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InvestorGila
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Posting #1: Sat Jul 28th, 2007 05:27 |
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Saturday July 28, 2007
Big on buybacks
By JOSE BARROCK
Should there be additional curbs for share repurchase schemes?
THESE days, it has become common for publicly traded companies in Malaysia to repurchase shares from the open market. Even companies generally perceived as conservative have joined the fray, convinced that there are benefits from embarking on these buyback schemes.
Resorts World Bhd is among the new kids on the buyback block. Whether coincidence or not, the heavyweight counter has gained much upward momentum after it had made its maiden share repurchase on July 20.
However, this spree of buybacks is actually a pretty new phenomenon. It has not always been the norm for companies to repurchase their shares.
Share buybacks were initiated some 10 years ago, under Sec 67A of the Companies (Amendment) Act 1997. However, the buyback mechanism did not catch on until much later, as many were still arguing the merits and demerits as a result of lessons learnt from more mature markets such as the US, where buybacks have been ongoing for about two decades.
With these nagging doubts, a year after the Act had been amended to allow buybacks, only some 10% of the 120-plus companies on the local stock exchange then had opted to buy back their shares.
Since then, many more companies have grown to appreciate the value of share buybacks as a tool for capital management and to enhance shareholder returns. Among the more prominent examples are those in the YTL stable, with the exception of Mesdaq-listed YTL e-Solutions Bhd.
YTL Corp Bhd, YTL Cement Bhd, YTL Land & Development Bhd and YTL Power International Bhd have all been proponents of share buybacks and have been aggressively repurchasing shares for a few years.
To illustrate, this month alone (until July 19), YTL Corp repurchased 2.3 million of its shares, and on some trading days even accounted for as much as 75% of the stock’s trading volume. For example, on July 3, when the company bought back 875,100 shares, the stock's total trading volume was about 1.2 million shares.
One analyst from a foreign brokerage says, “The companies in the YTL group have been buying back their shares for sometime now, almost on a daily basis. If they stopped (buying back shares), it would create quite an impact and investors would wonder what had gone wrong – why the change of heart, why the sudden lack of confidence in the company?”
The YTL companies have consistently distributed their treasury shares (the shares they have repurchased) to shareholders. As a matter of fact, YTL Power was the first company to issue its treasury shares as dividends, back in 2001, when it announced a 1-for-50 share dividend to its shareholders.
Share buybacks issues
Despite the pick-up in buyback activity in Malaysia, the debate has not ended. Critics often question the wisdom in corporate funds being utilised to buy back shares, especially when the stock market is perceived as strong. The adverse opinion gets more intense in cases of companies going into debt to fund buybacks.
Says an analyst with a local bank-backed brokerage, “I don’t actually get it, especially when companies borrow money to buy back their own shares. I feel it’s a waste of resources. I think the funds can be utilised in other ways that can increase earnings.”
Share buybacks are meant to be an effective method of returning money to stockholders, especially so in cases where the income tax rate is higher than the capital gains tax rate.
However, there may be room for abuse as seen in other jurisdictions, where accusations of insider trading are quite common because share prices tend to strengthen when buybacks occur.
Thus, in Malaysia, several measures linked to buybacks have been put in place. Among them is Article 12.09 of Bursa Malaysia's Listing Requirements, which says a publicly trade company must not purchase its own shares or hold any of its own shares as treasury shares if this results in the aggregate of the shares purchased or held exceeding 10% cent of its issued and paid-up capital.
However, there is no actual limit as to how many shares can be bought back on a single trading day, an issue that has been addressed by more mature markets.
In the US, there are conditions imposed by the Securities and Exchange Commission, such as a volume condition, which limits the amount of shares that can be repurchased in a single trading day.
Under the volume condition, a company can only purchase as much as 25% of the stock's average daily trading volume, with other minor regulations imposed for clarity.
In Germany, meanwhile, some companies commission banks to handle the share buybacks, which thus means that judgments such as the timing and volume of a buyback will be independent, with only a clause ensuring the listed company that the shares are bought at the best possible price and the interest of the company.
