Some companies have embarked on share buy-backs post-GE14
Since May 9, following the 14th general election, the Malaysian stock market has taken a hit, with companies across various industries seeing their share prices plunge to multi-year lows.
There are the politically-linked stocks – those seen as linked to the previous ruling government – and also construction companies which had been seen as potential beneficiaries of major infrastructure projects which had either been cancelled or suspended by the new Pakatan Harapan government.
Some of these companies have been aggressively embarking on share buy-backs over the past two months after their share prices were battered, and while some stocks rebounded, some have remained hovering at the same level.
Share buy-backs are common when the market is down or when companies feel its shares are undervalued. The move is often seen as signalling that the company is confident that its share price is set to rebound, and also indicates that the company has plenty of cash.
When they repurchase their shares, the companies usually either keep it as treasury shares which can be sold to the market at a later date, cancel the shares or return to shareholders in the form of dividend-in-specie.
Among the companies that have been aggressively embarking on share buy-backs is e-government provider MyEG Services Bhd.
The company has repurchased a total of about 54 million of its shares between May 16, 2018, and June 30, 2018.
Seen as a stock reliant on contracts from the previous Barisan Nasional government, MyEG was among the biggest losers following GE14, losing nearly 65% between May 8 and May 17.
When the company began buying back its shares on May 16, the price was at RM1.27, but had continued to slide, hitting a low of RM0.685 on June 4.
On Friday, it closed at RM0.875.
Another company that has been aggressively repurchasing its shares, having bought back 19.15 million shares since May 14, 2018, is construction and property company Gabungan AQRS Bhd.
Also perceived to be linked to the previous administration, the stock had seen its share price dive after the elections from RM1.548 to a low of RM0.64 on June 1, 2018.
The company began buying back its shares on May 14, at RM1.083, and it has since strengthened to RM1.22, which means the company is likely to have already made profit from the exercise.
Cahya Mata Sarawak Bhd, which is the family-listed vehicle of Sarawak Yang di-Pertua Negeri Tun Abdul Taib Mahmud, saw its share price plunge to half its value in less than two weeks after the elections.
The share price fell to a low of RM1.92 on May 21 from RM4.05 prior to the elections.
Between May 23 and June 30, the company has carried out a buyback of over two million shares.
The company announced two weeks ago that its state road maintenance concession has been extended by the Sarawak government for another year, till June 30, 2019, with the same terms and conditions.
The one-year extension contract is worth RM180mil.
Analysts say the company’s proven track record, cost advantages with major capex in plant and machinery having already been made over the years, and the absence of any clear competitors for the project makes it a clear winner.
AllianceDBS Research said in a recent note that the change of political landscape at the federal government level “will have no immediate impact on CMS”, particularly on its road maintenance concession.
The stock has regained some of its losses following the contract renewal and positive analyst projections, closing at RM2.43 yesterday.
Are share buy-backs effective?
The question is, are share buy-backs an effective strategy at this point, given the current market conditions, and should investors be paying more attention to companies doing this if it indeed is an indication that the share price is set to recover in the near future?
Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew says he is quite neutral on share buy-backs, as it is “not fool-proof”.
He notes that it is generally seen as a signal that there is an upside to the share price and is a way for companies to tell its investors that the stock is worth more than its is valued at the time.
“It also signals financial strength as the companies have to do the repurchase of shares in cash.
“However, it is not fool-proof.
“There are cases whereby companies have gone out and borrowed money in order to fund the buyback. In such cases, the implications are different,” he tells Star Bizweek.
It can be an effective tool to signal confidence and to push the share price up, and similar to returning dividends to shareholders who are looking to cash out, Pong says.
“I don’t see it as the best strategy for companies - I am quite neutral about it. There are pitfalls, such as in cases whereby companies have to borrow money to fund the exercise,” he says.
Investors, he adds, must look at the company’s balance sheet in such cases to ensure that the company is able to fund the exercise on its own.
In the US, he notes that share buy-backs are often misused as share prices are taken as a basis for rewarding the company’s management. Kenanga Research head Chan Ken Yew is more positive on share buy-backs, saying it could be a good strategy for companies during the current market condition.
“If the company believes that its fundamentals are strong and have not changed, and that the value is still there, why not?
“If the share price is down just because of sentiment or overall market conditions, it can be a good opportunity to implement and capitalise on weak sentiment,” he says.
Chan says shareholders often welcome share buy-backs.
“The most important thing is that the company must be able to afford it. They must not be seen as taking up borrowings in order to fund the buy-back,” he says.
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