This article first appeared in Forum, The Edge Malaysia Weekly on May 9, 2022 - May 15, 2022
In the first part of this article published two weeks ago, I focused on mergers-and-acquisitions-related issues. This week, in the concluding part, I will be sharing simple but effective dos and don’ts for public-listed companies. As the title suggests, to optimise your share price, these are some simple principles to follow.
When politics intertwines with business, the company suffers, aptly captured in a Malay proverb “Bila gajah sama gajah berjuang, pelandok mati di tengah-tengah” (When two elephants fight, the mousedeer dies in the middle). The political arena is a landmine in Malaysia, where pressure is sometimes asserted on government-linked corporations to bail out certain crony companies or undertake transactions with unfavourable terms.
Although the easy thing to do is to succumb to political pressure and toe the party line, this will come back to bite as these assets are likely bought at overvalued prices or full valuations. The market won’t be deceived by the sweet talk and can see through a bail-out very quickly. It will destroy the credibility of the management and the board.
A well-documented case is Tenaga Nasional Bhd being pressured to sign the exuberant power purchase agreements with independent power producers (IPPs) after a nationwide blackout in the mid-1990s. It is well known that the then Tenaga CEO, Tan Sri Ani Arope, refused to turn up for the signing ceremony as a sign of protest against the government forcing Tenaga to work with the IPPs.
Some would argue that Tenaga needed help from the private sector to alleviate the electricity brownouts, but the deals were too favourable for the first-generation IPPs which garnered internal rates of return of over 18%. Tenaga’s margins collapsed when the IPPs came onstream, and it took close to two decades for Tenaga’s share price to recover to its IPO price.
Share buybacks are very common among the US giants such as Apple, ExxonMobil, Pfizer and Amazon.com. According to a Harvard Business Review survey, US companies allocated about half of their profits to share buybacks. Malaysian companies are far less active in this space. The jury is still out on share buybacks, in my opinion. There are two sides of the coin.
What are the benefits?
• When companies with excess cash choose share buybacks over cash dividends, it signals to the world that it believes its shares are undervalued, and the returns from buying more of its own shares will be greater than returning the excess cash as dividends. Who should know a company better than its own management?
• Once the shares are bought back and cancelled, the cancelled shares are taken out of circulation, and earnings per share will naturally be lifted for the remaining shareholders.
• Share buybacks can also be an avenue to discourage hostile takeovers at deep discounts to market value, perhaps more applicable for companies where there is no majority shareholder, which is a rarity in Malaysia.
When are share buybacks seen as a negative?
• I have seen Malaysian companies use share buybacks as a means of supporting their share prices. A conglomerate together with its subsidiaries were buying back shares almost every day for years, come rain or shine, regardless of whether the shares were undervalued or overvalued. In the eyes of the entrepreneur, the company was perpetually undervalued, which didn’t sit well with institutional investors who preferred cash dividends.
• If a company with high debt is buying back shares, then again, it will not be looked upon favourably, as balance sheet clean-up should take priority over share buybacks.
• An aggressive share buyback exercise could be seen as a way to support share prices for the benefit of management who own large amounts of share options issued as part of its compensation.
• If a company is using its excess cash flow to buy back shares instead of reinvesting in the capex of the company, or acquiring new assets, this may suggest that the management has run out of ideas as to how to grow the company.
Many Malaysian companies, even the large ones, fail to understand the importance of communicating with stakeholders. Having a reliable investor relations (IR) or corporate communications department is key to building stakeholder confidence and trust. Giving reliable, clear and consistent information to investors, without needing to reveal trade secrets, is a boon to the share price, as investors feel comfortable that they are kept updated. In today’s world, if investors cannot reach management in an unexpected turn of events, the tendency is to “sell first and ask questions later”. The stock market is an efficient animal, and every second can lead to millions of losses, hence timely communication is crucially important.
Some easy pointers:
• If a major announcement is about to be made, plan ahead. The moment the announcement is out, a conference call can be arranged within hours with stakeholders to clear the air. Do not assume that investment analysts and investors will wait around for days for the management to clarify complex deals.
• The IR department should have access to updated information and cannot be staffed with junior executives. On the other hand, if only very senior management speaks to stakeholders, the designated person should not see it as his/her “last priority”. In short, management, be it in IR or the C-suite, should be contactable. An IPP, which should have steady income, once announced quarterly losses without any explanation, and management had all gone home for the night. Imagine the damage to the share price!
• The IR department cannot be seen as a conveyor of good news rather than a conduit to inform and guide at all times, especially during challenging and uncertain periods. A management team which only provides optimistic guidance can lose credibility very quickly.
• Ignoring constructive stakeholders’ feedback can spell pain for the share price, but let me emphasise here that sometimes, short-term share price pain is necessary for long-term reforms.
While it is very interesting for boards and management to be involved in sizeable and game-changing deals, the most important trait can be summarised in one word — “execution” or rather the lack of it. The “sexy bit” of winning the prized asset must now transition to the more important but arduous and painstaking phase of integration and optimisation. Many Malaysian companies tend to fail in the latter phase, leading to value erosion of the acquired assets. In short, execution is key.
Tan Ting Min is a former head of equity research for Credit Suisse (M) Securities. She is currently an independent non-executive director of Sime Darby Plantation Bhd, Sime Darby Oils Ltd, New Britain Palm Oil and IJM Corp Bhd.
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