There are rules in Germany as well that only allow as much as 25% of the daily average trading volume of the company’s stock to be repurchased. The average daily share turnover is calculated by taking the average daily trading volume during 20 trading days before the date of purchase.
General perception
There is also the worry about the likelihood of insider information compelling companies to repurchase their own stock. The fear is that the company directors who approve the buybacks may do so based on insider information, which can be utilised to prop up share prices.
There have been cases such as that of French conglomerate Vivendi Universal, where buyback regulations have been flouted and action taken against the top brass, including chief executive officer Jean-Marie Messier, for stock manipulation.
Warren Buffet of Berkshire Hathaway fame said a few years ago, “Repurchases are all the rage... but are all too often made for an unstated and, in our view, ignoble reason, to pump up or support the stock price.” And Buffet was among the early proponents of the share buyback scheme, only changing his tune somewhere in 2000.
However, not all are as cynical as Buffet or tread as cautiously as him. A head of dealing from a local brokerage quips, “It is a matter of perception, and different investors have different perspectives when they invest in the stock market, but the ultimate objective is still the same, to make money.
“It (a share buyback scheme) is basically how a company rewards its shareholders, and how a company wants to utilise its funds. And more importantly, the minority shareholders do gain from the buyback exercise. If a company’s buyback scheme supports the price, I’m willing to buy the shares. It’s a matter of riding with it.”
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Moolah
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Posting #2: Mon Feb 18th, 2008 12:25 |
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Saturday January 5, 2008
Why buybacks fail
Investment Scents
By S. DALI
EVERY now and then, Bursa Malaysia and the business papers highlight the share buyback activities carried out by listed companies. Also, there have been many articles written on the merits (and demerits) of such programmes.
So, do share buybacks work?
To answer that, we need to be mindful of why there is a need for a stock market in the first place? There are two main reasons for the establishment of a stock market. First and foremost, it allows companies to raise cheap funds to fund their growth strategies. Secondly, it is to allow for individuals and other entities to participate in the growth of these companies. All other reasons are secondary in nature.
A company raises funds to facilitate corporate strategies with the hope that it will make money, preferably higher than the prevailing interest rate. Successful companies keep accumulating profits to prepare for two eventualities – market down cycles or to take advantage of opportunities when there is a market/industry correction/sell-down.
Companies should only indulge in share buybacks when accumulated funds are in excess for the two reasons stated above. This is because share buybacks will deplete reserves and may not be easily convertible to cash when there is a down cycle or market correction – the time when funds may be needed.
Companies doing share buybacks must and should consider this aspect before embarking on the exercise. Even then, the company can still decide on other options to utilise the excess cash – give back to shareholders in the form of dividends or bonus – especially in a matured industry.
Companies raise cash for investing in growth. If they find no good investing opportunities after a prolonged period and cash flow is healthy, the funds ought to be returned to shareholders. Essentially, when companies embark on a share buyback programme, they are saying that it is the best way to utilise their excess cash. To arrive at that decision, they must be convinced that their share is undervalued compared to their company's prospects.
A company's share price may not reflect its true potential. Who knows the company's fundamentals better than the people running them? Then we have to look at why management is doing it: Is it to improve the share price via reducing the free float; and/or improve the earnings per share (which only happens when the shares are subsequently cancelled).
If a company has to resort to improving its share price by reducing free float, it is rarely successful. By reducing free float, it is a futile exercise as the company will have to accumulate a significant amount to prop up the share price – that seems artificial no matter how you look at it as the only group really keen to own the shares is the company themselves.
Of course, share buybacks can successfully engineer higher share prices by massively reducing free float but they will have to meet regulations for minimum free float in the market place as well. The danger is that share buybacks can be taken advantage as “insider trading” by management as it involves market timing – hence the authorities must be more vigilant when it comes to the timing of share buybacks. If a company buys back the shares and do not cancel them, are they waiting to unload when price is higher? That is tantamount to trading in their own shares or having an investment portfolio. Is that part of the company's normal course of business? Can this activity account for a substantial amount of profit for the company? How should analysts regard this profit – probably not enthusiastically as it is considered as a “one-off.”
