OUE’s buyback plan may not permanently lift investor appetite for its depressed shares

INVESTORS reacted positively this past week to OUE’s announcement of an off-market, equal-access buyback of up to 10 per cent of its outstanding shares.

The corporate exercise may not result in a lasting re-rating of the real estate and healthcare group’s depressed share price, though.

Over the longer term, the smaller number of shares in issue may just reduce their trading liquidity and shrink the company’s investor following.

On May 20, OUE unveiled plans to repurchase more than 84 million shares at S$1.25 apiece – a 20 per cent premium to the stock’s average closing price over the five trading days preceding the date of the announcement.

The offer will provide all shareholders of OUE with the option, but not the obligation, to sell up to 10 per cent of their shares for more than their recent market price.

The shareholders may tender shares in excess of 10 per cent of their holdings, if other shareholders do not accept their full entitlements.

All shares purchased under the offer will be cancelled immediately.

OUE said the share buyback – which could cost as much as S$105.1 million – is to commemorate its 60th anniversary, in addition to the special dividend of S$0.02 per share that was paid last week.

Including the special dividend, OUE declared total dividends for 2023 of S$0.04 per share – or more than S$33.6 million, based on its 840.4 million outstanding shares.

OUE said the share buyback would also enhance shareholder value, as the reduced number of shares in issue would boost its earnings per share and its net asset value (NAV) per share.

The market seemed to accept this narrative last week. The company’s share price surged the day after the share buyback plan was announced, and continued climbing over the rest of the week.

OUE closed Friday (May 24) at S$1.17, up nearly 10.4 per cent for the week.

Higher NAV per share

In hindsight, OUE provided a strong hint that an off-market share buyback at a significant premium to market price might have been coming when it gave notice of its annual general meeting (AGM) last month.

The AGM notice said the company would seek shareholder approval for a mandate to purchase up to 10 per cent of its shares. This new mandate was similar to the one approved by shareholders at the previous AGM, except for the maximum prices OUE is allowed to pay for off-market purchases of its shares.

Under the new mandate, OUE is not allowed to pay more than 120 per cent of the average closing price over the preceding five trading days in the case of off-market purchases, and 105 per cent in the case of market purchases.

The previous mandate capped the maximum price for both market and off-market purchases at 105 per cent of the closing price over the preceding five trading days.

The new share purchase mandate was approved at OUE’s AGM held on Apr 26, paving the way for the company to announce its off-market, equal-access buyback offer at S$1.25 per share last week.

What financial impact would the buyback have on OUE? The company’s announcement last week did not provide detailed information, but its letter to shareholders last month about the new share purchase mandate offers some clues.

The company said in the letter that the new mandate would allow an off-market purchase of up to 84.2 million shares at a maximum price of S$1.284 per share, based on the number of shares in issue and their market price at the time.

This would have lifted the company’s NAV per share as at Dec 31 from S$4.32 to S$4.66, and pushed its gearing ratio up from 0.46 to 0.49.

It seems likely to me that the off-market, equal-access buyback at S$1.25 per share OUE has now proposed will have a similar financial impact.

Fewer shares in public hands

This column has in the past expressed ambivalence about share buybacks – because companies generally do not explain how they determine that their shares offer good value.

It seems clear, however, that OUE is currently being undervalued by the market. Even after their recent bounce, the company’s shares are trading at a discount to NAV of nearly 73 per cent.

OUE has also divested more than S$1 billion worth of assets over the past four years, its top executives noted during the recent AGM. This helped reduce its gearing ratio from 0.58 as at end-2019 to 0.46 as at end-2023.

OUE’s off-market, equal-access buyback may not permanently improve investor appetite for its shares, though. Many other companies with significant exposure to real estate assets trade at big discounts to book value, too.

Moreover, OUE does not have a big public float. Stephen Riady, the company’s chairman and group CEO, has a deemed interest in 618.9 million – or about 73.6 per cent – of OUE’s outstanding shares.

Assuming all OUE’s shareholders utilise their full entitlements under the buyback offer, the roughly 221.5 million shares currently in the hands of the public would shrink by 10 per cent – that is, 22.2 million shares.

On the other hand, if OUE’s controlling shareholders choose to hold on to their shares, and the company’s minority shareholders tender shares in excess of 10 per cent of their holdings, the number of shares in public hands could shrink by as much as 84 million shares.

By my calculations, this would result in OUE’s public float shrinking from the current 26.4 per cent to just 16.4 per cent.

This could weaken OUE’s investor following, weigh on the market valuation of its shares, and ultimately leave the company’s minority shareholders vulnerable to a lowball offer.

When I asked OUE last week whether the various entities linked to Riady would be taking up their entitlements, the company said it was not in a position to comment on behalf of its shareholders.

“Every shareholder has an equitable opportunity to realise a portion of their investment at an attractive premium over recent market prices,” it added.

“We currently have a public float of approximately 25 to 26 per cent and we do not expect any issue meeting the free float requirements under the listing rules.”