings surprise that may be emerging”.

Publishing analyst forecasts or consensus estimates

The updated GN 8 makes it clear that publication of a particular forecast or consensus estimate on the ASX Market Announcements Platform constitutes an implied endorsement of the forecast or estimate and thus effectively provides de facto earnings guidance.

For entities wishing to publish information about analyst forecasts, ASX recommends that, to reduce the risk of any perceived de facto earnings guidance, the entity publish either:

  • a list of the individual earnings forecasts of the analysts known to be covering its stock; or
  • a range showing the low, average (or consensus) and high earnings forecasts of the analysts known to be covering its stock,

along with a disclaimer making it clear that it “does not endorse, confirm or express a view as to the accuracy of the forecasts nor does it make any representation that its earnings will fall within the range of expected range of forecasts provided”.

A new section regarding publication of analyst forecasts or consensus estimates to analysts has been added to Guidance Note 8. The ASX cautions that providing summaries of forecasts to analysts may be interpreted as de facto earnings guidance and that it will “generally be safer” for an entity to make the information available by publishing it on its website or in a market announcement. 

Disclosing information at analyst and investor briefings

The updated GN 8 includes a new section on “Analyst and investor briefings” emphasising the importance of avoiding selective disclosure of market sensitive information. It points out that it is prudent practice to first provide any materials to be handed out at an analyst or investor briefing to the ASX and publish the information on the entity’s website. The note also clarified that that where an entity gives a series of presentations over a short period of time and the presentations have been tailored for each event but contain materially the same information, it will not expect that each subsequent iteration of the presentation be lodged with ASX for release to the market.

GN 8 also recommends that entities review proceedings at analyst and investor briefings, including any responses provided to questions, to ensure that no market sensitive information has been disclosed, and if it has, the entity should immediately publish the information.

 

Link to the updated Guidance Note 8: http://www.asx.com.au/regulation/rules/asx-listing-rules.htm

Please contact Market Eye if you would like to discuss this topic further.