Five weeks ago, Medserv announced that it had appointed Edison Investment Research to carry out analytical investment. Vanessa Macdonald spoke to Edison director Charles Combet to ask why.

Why would a company pay to have research done? And what value would it have to investors if it is being paid for by the company itself?

You are right. Companies being asked to pay Edison to write a research report on them was a novel approach and some people – especially older chairmen – could not understand. The argument was that they got research done free of charge.

Traditionally, credit rating companies which deal with the debt side are paid for their reports. But research is usually written because clients would want to know about the companies. So Goldman Sachs would send research out to Fidelity, for example, with a ‘buy’ recommendation on a company, which would in turn pass it on. Goldman Sachs would get a commission and they would also have an eye on adviser fees, looking at future acquisitions and investor outreaches. But that model has been affected in a number of ways, particularly since commission levels have shrunk to a tenth of what they were.

In addition, Mifid II demands that fund managers should demonstrate that the research is adding value and unique information. You cannot just put a short pager out. So you then end up covering fewer companies. I know of a FTSE 250 company which used to be covered by 26 analysts; they came in to see us two weeks ago as that has been whittled down to three.

Why do you need research? If there are no forecasts, it is very, very difficult for investors to understand a company. What is its growth trajectory? How much will it make next year? Is the share price appropriate in terms of how fast it is growing? What are its plans this year and next year?

What we do is write research on companies to get that message out there to international investors.

I was invited to come out here by stockbroker Edward Rizzo and we met a few companies. It was fascinating that none of them had any forecast numbers out in the market.

I also visited the Malta Stock Exchange, which is also looking at ways to generate liquidity and interest in Maltese stocks.

Why would Maltese companies be of interest to international investors?

Companies should be looking for investors in the countries where they derive their revenue. If you look at FTSE100 companies, their investor base matches the footprint of their revenue.

Apart from Medserv, there are many companies, such as hotels and IT groups, which operate internationally, even though they are based in Malta.

We try to generate liquidity from new investors and broaden the shareholder base

What we try to do through our research and through our road shows is basically to generate liquidity from new investors and broaden the shareholder base by getting that message out there. And this has an impact on a company’s share price as a larger investor base makes it easier to reflect the company’s real fundamentals.

Why would this be of interest to existing Maltese shareholders? Would the impact be positive or negative?

If you add international investors to a shareholder base, it adds stability as they are looking at the long term. If you only have a small number of shares being traded, you have a very broad ‘bid-ask’ spread. The small companies on Alternative Investment Markets have this problem: one shareholder sells his or her shares and there is a five per cent reduction in the share price!

You also find that when you buy a stock with a very broad spread, the company has to perform 10 to 15 per cent better before you make a profit because the point where you can sell at a profit is so much higher.

What we would add by generating liquidity is to reduce the ‘bid-ask’, making it easier for Maltese shareholders to make a profit.

Surely the amount of shares available in Maltese companies would be too limited to be of interest to international investors?

We have a range of investors from large institutions like Fidelity, JP Morgan and Black Rock which pay us to write research on their investment trusts, but our traditional audience has been private wealth managers.

This is not for every single company and we fully appreciate that.

The answer is that it would be harder but when you are talking about, for example, a business with assets in London or in the UAE, then investors take notice. Oil and gas assets are international – and oil and gas services companies operate anywhere in the world and can be listed anywhere in the world.

Maltese companies are small but look at GO: if you invested at 80c, you would now be looking at €2.87 per share. You have more than trebled your money. That is an argument you could make to any investor in the world. All people want is to generate the best return.

The problem is getting the story out there and with all the changes in regulations plus the reduction in commission levels, it is becoming harder and harder, especially for small cap companies, to generate that equity research coverage from banks and brokers.

MSE chairman Joe Portelli suggested getting a group of analysts to Malta but the problem is that analysts are specialised; they do not cover a support services company one minute and a hotel company the next.

And you have to look at how the analysts would be paid… If Merrill Lynch were to write about a company, how could they justify the expense of an analyst writing a full initiation note?

How can you afford it?

We are not relying on commission. We do not generate revenues from commission or on a corporate broking fee. We are affordable because the company pays us, not the investors.

If you are paid by the company, how independent can the research be, especially when your conclusions are negative?

We are independent of the conflicts of being a broker. We are not paid commission, so we are not writing a glorified ‘buy note’ because we want people to trade. If you look at the Medserv one, the feedback we got was that it was ‘fair’.

We would never write about a company that could have an impact on our reputation. We would walk away.

There is also a natural sieve. A company that is going through a difficult time will not come to us. And, if they did, we would advise them that it would not be in their interest to go ahead at that particular time.

We are not paid commission, so we are not writing a glorified ‘buy note’ because we want people to trade

There are clients who believe that they are undervalued but we would not write something if we could not verify and justify it. Our analysts would not put their name to anything they could not stand by.

There is that conflict to manage and we believe we do it well. We have a team of 10 as our central desk, made up of former fund managers, and they go through every single note before it is published – with a red pen! – to make sure it is rock solid.

Does your role have an element of forensic investigation or is it only based on the information that you are given?

It is a combination of published information but we do speak to the company and its executives and ask for management accounts. We put nothing in the market which is not already in the public domain. But we add our forecasts. The company has sight of the note before we publish to make sure that there are no factual inaccuracies but we are very strong on the fact that it is independent.

Do you benchmark companies against industry standards?

We do a discounted cash flow. But one of our main valuation methods is to look at comparables, comparing the average results, like price/earning ratio, of a company’s peers.

Since we have 85 analysts and write about so many companies, then we draw on the results’ presentations of many companies. You cannot write about a company unless you understand what is going on in the market.

All our analysts have their own domains of expertise, with teams for each sector. The analysts speak to the companies regularly and get to know them. You maintain your distance and have a professional relationship but you have to have a rapport and know the company and market inside out.

Medserv was your first client here. Give me an idea of what will be happening with their research now…

In a typical year, we do a 12 to 16-page initiation style note. We update this every year as things do change. We keep them concise as we don’t want to bore investors! The skill of the analyst is condensing the salient points. We typically write three updated notes on average, reflecting a company’s annual report, its interim report and trading statements (even though these are not mandatory).

In addition, if a company were to make an acquisition or any material changes, we would do research on that too.

The Medserv note went out to about 20,000 investors, in addition to which we have relationships with 75 platforms, such as Bloomberg and Thomson Reuters, as well as to some of the retail ones, which host our research.

We work hard to keep our Google ranking high too so that the notes come up when people search for the company.

We also have a ‘research link’, an HTML code which would go on to Medserv’s website, with updates added automatically.

It is also on our website, of course, and regulatory announcements are made.

Brokers only send research to professional clients who pay them for that research. Our view is completely different as we want that message to go out to as many potential investors as possible.

That is how we generate success, by making as much noise about the company as possible.

Who is Edison?

• The Edison Group was founded in 2003 by two small cap fund managers and a research analyst. They started off looking at UK-based, predominantly small cap companies with less than £1 billion, who were not attracting any research companies.

• Edison now is headquartered in London, with offices in the US, Frankfurt and Sydney, with a presence in Wellington/New Zealand and Tel Aviv/Israel.

• It currently has 85 analysts looking after 450 corporate clients.