Removal of EPS Forecast Under Scrutiny

The Securities and Exchange Organization’s decision to remove earnings per share forecasts is justified, as most companies’ forecasts for the previous fiscal year (March 2016-17) had a 466% deviation from their actual profits, a certified public accountant said.

Implemented as of Saturday, SEO’s measure mandates EPS to be calculated on the basis of corporations’ realized profits or losses in their last fiscal year and bars them from publishing forecasts. Forecasts will be replaced with corporate reports on the firms’ performance.

“What is published by some corporations as EPS forecast is simply meant to deceive investors and manipulate share prices,” Sarkis Abrahamian was also quoted as saying by ILNA.

According to SEO data, about 65% of publicly traded companies forecast a higher fiscal year earning than they actually realize it by the yearend.

“Instead of basing trade on unreliable data, investors should study the firms’ audited financial statements, sales reports and descriptive corporate reports,” he said.

Descriptive corporate reports are set to include the current and potential developments’ financial impacts and risks, information on revenue source and quality as well as cash flow, enumerating the primary criteria for performance evaluation and naming unfinished or stalled projects with their potential financial impacts.

The move is also ultimately meant to facilitate trade by reducing the number of companies’ tickers frozen on the market due to deviations from announced earnings forecasts.

Currently, 20 and 48 companies’ shares are barred from trading on Tehran Stock Exchange and Iran Fara Bourse respectively. While positive in nature, the move has spooked investors on several fronts.

The main controversial issue is its implementation. EPS forecast was totally removed from www.tsetmc.ir on Saturday and has been replaced by the last fiscal year’s realized EPS. The next day, however, saw all information on EPS being wiped off the website, sowing confusion in the market.

“It would’ve been much better if there was first a trial run for a few highly transparent and financial responsive firms before the rule was applied to the whole market,” managing director of Goharan Omid Investment Company, Siavash Vakili, told Bourse 24.

The next problem is that the lack of a public EPS forecast could potentially cause certain larger, institutional investors to gain unfair access to vital corporate information before the rest of the market. Therefore, a “hidden EPS forecast” will persist in the absence of proper deterrents, Vakili added.

Echoing similar remarks, Sepehr Investment Bank’s international finance manager said Iran’s capital market is highly influenced by psychological factors and herd mentality.

With no EPS forecast, Mahdi Asima added, the way will open the way for social media rumors and unofficial data to distort market trade.

Simply introducing the measures, Asima says, is not enough, as market regulators must also supervise social media channels and provide a reference for investors’ inquiries.

Market analyst Mohsen Abbasi also told Bourse Press that in the absence of dependable analytical services and organization, the new measures will mostly likely end up hurting smaller investors and firms such as contractors, whose performance reports have very little to do with their future profit.