It is then easy to appreciate the call for companies to make their intentions known to the public when carrying out share buybacks – is it for future placements to institutions; to be cancelled? and if so, a time frame needs to be stipulated; not to be cancelled?; to be sold back into the market when price is higher?; or to be disbursed as bonus? To me, that is vital information and I believe investors will rate the stock accordingly with the new information.
Bottom line, if it is not going to be cancelled, share buybacks are not really that big a positive in rating the company. Most times, companies who carry out share buybacks do not see significant improvements in their share price. Investors do not rate a company higher because of such an exercise as they are not buying the stock in the first place for various other reasons. In addition, the free float is not really a major factor. A worthwhile share buyback is one that subsequently involves the cancellation of the shares that have been bought back. Companies that do not do that, need to ask themselves why their share price is not at a level where it should be. Are investors not happy with the management's vision? Is the company not communicating its plans effectively? Has the company not been able to chart a credible track record? Have the financial results for the company been haphazard or inconsistent? Is the company unfocused or too diverse that nobody wants to follow/research the company? What is the management's track record in dealing with minority shareholders? Have transactions or deals been fair to all shareholders or been forced down investors' throats?
Chances are the stock will be rated properly and accordingly if the above concerns are addressed. With emphasis on that, it is likely that most share buybacks may not be entirely successful as it is fighting against the “enemy” when the “enemy” is really internal and not external.
S Dali is a pseudonym. He is an ex analyst/fund manager and active blogger. (malaysiafinance.blogspot.com) who says he is too young, too old, too sacarstic, too dark, too funny, too charismatic, too poor, too Cantonese, too Malaysian, too frank, ...too bad.
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Moolah
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Posting #3: Mon Feb 18th, 2008 12:26 |
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18-02-2008: Share buybacks have limited appeal
by Sharmila Ganapathy
KUALA LUMPUR: Few companies have become more attractive to fund managers by merely buying back their shares, as most Malaysian companies do not cancel shares that they have bought back, industry experts said.
“The average foreign fund manager would generally be pro share buyback as long as it’s followed by share cancellation,” Credit Suisse Securities (Malaysia) Sdn Bhd managing director of Asian equities Stephen Hagger told The Edge Financial Daily.
“However, this is rarely done in Malaysia,” said HwangDBS Investment Management Bhd chief investment officer David Ng. “As such, the practice of share buybacks does attract some criticism from fundamentalists.”
He said if the company decided to cancel the value of shares bought, instead of holding them as treasury shares, it would enhance its earnings and thus win investor approval. “But some would argue that the excess cash could be better utilised by distributing it back to shareholders,” Ng said.
He said it raises the question of how positive share buybacks are if not followed by cancellation. “What would be positive is if the major shareholders of companies add to their positions using their own funds,” he said.
“You can understand why companies are holding the shares because it’s easier to raise funds, and there’s no way you can go into the capital markets and match this in a short period of time,” an analyst said.
He added that companies like Public Bank Bhd and YTL Corporation Bhd, which had been actively buying back shares, could be holding on to the shares in case an acquisition or business opportunity came up and they would have ready cash.
The trend, he said, has been for cash-rich companies like YTL Corp and IOI Corp to buy back shares because they can afford to do so and have the assets. It also makes sense for companies like YTL Power and IOI, which are in industries that have limited opportunities for expansion, and thus buybacks offer better returns for them.
YTL Corp bought back 2.03 million shares this year, increasing its treasury shares to 160.56 million as at Feb 15, while IOI Corp added 10,000 shares, raising its hoard to 163.83 million as at Jan 31.
Hagger thinks buybacks will not deflect investor interest in the local market as a whole, although it would influence decision on individual stocks.
