Share buybacks: A strategic tool to boost prices and market

SHARE buybacks are a common tool used by listed companies for multiple reasons.

Topping the list is when the underlying shares of the company are trading below their intrinsic value, and when there is undue selling pressure due to overall market uncertainty and volatility, or when there are no material reasons to justify the weakness of a company’s share price and the fundamentals of the company remain unchanged.

However, before a share buyback can be initiated, a listed entity needs to obtain approval from its shareholders to carry out the mandate, which is typically at every AGM.

A share buyback programme allows a company to repurchase up to 10% of its issued and paid-up capital.

A company must also ensure that it has sufficient retained profits for the buyback and maintain its public shareholding spread of 25%.

Under the Bursa Malaysia Main Market Listing Requirements, share buybacks must be made wholly out of retained earnings.

There is also no restriction for companies to utilise either funds that are internally generated or via external borrowings.

The maximum amount of funds to be allocated, however, shall not exceed the amount stated in the retained profits of a company.

At what price?

It is common for listed companies to have a special resolution at an AGM to undertake share buyback.

In fact, most, if not all, companies do so annually. However, the real question is, to what extent are these buybacks being carried out, and what do companies do with the shares that have been bought back?

Carrying out a buyback programme can be tricky, as a company must ensure it is at an appropriate price level, which will enhance shareholders’ value.

This is typically gauged as either the price level which is below the net asset value of the company or, on an earnings basis, if the company’s shares are trading at a price-to-earnings multiple that is near the low of an acceptable valuation band.

A buyback also makes sense when there are black swan events that could lead to a substantial market correction, which are likely temporary in nature, as seen in events like Covid-19, as well as recent events in early April this year when the United States first announced tariffs for the rest of the world.

Not significant

Among the top 30 FTSE Bursa Malaysia KLCI constituents (FBM KLCI), Hong Leong Bank Bhd last purchased its own shares more than 10 years ago and still holds 81.1 million shares in its own books.

YTL Corp Bhd and YTL Power International Bhd last exercised a share buyback programme in May 2022 and August 2022, and still hold 58.7 million and 56.0 million shares in treasury, respectively.

Others include Sunway Bhd, which last bought its own shares back in October 2020 and currently holds 45 million shares in treasury.

Other FBM KLCI components that bought back their own shares include MISC, which repurchased some measly 47,400 shares back in October 2018, while IOI Corp Bhd was last active in June 2023 and presently holds some 81.5 million in treasury shares.

The examples above show that share buybacks among FBM KLCI constituents are not common.

Worse, we also do not see government-linked entities that also shy away from share buybacks.

Outside the 30-KLCI constituents, in the past month, the active share buybacks were by Zetriz AI Bhd, Batu Kawan Bhd, and IGB Bhd.

What’s next?

FBM KLCI constituents that have dealt with shares that were bought back are companies like Kuala Lumpur Kepong Bhd, which transferred 40,289 shares in its treasury for the purposes of the employee share grant scheme early this year.

AMMB Holdings Bhd and QL Resources Bhd also utilised their respective share repurchases for their own employee share schemes in September this year.

AMMB and QL have also been active in the market, with their last share buyback in September and July this year, and currently hold 6.3 million and 200,000 shares in treasury, respectively.

Public Bank Bhd is among the companies that have disposed of their shares to the market when it sold 20.6 million treasury shares back in June 2018.

Time to cancel

Surprisingly, corporate Malaysia is not used to using the shares that are bought back under the share buyback programme and cancelling them right away.

Reissuing these shares either in the form of an employee share scheme, or a sale, or even distributing them back to shareholders in the form of dividends-in-specie, although completely legal and allowed, is not the best way to enhance shareholders’ value.

Shares that are cancelled will allow the company to reduce the total shares outstanding and enhance both the company’s earnings per share (EPS), improve return on equity, and net asset values.

Boost to FBM KLCI?

In a recent research report by MBSB Research, an analysis was carried out to determine the impact of share buybacks on the respective indices of major international bourses, and it was found that the buybacks help to boost market performance.

For example, between 2020 and 2024, and in the case of the S&P500, average share buybacks accounted for 1.7% of the total market capitalisation and 14.2% of annual performance.

Closer to home, markets in Japan and Singapore are beginning to appreciate the value of share buybacks, with buyback accounting for 1.2% and 0.3% of total market capitalisation over the same period.

Mirroring the performance of the S&P500, the Nikkei 225 and Singapore’s Straits Times Index rose by 11.8% and 3.7% during the same five-year period.

Interestingly, it was also found that despite increasing share buybacks, companies were not compromising on their dividend payouts as growth in earnings allowed companies to do both, according to the report.

Hence, among the FBM KLCI constituents, it is imperative that companies in the benchmark index have a robust share buyback programme as well as a clear intention to cancel those shares that are repurchased, which will then enhance valuation as well as boost their respective share prices.

Assuming that the top 30 FBM KLCI constituents even make the effort to buy back approximately 1% of their outstanding shares at the current market price, this is worth approximately RM10bil, which will definitely enhance the value of the top-ranked companies in terms of EPS as well as fair values, which indirectly can lead to a firmer FBM KLCI.

Next move

As mentioned earlier, it is a fact that all companies seek share buyback mandates from their shareholders annually and very few carry out the mandate, let alone use it to enhance shareholders’ value.

Companies should have a vigorous share buyback programme that is well communicated to all stakeholders, and these shares must be cancelled once repurchased.

A company does not need to reissue these shares later, as there are other means to do so.

This includes the annual mandate obtained by most companies to issue and allot shares pursuant to Sections 75 and 76 of the Companies Act 2016, which allows a company to issue up to 10% of its own shares at any one time from the date of its AGM to the next AGM date.