3 Key Things to Know from Annual Reports

2020-07-13     thesmartinvestor
3 Key Things to Know from Annual Reports

This year’s annual general meeting (AGM) season is turning out to be a radically different one compared to prior years. But the reports remain the same.

The circuit breaker measures by the government have seen AGMs being postponed.

Another outcome from the measures is the push for listed companies to adopt video conferencing to live-stream their AGM to shareholders, like what iFast Corporation Limited (SGX: AIY) had done recently.

For companies that announced the postponement of AGMs to mid or late May, shareholders now have more time to peruse through the annual report to gain better insights into what has happened in the past year.

Here are three aspects that investors should look out for in annual reports.

The Chairman and CEO’s statement

Typically, the chairman or CEO of the company will provide a commentary for the year’s performance.

This summary is an important read as it highlights the good and bad aspects of the year, what lessons management learnt, and how they are preparing for the future.

Some of these statements are more detailed and candid, like the one from the Hour Glass Ltd (SGX: AGS), where the chairman took pains to detail the changes in the luxury watch industry and his views on the retail landscape.

Other CEOs may also provide a frank assessment of where the company has gone wrong or what it has failed to achieve, which is tapered by the listing of the company’s successes and achievements.

An example that comes to mind is Boustead Singapore Limited (SGX: F9D), where CEO Wong Fong Fui will provide a candid, no-holds-barred assessment of where the group stands, the challenges it faces and how it plans to tackle them.

Not all CEOs might be that upfront, therefore it’s always refreshing to read this section as it may contain insights that are not found in the usual earnings report.

Divisional updates

For companies with multiple divisions, it can be tough to obtain a detailed review of what happened during the fiscal year.

Some annual reports provide detailed descriptions of the intricate details of each division, and investors can absorb this information at their own pace.

Using the example of Boustead Singapore Limited again, the group offers a detailed description of the contracts each division has secured, the clients it serves and the achievements.

There are also graphs on how the division has performed over the last three fiscal years, as well as the order book for each division.

This display allows investors to gain a better perspective of how the division has grown or evolved over the years.

For companies such as VICOM Limited (SGX: V01), the annual report provides details of its two key divisions — vehicle inspection and non-vehicle inspection.

Detailed descriptions are provided for the certifications and milestones each division has achieved, and operational numbers such as the number of cars inspected for the year are also provided.

Astute investors can compile this numerical information from the business divisions over the years to track the progress of the company.

Industry reports

In rare instances, annual reports come with an industry report that is commissioned by the company.

The industry report will detail the trends within the industry and also shed light on the prospects and addressable market for the business.

A recent example was Keppel DC REIT (SGX: AJBU) and its fiscal year 2019 annual report.

Page 24 of the annual report contained a market review report on the global data centre market prepared by BroadGroup Consulting, an independent research and consulting firm specialising in the data centre sector.

Such reports are very valuable as they are prepared by a third party and provide useful and relevant information on industry structure and prospects.

Get Smart: A wealth of information

Annual reports provide a wealth of information for the discerning investor.

The three sections above are key aspects to watch out to provide you with a better understanding of the business drivers, risks and outlook for the company.

I strongly recommend that investors trawl through the annual reports of companies that you own, as well as those on your watchlist.

You never know what you might learn that can make yourself a smarter investor.

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Disclaimer: Royston Yang owns shares in iFast Corporation Limited, VICOM Limited, Boustead Singapore Limited and Keppel DC REIT.

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