He cited the example of IOI Corp, which has been buying and then cancelling bought shares. “When looking at the kind of company, such as plantations, investors are more likely to buy IOI rather than any other company as the cash flow will be channelled back to shareholders in the form of a dividend or buyback, rather than placed in non-related businesses,” he said.
Hagger also feels that while the market would be more attractive to foreign investors with a higher prevalence of share buybacks, this didn’t necessarily mean more companies would practise it.
“It’s a huge change for local company directors to realise that instead of holding cash, they should be freeing up capital to return to shareholders.
“With banking systems globally, during a crisis banks never lend, you keep the cash because you can extract the funds if you see an opportunity,” he said.
Share buybacks were less prevalent last year, said Ng, as stock prices were higher in 2007 than in 2006, giving companies less incentive to carry out buybacks as it was more expensive to do so.
Ng believes fewer share buybacks will occur this year, as the market has been performing well, leaving little reason for buybacks motivated by undervaluation.
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InvestorGila
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Posting #4: Thu Oct 9th, 2008 09:33 |
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09-10-2008: Buybacks not boosting prices
by Gan Yen Kuan
KUALA LUMPUR: Companies that actively bought back their own shares from the open market for the past one month did not see such an exercise help improve their share price performance, suggesting that share buybacks in a volatile market may be just pointless.
A compilation of data on the share buyback activities at Bursa Malaysia from Sept 7 to Oct 7 showed that companies that were most aggressive in buying back their shares had actually seen a decline in their respective share prices.
Of the 20 most aggressive companies in repurchasing their shares, ranked by the percentage of total shares bought back, 16 saw a decline in their share prices, while only four chalked up some gains over a one-month period.
To name a few, OSK Ventures International Bhd bought back two million shares, or 1.33% of its issued share capital over the past one month. However, its share price fell by 23.6% during the period.
Glomac Bhd, which repurchased 2.45 million shares or 0.74% of its issued share capital, saw a 26.4% plunge in its share price during the period.
Kinsteel Bhd was the worst hit among the 20 companies, registering a decline of 37.9% in its share price over the past one month. The company bought back some 4.32 million shares.
It is worth noting that the top 20 best performing companies, in terms of share price gain over the past one month, did not undertake a share buyback exercise during the period.
Recent data by Thomson Reuters showed that from Jan 1 to Aug 8, share buybacks in Malaysia rose 94.8% to US$317.1 million (about RM1.1 billion) from US$162.8 million in the previous corresponding period. Notably, the eight-month share buyback volume already exceeded 2007’s full-year volume of US$228.4 million.
Generally, companies get more aggressive in buying back shares during a bear market, as share prices tend to be lower, or when they think their share price is undervalued. Shares that are bought back could be kept as treasury shares, which could be distributed back to shareholders in the future as bonus shares.
Share buyback is usually seen as an indicator of the management’s confidence in the company’s future prospects, otherwise money would not be spent investing in itself.
However, massive share buybacks by a company do not always or necessarily signal bright prospects for the company. Chances are, some companies may be buying back their own shares on hopes that it could push up the share price in the short term.
Pong Teng Siew, head of research at Jupiter Securities, noted that buying back shares during a bearish and volatile market was “pointless”.
“Buying back shares is seen as one of the ways to return value to shareholders. However, in a very bad market like this, it may not be effective.
“Company treasury should not spend money like this. It is pointless to try to support share price like this,” he told The Edge Financial Daily via telephone yesterday.
According to Pong, a share buyback exercise may meet its purpose of adding shareholders’ value when the share price of a company shows strong signs of rebound and stabilises.
Meanwhile, a broker said share buyback would fail to support share price growth if there is nothing fundamentally good in the company.
“Whether a buyback will be beneficial in the long term goes back to the question of fundamentals. What kind of message are you delivering to the investors by buying back your own shares?” he asked.
Given that the current market is not only bearish but also volatile, companies may need to review their share buyback programmes to avoid improper use of cash flow.
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