Undervaluation fuels share buybacks among plantation stocks

TheEdge Mon, Aug 23, 2021 02:00pm - 1 year View Original

A massive share buyback of more than RM1 billion by Top Glove Corp Bhd, the world’s largest rubber glove manufacturer, between September 2020 and February 2021 has cast a spotlight on the corporate exercise, which allows listed companies to support their share price during periods of sluggish market conditions or when their shares are undervalued or thinly traded.

However, some investors would frown on companies putting cash to work by buying their own shares when they believe it should be better utilised for business operations or expansion.

This year, companies that have been actively buying back their shares on the open market include those in the plantation sector, namely IOI Corp Bhd, Batu Kawan Bhd, and Batu Kawan’s 47.3%-owned subsidiary Kuala Lumpur Kepong Bhd (KLK). But are these companies making good use of their cash?

Checks show that IOI Corp has spent a total of RM126 million since the beginning of the year to repurchase 32.53 million shares, representing 0.52% of its total issued shares. From July 22 to Aug 3, IOI repurchased 5.49 million shares for RM20.18 million, or between RM3.59 and RM3.72 a share. The total number of treasury shares held by IOI Corp amounted to 51.4 million, from 18.82 million as at end-December 2020.

The plantation giant’s share price has been on a downward trend since early this year, touching a 17-month low of RM3.54 on Aug 2.

In contrast, IOI Corp’s net profit jumped nearly threefold to RM1.05 billion for the nine-month period ended March 31, 2021, from RM364.5 million a year ago, driven by higher contribution from all business segments as well as a net foreign currency translation gain of RM155.4 million.

As at end-March 2021, its cash and cash equivalent came in lower at RM2.06 billion against RM2.33 billion as at end-December 2020.

Crude palm oil (CPO) prices have soared 25% year to date (YTD), after hitting a high of RM4,800 a tonne in May. At the time of writing, the CPO futures contracts for September and October had settled at RM4,570 and RM4,471 per tonne respectively. In comparison, the Plantation Index on Bursa Malaysia has fallen 15.8% during the same period.

Analysts believe the share buybacks help plantation stocks enhance their valuations.

“It is an opportunity for companies to increase their earnings per share when share prices are not reflective of their current operations. For example, if the plantation companies don’t have plans for their excess cash, they might opt to use them on share buybacks,” Inter-Pacific Securities head of research Victor Wan tells The Edge.

A share buyback usually occurs when a company thinks the valuation of its shares is too low compared with its underlying value. The shares bought back will be retained in the form of treasury shares. The treasury shares will be sold in the market for a profit, distributed to shareholders via a dividend payment, or cancelled to reduce the shares outstanding.

Although Batu Kawan’s share price has risen 11.7% YTD, it has been acquiring its own shares every month this year for a total of RM23.73 million, lifting its total treasury shares to 4.45 million from 3.15 million as at end-December 2020.

Similarly, KLK has paid RM8.19 million for the 402,100 shares purchased since June, bringing its total treasury shares to 2.84 million. Interestingly, the most recent share buyback by KLK was about 20 years ago, in 2002.

In a recent research note, Hong Leong Investment Bank Research noted that IOI Corp and KLK are among its top picks, with target prices of RM4.67 and RM26.42 respectively. This is despite a “neutral” rating for the plantation industry as the near-term share price sentiment is likely to remain weak, owing to lingering environmental, social and corporate governance (ESG) concerns.

Credit Suisse said in an Aug 10 note that the ESG discount in the Asian palm oil sector has been more than priced in.

“The sector trades at a 72% discount to its peak price-to-earnings ratio, wider than the 60% average of other ESG-excluded names. As the focus shifts from divestment to engagement on transition, we believe this steep discount will incrementally be removed for sustainability leaders due to the viability of sustainable palm oil.

“Against key ESG issues, Singapore-listed Wilmar International Ltd ranks favourably while (Indonesia’s) PT Astra Agro Lestari Tbk lags its peers. Sime Darby Plantation Bhd stands out in terms of governance, based on Refinitiv data,” says Credit Suisse.

It also highlights that there has been increased scrutiny on the palm oil sector over labour exploitation issues, especially among Malaysian planters. “Despite initiatives to mechanise multiple stages of palm oil processing, the palm oil sector continues to be heavily dependent on manual labour.”

Property, construction and manufacturing firms could be in focus

Fortress Capital Asset Management CEO Thomas Yong says as the equity market softens, more companies are set to embark on share buyback exercises, and they may include property, construction and even manufacturing companies.

Other notable share buybacks on the local bourse this year were by IJM Corp Bhd, MyEG Services Bhd and Datasonic Group Bhd, among others.

From July 27 to Aug 6, IJM — which had in June agreed to sell its entire 56.2% stake in IJM Plantations Bhd to KLK for RM1.53 billion or RM3.10 per share — bought back 6.97 million of its shares for RM12.82 million, or at between RM1.78 and RM1.86 per share.

Its share buyback exercise started in February when its shares were trading at about RM1.50 each. As the stock continued to gain, IJM ramped up the purchase of its shares, spending more than RM48 million in the past three months. It has now accumulated 52.54 million treasury shares, from 19.84 million at the end of last year.

IJM shares have increased 6.4% this year, while MyEG and Datasonic are down 13% and 12.4% respectively.

IJM has pledged to distribute a potential special cash dividend of 15 sen per share, or RM542 million, to its shareholders upon completion of the IJM Plantation stake sale.

Meanwhile, Sime Darby Bhd is also keen to carry out a share buyback exercise as its share price has skidded 7.8% so far this year. Last month, the group appointed CGS-CIMB Securities Sdn Bhd as the stockbroker to facilitate the planned move. Its cash and cash equivalent rose to RM2.57 billion as at end-March 2021 against RM1.79 billion as at Dec 31, 2020.


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