Is share buyback really beneficial to the company? 11 Facts about Share Buyback

Is share buyback really beneficial to the company? 11 Facts about Share Buyback

Take KRONO for example, has proposed a share buyback which is pending approval at the forthcoming AGM. Krono is planning to buy back 10% of its shares in the market, equivalent to 52.2 million of shares.

Assuming an average price of RM0.70, the company would have to fund a total value of RM36.5 million either via its own cash or bank borrowings.

However, given that the total value of purchased shares should be the lower of

(i) 10% of total issued shares; and

(ii) the retained earnings balance of RM55 million in FY2019 (RM47 million in FY2018),

the company would have sufficient cash balance of RM57 million to buy back maximum of 10% of the total issued shares.

The purpose of share buyback is to reduce / cancel the purchased shares or retain the purchased shares as treasury shares and sell those shares at a higher price in future.

Normally, the board will only buy back its own shares when they deemed that the current market price is trading below the company's INTRINSIC VALUE.

So, what is the impact then?

Advantages:

1. Earnings of the company might increase if the treasury shares are then resold to Bursa at a higher price, realizing the potential gain without affecting the number of issued shares in the company.

2. P/E will decrease. As the number of shares consolidated, the Earnings per shares (EPS) will increase assuming the shares purchased are subsequently cancelled. As such, P/E ratio will decrease with the prices remain unchanged.

3. Increase shareholders' value by distributing the purchased shares as share dividends, as a reward to the shareholders.

4. Enhance investors' confidences. More often that not, if the company is willing to buy back its own shares, meaning even the Board thinks that the company is currently undervalued. And investors will be hopeful that the share price will soon reflects its true value. The investors' confidence will be further strengthened if the board of directors continue to buy the company's shares using their own money instead of company's funds.

5. Since Krono has been on its M&A spree, the company can also offer its purchased shares as a non-cash consideration when acquiring its target company. This is also another way to unlock the value of purchased shares if the share price now is higher than the price of the purchased shares. Working capital of the company can be preserved.

6. Purchased shares can be offered as VSS schemes to the employees where the employees can exercise the shares at a much cheaper price once the price has rebounded higher. This would preserve the EPS without increasing the number of shares in the company (usually exercising shares from VSS would dilute the EPS).

Disadvantages:

1. Investment opportunities might arise and if the company has used up its own financial resources to buy back its own shares, the company would have missed the rare opportunity that may emerge in the future.

2. Net asset (i.e. equity) of the company will decrease. If the company uses its own cash to buy back the shares, the assets will reduce and the purchased shares will be classified as treasury shares, which is a contra-equity account.

3. If the directors are so confident in the prospects of the company, the directors should buy more shares using their own money as the company's funds should be used for investing purposes or business expansion instead of share buyback.

4. Bottom line of the company will be impacted negatively. Interest income would reduce if the company is using cash to buy back the shares. Interest expense would increase if the company is funding the share buy back through external borrowings that bear interests.

5. Share buyback, in our perspectives, is indicating that there is no use of the excess financial resources owned by the company and is therefore wasted on buying back its own shares. However, this can be counter back if the share price is relatively low and will be resell at a higher price later in future.

All information provided here should be treated for informational purposes only. It is solely reflecting author's personal views and the author should not be held liable for any actions taken in reliance on information contained herein.

No buy call. No sell call. No bullshit. Only content.