Genting, IOI lead in bargain hunting

KUALA LUMPUR: The market meltdown during the week of Aug 8 triggered by fears of a double-dip recession in the US and a credit rating downgrade by Standard and Poor’s spooked investors. But many companies took the opportunity to buy back their own shares.

Companies saw that as an overselling of their stocks and took advantage to undertake share buybacks on the open market, resulting in over 37.63 million shares bought for RM146.61 million during the week, according to tabulations by The Edge Financial Daily.

Top repurchases came from Genting Bhd, IOI Corporation Bhd and Genting Malaysia Bhd (GENM).

Genting bought back 7.54 million shares for RM76.69 million on Aug 8, 9 and 10, paying an average price of RM10.16 per share, according to calculations by The Edge Financial Daily based on filings with Bursa Malaysia.

IOI purchased 3.7 million shares on Aug 8, 10 and 12 for RM17.38 million, with an average price of RM4.69 per share. GENM spent RM19.25 million on Aug 8, 9 and 10 buying back 5.5 million shares for an average price of RM3.50 per share.

Genting, GENM and IOI’s purchases accounted for 52.3%, 13.1% and 11.9% of all buybacks during the week, respectively.

Before the sell-down on Aug 8, Genting has been buying back shares since July 27. From then till Aug 5, the group had already bought back 7.95 million shares for RM84.93 million at an average price of RM10.68 per share. This brings the amount repurchased to 15.50 million shares at a total cost of RM161.62 million and an average price of RM10.43 per share.

Genting’s share price fell 8.8% from RM10.64 on July 27 to RM9.70 last Friday, when it first started buying back aggressively.

Prior to the market sell-off, IOI had already bought 10.05 million shares worth RM51.29 million on an average price of RM5.10 per share from July 29 till Aug 5.
IOI continued to buy back an additional 7.16 million shares for RM33.56 million last week on an average price of RM4.69 per share.

Since the buybacks started at the end of July, IOI has bought 20.91 million shares for an average price of RM4.89 per share, totalling RM102.23 million.
IOI’s stock closed at RM4.51 last Friday, falling 12.4% from RM5.15 on July 29, when the buyback started.

It is not unusual to see companies undertake buybacks when their share prices fall sharply. This suggests confidence and that management believes the market to be undervaluing the company.

“These three entities have one thing in common — they are cash-rich companies. Genting Malaysia has about RM2.8 billion cash in its war chest and Genting Bhd has a consolidated spare cash of RM14 billion. In the case of IOI, the rising CPO (crude palm oil) prices have boosted their cash buffer to RM3.8 billion. The liquidity in their coffers is usually meant for investment, dividend payout or share buyback,” said Gan Eng Peng, head of equities at Hwang DBS Investment Management Bhd.

“Both Genting entities have been buying back their shares because the owners or management probably think there is value in their shares versus cash in the bank. The respective share prices have been buoyant and remain unaffected by the recent sell-down,” he added.

In the case of IOI, whose base is in the highly volatile and cyclical commodities sector, it is among the first to be hit when risk aversion rises in the market and investors dump its shares and retreat to low-risk assets, Gan said.

“Hence, this tends to be one of the main reasons why the performance of the share price has been such over the past few days. The share was trading at RM6.00 early this year and there was a sharp fall to RM4.50 last week. With its large coffers, it makes sense for the company to buy back its shares to prop up the price and investor confidence,” he added.

Buybacks require prior approval from shareholders and are usually limited to 10% of all issued shares. Once the shares are bought back, they can be returned to shareholders as a form of capital management in lieu of dividends, or cancelled.

If the shares are indeed undervalued, buybacks can create wealth for remaining shareholders while reducing dilution. It is important, however, that only free cash flows are used for buybacks, otherwise they will have a negative impact on the company’s future growth capabilities.

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