Buybacks no guarantee share price will rally

Singapore

THIRTEEN of the top 20 Singapore listed companies in terms of share buyback value in the first half of the year have seen their share price advance, while six finished lower, with one ending unchanged.

Though share buybacks would theoretically lift a counter's price, all things being equal, analysts point to negative business and company-specific factors that might push prices the other way.

A good example is mainboard-listed skincare products company Best World. It led the pack of decliners not only in terms of the buyback value but also price fall. Despite pumping in S$8.58 million, the scandal-hit company's share price tanked 48.29 per cent between January and May 9, when it was suspended from trading.

The company is plagued by disclosure concerns, and an independent review of its affairs - directed by the Singapore Exchange Regulation - is underway.

After Best World, Indonesia agri-food firm Japfa suffered the biggest slide in stock price - 26.32 per cent - even though S$2.11 million worth of its shares was repurchased.

Theoretically, buybacks increase share price as it reduces a company's share base. Given the same amount of dividend and earnings pool, a smaller share base would boost dividends and earnings per share.

Joel Ng, head of research at KGI Securities, said bigger factors affecting share price performance in 2019 have been macro factors and fund flows rather than buybacks. "Share buybacks as a percentage of total value traded is also too small to have an impact on the share price. "

He cited the example of the local banks to illustrate the point: OCBC topped the share buybacks activity in terms of value (about S$146 million as at mid-July) but its share price underperformed those of DBS Group (which bought back S$78 million in the same period) and United Overseas Bank (no share buybacks in 2019).

OCBC scooped up S$132.69 million of its own shares in the first six months to lead the list in terms of buyback value. Its share price gained 1.24 per cent. The repurchased shares are redeployed for staff share options.

Corporate treasury head Ang Suat Ching said: "We execute our share buybacks on a regular basis in order to meet delivery obligations under our employee share schemes. We conduct these exercises in a controlled manner, taking into consideration factors including the daily market volume and daily market price of our shares."

Adrian Loh, head of research Singapore at UOB Kay Hian, told The Business Times that when the market does not reward share buybacks, it could be due to the motivation behind the buyback.

For example, it could signal that the company does not have any other meaningful projects to invest in to generate a return for shareholders, so the company is using the cash to buy back shares instead.

On whether firms should buy back their shares or issue dividends to return the idle cash to shareholders, KGI Securities' Mr Ng prefers the latter. "Trading liquidity of many of Singapore shares has been declining over the past years, and buying back shares further reduces liquidity. "

As for buybacks driven by a company's view that its shares are undervalued by the market, Mr Ng said this is not a reliable indicator, based on the track record of companies doing share buybacks. He cited Best World as an example of a company aggressively conducting share buybacks but whose valuations were called into question after BT highlighted its China business practices.