In a new Continuous Disclosure Guidance Note published last week (the New Guidance), NZX Regulation (NZXR) has provided more detailed guidance on an issuer's continuous disclosure obligations in relation to:
NZXR's previous Continuous Disclosure Guidance Note otherwise remains unchanged.
The New Guidance makes clear that, although there is no requirement for issuers to provide earnings guidance to the market, NZXR believes earnings guidance will provide “the best foundation from which to assess market expectations" and may therefore provide a “benchmark that assists an issuer in managing its disclosure obligations".
NZXR also provides practical examples on what may constitute “earnings guidance", which may include statements made by an issuer that it is comfortable with consensus analyst performance expectations and statements made by an issuer that it expects its performance to be below, in line with, or to exceed, its performance in a prior comparable period.
Correcting market expectations
The New Guidance sets out detailed considerations for issuers to take into account when determining whether a deviation in an issuer's actual or projected earnings from market expectations is “material information" requiring disclosure under the Listing Rules. Certain key aspects of NZXR's guidance in this respect are briefly described below.
Assessing market expectations
Issuers should assess deviations in financial performance against market expectations, including taking into account the issuer's own published earnings guidance (which NZXR emphasises should provide the best foundation from which to assess market expectations), outlook statements and other disclosures, as well as analyst coverage, prior comparable period earnings and the impact of external events known to the market.
The New Guidance states that it is reasonable for issuers to place less emphasis on analyst coverage that is less credible or represents an outlier view.
NZXR encourages issuers to be cautious in taking a view that the market will have correctly and fully deduced, concluded or inferred the impact of external events on the issuer without the issuer itself having provided disclosure of those impacts to the market.
Nature of the deviation
Issuers should consider various factors regarding the nature of the deviation when assessing whether a deviation in financial performance constitutes material information.
NZXR has set out a non-exhaustive list of those factors, which include whether the deviation affects cash flows or will affect the outlook of the issuer in the future reporting period, whether near term earnings is a material driver of the price of an issuer's financial products and whether the issuer's performance is usually stable.
Extent of the deviation
Issuers should consider the extent of the deviation when assessing whether a deviation constitutes material information. However, NZXR draws a distinction between the extent of deviations of performance from market expectations, where those expectations are derived from an issuer's own earnings guidance and where those expectations are derived from other sources (including analyst coverage or prior comparable period).
In NZXR's view, a material deviation of performance from market expectations derived from an issuer's own guidance will usually require disclosure. NZXR considers that, although not solely determinative, where an issuer has published earnings guidance, a deviation from that guidance:
of 10% or more will usually be material,
of between 5% and 10% may be material, and
below 5% will not usually be material.
The above thresholds are consistent with the price movement thresholds that NZXR uses as a general point of reference when determining whether information has had a material effect on the price of securities under its own review function (as set out in section 3.1 of the New Guidance).
NZXR notes that for the purposes of quantifying the extent of a deviation where an issuer has presented its earnings guidance as a range, the issuer should use the floor of the issuer's guidance range as the base amount for negative deviations and use the ceiling of the issuer's guidance range as the base amount for a positive deviation.
In contrast, NZXR considers that it is not appropriate to have prescribed percentage guidelines for deviations where an issuer has not published earnings guidance (i.e., where market expectations are derived from sources other than the issuer's own earnings guidance) as those market expectations will inherently be less certain. The New Guidance provides that a deviation of performance from market expectations derived from such other sources will usually need to be more significant in order to require disclosure than a deviation derived from an issuer's own earnings guidance.
Certainty of the deviation
Helpfully, the New Guidance remains largely unchanged in stating that a reasonable degree of certainty that there will be a material deviation needs to exist before a disclosure obligation arises. In this context, NZXR notes that an issuer's earnings being materially ahead or behind market expectations early in a reporting period does not necessarily require disclosure where there is still an opportunity for that position to revert back closer to market expectations by the end of the reporting period.
When it is sufficiently certain that an issuer's performance will deviate from market expectations and the issuer has assessed that deviation is material information, a disclosure obligation will arise. It is noted that an indication of the order of magnitude of the deviation should be included in any such disclosure (which may be a description of the extent of the deviation if the issuer is unable to numerically assess its magnitude).
The New Guidance does not materially change NZXR's previous guidance on monitoring analyst coverage and engaging with analysts. NZXR also has retained its position that it does not consider that issuers have a general obligation under the Listing Rules to:
correct analyst earnings forecasts or consensus estimates which do not align with an issuer's internal earnings projections, or
publish their internal earnings projections solely because they do not align with analyst earnings forecasts or consensus estimates.
If you have any questions about NZXR's New Guidance or your general continuous disclosure obligations, please get in touch with the contacts listed or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.