Following the announcement of Bank South Pacific’s share buyback process, fastbusiness did an analysis of the buyback process to determine who really wins in this share buyback process.
Also called a share repurchase program, stock buybacks are a way a company returns wealth to the shareholder by purchasing outstanding shares of its own stock.
In an interview with fastbusiness, BSP group CEO Robin Fleming says;
“The buyback process gives opportunity to small and individual investors to sell their shares” which he says, is sometimes difficult due to the liquidity issues at Port Moresby Stock Exchange.
Lack of liquidity at Port Moresby Stock Exchange (POMSoX) has been an ongoing issue and the government in collaboration with Central Bank of PNG has recently introduced products like the Tap Bill Facility to encourage more small and individual investors to enter the market and increase the liquidity at POMSoX.
Low liquidity makes it difficult for investors to get in and out of the market quickly, as is done in overseas exchanges.
A stock buyback is generally conducted in one of two ways: buying shares in the open market over time or tendering an offer to existing shareholders to buy shares at a fixed price. Most commonly the company will repurchase shares of its stock through the open market like the BSP just did.
There are many reasons a company may wish to begin a stock buyback program. One may be that the company sees its shares as a real value opportunity and wishes to purchase them while they are cheap. Any major corporation can serve as a value investor just as you or I can. A company expecting its share price to rise may believe that the best use of its money is a major stock buyback.
Mr Fleming technically denies saying that the buyback process does not have anything to do with underlying values (fundamentals) of BSP, though it seems likely on the outset. Buying the BSP shares cheaply now in anticipation of a rise in BSP share price could be the reason behind the buyback process.
When questioned on the real value or technically speaking the intrinsic value of BSP shares, Mr Fleming stated that BSP has strong fundamentals that, in the light of the announcement of the share buyback process, gave the directors the confidence to authorise the buyback process as chairman Constance Constantinou stated in a statement released on the POMSoX website.
“Mr Kostas Constantinou today announced that the board of directors had resolved to undertake a buyback program to buy back up to K15 million worth of its own shares. The buyback is set to open on the day following this announcement and will continue for a period of up to 12 months.
“The buyback program will continue BSP’s capital management strategy to achieve a balance between returning capital, retaining sufficient flexibility to invest capital, pursuing growth options and maintaining strong credit metrics.
“BSP intends to enter the market from time to time to purchase shares pursuant to the buyback. Under the buyback, shareholders are invited to sell up to a maximum of 1000 BSP shares of each registered holding. BSP will pay any brokerage on shares bought back. Selling shareholders will not pay brokerage” POMSoX website says.
Another reason companies buy back their shares is that buying back stock reduces the amount of shares on the open market and can help prevent a hostile takeover.
A third reason is to reduce the dilution of its shares that happens when new shares are created. Dilution can be caused by stock option plans, secondary offerings, convertible bonds or preferred shares, and they often increase the overall number of shares available and decrease the company’s earnings per share (EPS) growth over time.
Mr Fleming however, told fastbusiness that BSP had over the years seen an increase in EPS over time. BSP website also has evidence of staggering growth over the years despite the recent economic slowdown.
Investopedia defines EPS as the portion of a company’s profit allocated to each outstanding share of common stock. Generally speaking, EPS serves as an indicator of a company’s profitability.
BSP has recorded sound financial results over the last 5 years confirming Mr Fleming’s claim on BSP having strong business fundamentals.
BSP website states; “In 2013, sound results were achieved, despite a slowdown in the Papua New Guinea economy. Profits in 2013 increased by 7.1% from 2012 results. The net profit after tax was K436.8 million.
“Profits in 2012 increased over 14 percent to K407.7 million, and assets also grew 14 percent to K13.3 billion.
“Strong performance for the year 2011 with a profit of K355.9 million being a 26% increase on 2010′s results.
“Solid results were achieved in 2010 as the global economy starts a slow recovery from the Global Financial Crisis, positively impacting PNG’s resource-based economy
“BSP posted sound results in 2009 as the global economic downturn continued, increasing after tax results by 13%; BSP acquired the National Bank of Fiji and Colonial Fiji Life Insurance Limited from Commonwealth Bank of Australia, contributing K1.2 billion to assets growth of K2.6 billion.’’
On a negative note, sometimes, a company may choose to implement a stock buyback program to cover up a poor performance. Investors use financial ratios to help make investment decisions, and a major stock buyback reduces the number of shares available, creating more attractive financial ratios.
However, as it seems, BSP has recorded a healthy growth over the last five years and the buyback process is seen as BSP giving opportunity to small mum and dad investors to free up their money held in BSP as stocks Mr Fleming alluded to earlier.
Despite all the good things discussed about BSP, and the short term gain for small investors, it’s BSP which wins in the long run.