Share buyback, also known as a share repurchase, is a corporate action where a company buys back its own shares from the market. The CMA guidelines on share buyback by listed companies provide three methods of undertaking share buybacks: Through open market repurchase – Where a company can buy back its shares on the open …
Share buyback, also known as a share repurchase, is a corporate action where a company buys back its own shares from the market. The CMA guidelines on share buyback by listed companies provide three methods of undertaking share buybacks:
Following the opening of the Centum Investment Plc share buyback programme on the 6th of February 2023, we decided to write a blog expounding on the share buyback programme.
Companies often engage in share buybacks when they perceive their stock to be undervalued, meaning that it is trading at a price lower than its intrinsic value. To illustrate this, let’s consider the example of stock A, currently trading at Kshs 5 but has an intrinsic value of Kshs 10. If the stock were to trade at Kshs 15, exceeding its intrinsic value of Kshs 10, it would be considered overvalued. However, the stock is considered undervalued since it is trading below its intrinsic value.
When a company believes its stock is undervalued, it may repurchase its shares from the market to increase its value. The reduction in the supply of the stock in the market following the buyback and improved earnings and book value per share results in a price appreciation of its trading shares. The company could also benefit from buying the shares at a low price and reissuing them once the market has stabilized, increasing its equity capital without issuing additional shares.
Other reasons companies may buy back their shares include:
How the shareholders benefit from the programme
In the above section, we have seen that the share buyback programme benefits the company by improving its capital structure, reducing its cost of capital and improving its financial ratios such as the EPS. So, what about the shareholders? How do they stand to benefit?
As the company’s financial ratios, such as the Earnings Per Share (EPS), improve, the stock becomes more attractive to investors and its demand in the market increases, making the stock more valuable and resulting in growth in the value of the shareholders’ investment. A share buyback can also reward long-term investors through increased ownership in the business due to the reduction in the number of outstanding shares. Increased ownership could lead to higher capital gains for remaining shareholders. It could lead to higher dividend payouts since the shareholder is entitled to a higher portion of the company’s earnings. Buybacks also allow shareholders to liquidate part or their entire stake in the company at a premium, which can be particularly attractive when the stock is undervalued.
The share buyback programme in Kenya with a focus on Centum
The first Public Share Buyback programme at the Nairobi Securities Exchange was engaged in June 2021 by Nation Media Group (NMG). Before that, two other listed companies, including Centum, had expressed interest in buying back their shares, but there were no guidelines around the process. This led the Capital Markets Authority (CMA) to develop the guidelines in late 2020. Since then, we have seen two share buyback programmes, with Centum being the second company to engage in the programme.
Centum Investment Plc set aside Kshs 600.8 million last year to finance its share buy-back programme. The firm seeks to purchase up to 10% of the issued ordinary shares (66,544,178) at a maximum price of Kshs 9.03. The program will run for 18 months and aims to offer Centum’s shareholders partial liquidity of their shareholding at the prevailing market price while retaining the option to benefit from potential uplift in future earnings and capital gains. The board arrived at this decision on the backdrop of huge declines in the stock’s share price over the last few years, from a high of Kshs 31.50 in November 2019 to 8.30 in November 2022. According to the Business Daily, the stock recorded a net asset value per share of Kshs 59.8 from the six months to September 2022.
Centum’s shareholders circular on the share buyback noted that it would be paid out of its Kshs 1 billion cash and cash equivalents as per its 31st March 2022 financial statements. Centum, through its circular, assured shareholders that the buyback expenses are not expected to adversely affect the company’s financial position.
Since the start of the buyback programme, the counter’s traded volumes have doubled, averaging 225,545 shares between the 6th and 21st of February against a daily average of 110,432 in the 12 months to February 2023. The first day of the share buyback alone recorded volumes of over 1.3 million shares. The price has since risen to Kshs 9.04 as of the end of the day, 24th February.
Assuming a 100% performance in the ongoing Centum buyback programme, a shareholder holding 7 million Centum shares will see their ownership stake in the company grow from approximately 1.05% to 1.17%, and the NAV per share will rise to approximately Kshs 69. As of February 24th 2023, the share price had rallied on to match Centum’s offer price. With 17 more months left in the programme will this be the answer to Centum’s undervalued shares?