Are your stocks on SGX's blacklist?

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Singapore-listed companies are now given the option to move away from quarterly reporting (QR). But not every company will get that option, especially if they are earmarked as "risky".

Since 2003, companies with a market capitalisation above $75 million have been required by the exchange to report their quarterly earnings.

But in late-2019, Singapore Exchange hinted towards a new approach to QR, saying that the requirement will be risk-based rather than based on the company's market cap.

SUPPORTERS AND DETRACTORS

The QR provides a timely, three-month update that could keep investors properly appraised on the financial health of their investments.

However, not every company supports quarterly reporting.

The market-cap based rule has arguably placed a financial and operational burden on smaller companies that do not have adequate resources to comply with such a requirement.

On the other side, there were valid concerns from the investment community regarding the complete removal of QR, as it would mean less information provided to investors for their investment decision-making.

RISKIER COMPANIES

Last month, I had shared my thoughts on the good and bad aspects regarding the proposed QR abolishment.

Since then, SGX has revealed more details releasing a full list of companies that must continue to do QR of their financial results.

The list comprises 109 companies that are deemed "riskier issuers". 61 of them are listed on the Mainboard while the remaining 48 are listed on Catalist (SGX's second board).

These firms have been ordered to continue QR because they either do not have clean audit opinions or face regulatory or financial issues.

Of the 109, 24 of the firms used to fall below the size threshold of S$75 million and therefore were not required to do a QR. These companies will be given a one-year grace period to start doing QR.

QUARTERLY ASSESSMENT

The 109 companies will be subject to a quarterly review by SGX to assess if they have managed to clear up their underlying issues.

If the audit issues are cleared up, the firms will get a chance to drop the QR requirement.

At this juncture, it's not known if SGX needs to have a clear unqualified opinion from the auditor with all issues resolved. Generally, audits are conducted only once per year.

The review may also throw up additional companies to be added to the list based on the new risk-based approach, and may not solely rely on audit-based opinions to form an assessment of "higher risk".

This area could be worth monitoring as it means investors can take the cue from SGX on whether a company may fall short of certain reporting or financial standards.

THE BLACKLIST

The new risk-based approach could anger some stakeholders.

For instance, companies within the list of 109 may complain of being "blacklisted".

The unfavourable status could impair their ability to conduct business in a normal fashion, as suppliers and customers will now know that the company is on SGX's QR list.

While such concerns may be valid, I believe SGX's shift is overall positive for investors and the companies concerned.

First off, the increased scrutiny and disclosure requirements will force these companies to be more aware of audit or risk-based issues, and perhaps spur management to clean up the accounts in order to exit the list as soon as possible.

Secondly, investors will also be able to get a laundry list of companies that face audit or other issues without having to dig through the latest financials or annual reports in painstaking detail.

The imposition of QR on these riskier companies also means that investors get to more closely monitor how management is dealing with the problems or issues they face.

GET SMART: USE IT WISELY 

The list provides investors with better clarity of SGX's new requirements for QR and can act as a criterion for filtering out weaker companies or those with audit issues.

Of course, investors should not simply tar all the companies on the list with the same brush as some of them may be undergoing temporary issues.

As smart investors, we must understand that this list is just one of the filters or criteria that we should use to sift through companies for investment.

While the list does suggest problems, there could also be interesting opportunities if we look carefully and do our own due diligence.

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This article was first published in The Smart Investor. All content is displayed for general information purposes only and does not constitute professional financial advice.

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