Case study 1: Responsible investing through engagement
A credit analyst at Insight engaged directly with a major listed company in 2017 to discuss a lack of transparency in its financial statements. The engagement led the company to provide more information. We provide the analyst’s report below.
Summary: I engaged with the company during the year to gain clarification on some very large ‘other’ items in the financial statements that lacked disclosure. I persisted on the topic until I received a full explanation of the accounting mechanics across the financial statements.
Risk identified Very large ‘other’ items in the financial statements that lacked disclosure – these figures are in excess of the company's annual cash generation and relate to the financing of new vehicles.
Action undertaken I persisted on the topic until I received a full explanation of the accounting mechanics across the financial statements. Both the investor relations and treasury teams were unable to provide a correct explanation and I escalated until they provided a specialist from the finance team. To highlight the need to provide better disclosure I contacted leading sell-side analysts and challenged them to explain the accounting. When they couldn't they called the company.
Reception from issuer The investor relations team was very helpful and put in hours of work trying to understand/learn the accounting quirks that were taking place and ultimately arranged a conference call with members of the finance team who are responsible for the reported financial statements.
Response from issuer I was assured disclosure would improve. They admitted that as the company's financial service business has grown, disclosure in the financial statements to explain the interaction with the industrial operations has somewhat lagged. Market concerns over risks in the leasing book has brought reporting here into focus.
Impact on your work Understanding the mechanics of these large ‘other’ items allowed me to calculate estimates for potential impact under various scenarios; this got me comfortable with the risks to the company's cash flow and I followed by moving the company to an overweight rating.