Friday, June 15, 2012

Olam International: Which mode was the right way to reward shareholders - share buyback or dividends?

Olam launches share buyback programme

[6/14/12] – Olam commenced a share buyback program on 8 June 2012.

This follows the mandate which was renewed on 28 Oct 2011, where Olam may purchase up to 10% of its total issued shares.

All shares purchased under the share buyback program may be held as treasury shares or cancelled, as Olam may decide from time to time.

Funding for the program will be done from Olam’s existing resources.

On 8 June 2012, Olam bought back 3.2 mln shares, representing 0.13% of its issued share capital, at an average price of S$1.63 per share.

Group’s share price has jumped 11% since the announcement of the buyback programme.

But brokers are divided over the amount utilised for the buyback programme could have been used to increase dividends.

Bullish analyst report

DMG OSK Research says Olam is buying back shares when valuations were at 2008-09 crisis levels.

It sees limited share price downside given Olam’s resilient corporate fundamentals.

The food commodity space is more resilient than the industrial commodities segment, and this was evident in the recent Olam results.

Assuming Olam buys back 5% of its issued share capital or 122 mln shares, at an average price of S$1.70, this will require some S$207 mln.

As of March 2012, Olam has cash of S$1,150 mln, which is more than 5 times the required cash outlay.

If 5% of the shares are bought back and cancelled, then Olam may see its FY13 forecasted EPS increase to 20.6 Singapore cents from the analyst’s forecast 19.6 Singapore cents.

Its forecasted FY13 book per share will fall to S$1.35 from current forecast of S$1.36 – hence the impact on price-to-book from the share buyback program is seen to be negligible.

DMG OSK has maintained its BUY call with a target price of S$2.56.

Bearish analyst report

Kim Eng Research says the case for a share buyback is stronger for companies with piles of idle cash coupled with strong operating cash flows.

Olam, however, is considered highly leveraged with net gearing of 189% and adjusted net gearing of 42%.

Since listing in 2004, its operating cash flow has been positive only in 2006 and 2009 as funds were needed for expansionary working capital.

Essentially, a company has two ways to reward shareholders – share buybacks or dividends.

Olam’s dividend payouts have been similar to peers but were hardly generous, at about 25% of profit since FY08.

Assuming a full exercise of its share buyback mandate at the last transacted price, this would represent an outlay of S$397 mln, close to its entire dividend outlay since its 2004 IPO.

Share buybacks also do not present any tax advantages in Singapore’s context.

Arguably, therefore, raising dividend payout may be a better way to build long term shareholder value, though a stock buyback may provide a boost to share price.

The house thinks this actually contradicts Olam’s dependence on the equity market for its M&A growth strategy.

Since adopting this strategy in FY07/08, it has done six equity-linked fund-raising exercises.

Kim Eng thinks market may have overreacted to news of the buyback and hence maintains SELL call with a target price of S$1.43.

Investor Central. We ask the questions that need to be asked:
1. Olam definitely intends to benefit the shareholders with the buyback programme. Arguably, Kim Eng says increase in dividend would have been a good option. So share buyback or dividends - Which of the brokers is right?

2. Why did Olam opt for share buyback rather than increasing dividends?

Source/Extract/Excerpts/来源/转贴/摘录: InvestorCentral,
Publish date: 14/06/12

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