Takeaways from MyEG, Hap Seng share buybacks


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This article first appeared in Corporate, The Edge Malaysia Weekly, on August 29 - September 4, 2016.

 

SHARES of My E.G. Services Bhd and Hap Seng Consolidated Bhd are among Malaysia’s top 10 performers in terms of returns as their share prices jumped at least five times the past three to four years. Some investors and shareholders might have noticed that the companies themselves too have profited handsomely from their strong stock price performance — by selling their own shares bought on the open market at tens of millions of ringgit in profit.

In fact, Hap Seng yielded RM528.2 million in profit from selling the 237 million shares it bought back between November 2011 and July 2016 — that is excluding the 60 million treasury shares it cancelled in March 2014. In FY2014, profits from the resale of treasury shares boosted shareholder equity by RM208.6 million — a size-able 28% against the RM753.5 million net profit attributable to shareholders that year. (Profits from the resale of treasury shares are credited to the share reserves account and not the profit and loss account.)

Both MyEG’s and Hap Seng’s shares are still trading near their respective all-time highs. Hap Seng sold the last of its treasury shares on July 19.

Interestingly, MyEG resumed its share buybacks in August, although its share price has largely stayed above RM2 apiece.

In July, MyEG’s stock price slipped to an eight-month low of RM1.72 after the registration of illegal foreign workers came in below target and the implementation of a sizeable Customs contract was delayed, something that some analysts saw as an opportunity to buy into the concessionaire for electronic government services.

But by end-July, the share price was at RM2 again (not that far from its all-time high of RM2.29) — the reason some investors took notice when MyEG resumed its share buybacks after stopping for nearly a year (excluding the 1,000 shares it acquired in March at RM2.12 apiece).

Between Aug 4 and 25, MyEG bought back 3.38 million shares at RM1.98 to RM2.07 apiece or RM6.87 million in total, filings show. On the days the company bought back shares, buybacks constituted 1.5% to 10.9% of the day’s volume.

The average buyback price of RM2.04 per share over the three weeks was 1.5% above the stock’s closing price on Aug 25. It was also above the stock’s 52-week average of RM1.88 and 30-day volume weighted average price of RM2.03. MyEG was trading at 35 times earnings and 13 times book value.

Billionaire investor Warren Buffett, for one, reckons that buybacks should only happen when a company’s shares are selling at a material discount to their intrinsic value and the company has “ample funds to take care of its operational and liquidity needs”. According to him, share repurchases are often dictated by management’s desire to “show confidence” rather than enhance share value — which, in turn, could risk the company not getting to sell the shares it bought back at higher prices.

Should shareholders be concerned?

“Our aim is to maximise returns for the shareholders,” MyEG co-founder and managing director Wong Thean Soon tells The Edge in an email reply.

“We have been conducting buybacks for a number of years, so it is not unusual. Our strategy is to conduct buybacks when we believe they will generate above-average returns for our shareholders.”

He says business expansion cash needs and shareholder returns are always the company’s priority. “We have maintained dividends at 30% of profits since our listing. Excess funds after providing for our opex (operational expenditure), capex (capital expenditure) and dividends can be used for share buybacks if they meet our criteria for expected returns.”

Indeed, MyEG has fared well, thus far. The company sold 11.2 million shares for RM47.4 million between Dec 15, 2014, and Jan 6 last year — RM37.2 million above the cost incurred between March 2010 and 

September 2014. It spent another RM10.78 million between March and September last year to buy 4.3 million shares, which it sold for a RM5.64 million profit last December.

At the time of writing, three analysts had a “buy” call on MyEG, all of which have price targets that are above its all-time high of RM2.29 in mid-January this year — CIMB Research (RM2.68), Credit Suisse (RM2.50) and Macquarie (RM2.30). MIDF Amanah Investment Bank is “neutral” with a target price of RM2.16 while BIMB Securities says “sell”, valuing the stock at RM1.72 apiece, Bloomberg data shows at the time of writing.

It is worth noting that Kumpulan Wang Persaraan (Diperbadankan) sold 5.6 million MyEG shares or a 0.2% stake between end-July and mid-August, stock exchange filings show. KWAP still had a 6% stake as at Aug 11.

In general, Chris Eng, head of research, products and alternative investments at Etiqa Insurance and Takaful, reckons that there is a place for stock buyback programmes.

“I think share buybacks in times of depressed stock prices and when the company has cash lying idle is a good thing. A company should never borrow for share buybacks, and opportunities to grow the business should take precedence. But it would be too extreme to say that a company should never do share buybacks,” he says.

“Companies should have a share buyback scheme approved. Dividends can be declared on a quarterly basis, but if there is a sudden unexplained selldown in a company’s shares, no harm done for some buybacks.”

But when do share buybacks stop being a price support or a catalyst for the stock price to go higher?

“It depends on whether one is a price maker or price taker,” a seasoned observer says.

At the end of the day, minorities should always ask themselves if they benefit from what the company does.