The JSE All Share index has slumped 15% in just two weeks as foreign investors rush for the exit and locals remain nervously on the sidelines too spooked to grab at falling knives. For companies with some cash and little expectation of a short- to medium-term pick-up in economic growth, now could be the perfect time for a share buyback programme. Or not.
It’s a tricky business, buying back shares. The chances of getting caught out being spectacularly wrong are much greater than the chances of success, which are often difficult to spot unless you’re one of the option-laden executives who might have helped to influence the buyback decision.
For ‘outside’ shareholders (not employees of the company) it’s a business made even trickier by the JSE’s lax disclosure requirements. These essentially mean you never know if you’re betting against the house, as it were, when selling your shares.
Recall a few years ago when Invicta was repurchasing its shares – thereby providing some support to the share price – at the same time its top executives were selling theirs.
According to Andre Visser, GM of issuer regulations at the JSE, there are no plans for an upgrade of disclosure requirements any time soon. “We recognise it is an issue that has to be reviewed, it’s on our log of things to be considered,” Visser tells Moneyweb.
Think buyback and you may be inclined to think Anglo American circa 2009 at the tail end of a four-year-long $10 billion-plus repurchase frenzy. By the time that repurchasing programme had ground to a halt $7 billion had been wiped off the value of the exercise; the $10 billion repurchased shares were worth just $3 billion.
In her defence, then CEO Cynthia Carroll had been under pressure to “do something” with all the cash pumped into its coffers by the commodity boom.
Then there was Telkom, which blew a small fortune buying back shares years ago when management thought they were undervalued.
Sasol was a keen advocate of the practice until 2008. Between 2007 and October 2008 it bought back 40.3 million shares at an average price of R300. That little exercise cost it around R12 billion, which is about 25% of what the company is worth today.
So, it’s a tricky business. Success or failure can depend on the time scale used. This time around Anglo seems to have been much luckier, or wiser. The global mining giant has just completed a $1 billion buyback, soaking up 42.3 million shares at an average price of around R335, which looked really good until the share price was hit by the coronavirus-induced commodity panic to a nine-month low of R311.
Protea Capital’s Jean Pierre Verster says buybacks are often problematic but can create value if managed well. However they are inevitably high risk for cyclical companies such as Anglo.
“Mining companies generally want to buy back their shares at the peak of the cycle when they are cash-flush but that’s when they should be conserving it, in preparation for the downturn,” says Verster. He notes that Anglo is now faced with challenges at its two most important cash-cows – Anglo Platinum and Kumba.
Verster thinks paying out a special dividend is a better and more straightforward option for cash-flush companies.
“Look at Santam, the moment it’s at the high point of the cycle and printing cash it pays out a special dividend.”
Stellenbosch University Business School has done the most useful and consistent research available on share repurchasing by JSE listed companies. Academics, led by professor Nicolene Wesson, have helped to fill a yawning gap at UBS created by the JSE’s dismal reporting requirements.
While London-listed companies are required to provide daily disclosure of share repurchasing activity, the JSE merely requires disclosure when 3% of the equity has been repurchased. Even that requirement has been abused as some companies interpret it to mean 3% a year and not cumulative.
The upshot is that while investors in London-listed companies are alert to the fact they may be selling when their company is buying, South Africans haven’t a clue.
At the end of each reporting period they can trawl through the financial statements in search of evidence, at which stage it is of little use.
Who the big repurchasers are
Initial research by Wesson and her colleagues revealed that the top four JSE repurchasers between 2000 and 2009 were Sasol, MTN, Remgro and Netcare. These four companies accounted for over 50% of the total value of shares repurchased during that period. In subsequent research covering 2010 to 2017, Bidvest, Clicks, Imperial Holdings and MTN accounted for 43% of the total value of shares repurchased.
On the basis of the long-term share price performance it looks to have been good capital allocation by Clicks and Bidvest; passing judgement on Imperial Holding is complicated by the subsequent restructuring of the group. But even allowing for the repurchase of BEE shares, MTN’s decision to keep buying looks ill-advised.
The telecommunications group pumps out a lot of cash but it also consumes a lot and may now, as it faces a period of considerable turbulence, be regretting the enthusiasm with which it sustained its decades-long buyback programme.
More recently, in February Barloworld splurged almost R1 billion on buying back its shares during what might have seemed to be temporary weakness in the share price.
Just a few weeks later it could have picked up the 10.6 million shares for 10% less.
In a few months’ time it might look to have been a good buy. Or not. Verster is sceptical. He puts Barloworld in the same category as Anglo and questions whether aggressively buying back shares at this stage of the cycle was appropriate.
Cobus Potgieter of AIP Capital Management reckons the current environment represents an excellent opportunity for many JSE companies – in particular companies like Remgro and PSG – to buy back their shares. He says international investors often use the SA economy as a proxy for emerging markets.
“Right now they’re panic selling; that represents an opportunity for SA companies,” says Potgieter, who believes we will see a lot more repurchasing. Or, rather we would if the disclosure requirements were more appropriate.
“I’d prefer to see the level of disclosure required by the London Stock Exchange,” says Potgieter.