Share buyback time?

KUALA LUMPUR: With a host of public-listed companies across the sectors actively buying back their shares, their nervy investors might be wondering if it is the right thing to do, what with the Kuala Lumpur Composite Index (KLCI) yet to find its bottom.

With the benchmark index way below the 1,200-point psychological mark, the share buyback might send contradictory signals to investors on the company’s near future, such as slipping financial results, aborted acquisitions and lack of investment opportunities.

Investors may also perceive the drop in the KLCI to mean that share prices of certain stocks would further lose steam and would only nibble at the shares if there are significant discounts.

In general, the share buyback in the prevailing market condition could further dampen investor sentiment and also mean that companies are paying too much for their own shares in a falling market.

However, some market observers beg to differ, viewing the buyback as an active way to increase the value of shares in the market.

The KLCI was volatile last week, falling 21.13 points to 1,153.70 last Wednesday and dropping an additional 19.56 points to close at 1,134.14. last Friday.

Some of the heavyweights that announced share buybacks recently were Genting Bhd, Bumiputra-Commerce Holdings Bhd (BCHB) and YTL Corporation Bhd.

Genting bought 3.7 million shares for a total of RM19.92 million at an average price of RM5.35 each from June18 to 20.

BCHB bought back 2.85 million shares for RM23.7 million at an average price RM8.175 per share from June19 to 27 while YTL had, from June 16 to 20, bought back 1.29 million shares for RM9.29 million at an average price of RM7.20 apiece.

Companies that joined the buyback spree last week but on a smaller scale include Ann Joo Resources Bhd, CB Industrial Product Holding Bhd, Glomac Bhd, Ahmad Zaki Resources Bhd and Parkson Holdings Bhd.

An analyst said share buyback was an effective means to reward shareholders. He said it was usually used to deploy excess cash flow as the company might have reasons to believe that it was unable to utilise the surplus cash to earn higher than the company’s cost of capital.

“Share buyback happens all over and companies in the US and UK usually have share buyback when they have surplus cash,’’ the analyst added.

He also said share buyback was an indication that a company was confident of its own share price, adding that the KLCI volatility had little nexus with share buyback by financially prudent companies.

Meanwhile, a broker said share buyback should also be balanced with a fair amount of dividends to be declared to shareholders.

He pointed out that buyback generally enhanced shareholder value as the laws of supply and demand would suggest that with fewer shares on the market, the share price would tend to rise.

The broker also said investors should look at the fundamentals of the companies undertaking a share buyback, noting that the buying appetite should not be affected by the dipping of the KLCI. which in turn was largely affected by the surging crude oil price and political issues.

A remisier also noted that the benchmark index’s fall was partly due to selling on particular stocks.

“Investors should not view the KLCI’s drop as a bad time to pick up stocks of companies with share buyback but instead look at the value of share buyback as a tool for capital management,’’ she said.