Proshare Articles
Re: SEC, Share-Buy-Back and Shareholders
Posted Sunday, November 4, 2007
An article titled “SEC dismisses the clamour for share buyback by shareholders, published on October 26, 2007 by Vanguard newspaper noted that the Securities and Exchange Commission (SEC) stated that the Companies and Allied Matters Act (CAMA) and Investment and Securities Act (ISA) 1999 have no provision for companies to buy back their shares as demanded by some shareholders’ group. The Deputy Director/Head, Legal Services of the SEC, Mr. Edessa K. Aigbekaen stated that “If a company buys back its shares, such company would be reducing its capital. Therefore, the SEC does not allow companies to reduce their capital under normal circumstances. If companies are allowed to buy back its shares, it means they would be using the shareholders’ fund.”

I beg to respectfully disagree with Mr. Aigbekaen’s and the SEC position on this issue. Buying back shares is a very smart and fundamentally sound strategy for companies with too many shares outstanding. Share buy back is continually used by companies in developed capital markets all over worldwide. For example, in 2006, Microsoft Corporation bought back 1.6 billion of its shares from the open market by spending $40 billion dollars. In October 2007, General Electric Corporation announced that it will spend $14 billion to buy back its shares. Microsoft Corporation which had 10 billion shares outstanding at that time, was not perturbed about reduction in capitalization. Companies usually buy back shares with funds from excess cash flow or free reserves. When companies buy back shares using free reserve funds, a sum equal to the nominal value of the shares purchased is transferred to the capital redemption reserve and details of such transfer shall be disclosed in the balance-sheet. As a shareholder, I would rather have the companies that I am invested in buy back shares, because the advantages of the buy back strategy outweighs it disadvantages as highlighted below:

Advantages of Share Buy back:

· Reduces the amount of shares in circulation. Therefore, future profits are spread across fewer shares to potentially increase a company’s earnings per share and the value of its shares.

· Build up of investor confidence and shareholder loyalty by increasing return on equity; and increases the company’s debt-equity ratio through shifts in financing structure.

· Signals to the capital markets and investors that the company’s stock is undervalued.

Disadvantages of Share Buyback:

· Share buyback reduces cash flow from operation that could be used to generate more revenue, increase earnings, and pay dividends.

It is important for the SEC to differentiate the issue of a company’s capitalization from the company’s solvency. Large capitalization does not translate to solvency of a company. For example, when Enron filed bankruptcy in 2001, it was the 7th largest company by capitalization in the United States. SEC and investors should not be overly concerned about capitalization of PLCs’, but rather the emphasis should be placed on the fundamental strength (PE ratios, free cash flow, dividend, payout ratios, EPS, earnings growth rate, ROI, ROE, etc) of a company. At this juncture, the SEC should not be concerned about the reduction of capitalization of banks in Nigeria, because currently the capitalization of each of the 20 banks in Nigeria far exceed N25 billion, the threshold previously set by the Central Bank of Nigeria.

As noted in the Vanguard article, several shareholder groups in Nigeria do not want PLCs’ to implement share reconstruction. As most of these investors recall, in 2006 and early 2007, several banks performed share reconstruction, but subsequently increased their number of shares outstanding through new secondary offerings. Reviews of the number of shares outstanding for some of the highly capitalized PLCs’ reveal that their outstanding shares exceed 10 billion. With these amounts of outstanding shares, it will be difficult for the stock price of these companies to experience any significant up trend. Additionally most of these companies will be unable to declare significant bonus shares in the future, since they already have too many shares outstanding.

Although bank’s like Access and PHB have seen their shares appreciate by 214% and 117% respectively since the conclusion of their share reconstruction (Note the percentage for PHB is based on the pre-bonus (1 for 4) price of N35.25k and the post reconstruction price of N16.00k), but studies and research have shown that internationally most share reconstruction usually have placid results (Jacobs, T. March 2003).

Although studies might have shown that results of Share Reconstruction are placid, the strategy has its advantages and disadvantages as shown below:

Advantages:

· It decreases the number of shares, but not the value of shares held by shareholders. Each shareholder’s proportionate ownership of outstanding shares of common stock would remain the same.

· Results in more acceptance of the company’s shares by the financial community and the investing public due to the higher stock price.

· Since the company did not use internal funds to buy back shares, they will have more funds to pay dividends and invest in alternative investments that might generate more revenue and profit.

Disadvantages:

· The reduced number of shares resulting from a reconstruction could adversely affect the liquidity of a company’s common stock.

· A significant devaluation of a company’s market capitalization might result, if the company’s stock price declines rather than increase after the reconstruction.

· If the share reconstruction is implemented and the market price of the company’s share price declines, the percentage decline may be greater than would occur in the absence of a reverse stock split.

· Share reconstruction may leave certain shareholders with one or more “odd lots,” These odd lots may be more difficult to sell because their might be no incentives for the brokers to sell these shares because of the low commissions.

Conclusion:

The decision on whether a company should implement a share reconstruction, or share buyback strategy should be left to the company and their shareholders. However, I believe the SEC and the NSE should implore the president and the legislature to amend Companies and Allied Matters Act (CAMA) and Investment and Securities Act (ISA) of 1999 to include a provision for share buyback. Amending these types of Acts will not be peculiar to Nigeria. In 1998, Indian Companies Act of 1956 was amended to permit buyback of shares by companies. Prior to the amendment of the Act, Indian companies were not required to buy bank shares (Indian Express, Oct 1998). Therefore, the amendment of the CAMA & ISA is possible in Nigeria, if the SEC and NSE want it done.

Chukwumah Biosah is the President of CEBABL Audit Group, based in Los Angeles, California and an adjunct Professor at University of Phoenix, U.S.
Copyright © 2004 - 2007 ProShare Limited. All rights reserved

our beloved WEMA was up the maximum 5%, nobody even tried going lower


the other gamble stock i have which i bought entirely due my descion is STERLING BANK,

Let ECOBANK PUT UP or SHUT UP so we have an idea whats in store for us

guys, whats ur take on the proposed acquisition,

For Stockbroking services,free investment advice and ?
  Contact:Kayode,DE-CANON INVESTMENT LTD
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jehosaphat:

@ all,
I need more info on ABBEY BUILDING SOCIETY. is it true that they are coming into the market soon? What is Mutual Benefit's connection to them, and how profitable is this Abbey venture?. Lastly, more info required on Chams, how profitable are they and when is their pp kicking off?

Thanks,

PS. Any other juicy hidden opportunities that any one else knows would be highly appreciated.

_{If you show me how to fesh water from the well i no go hask you for cup of water heveryday,}

Abbey building is planning to be listed on the NSE in November it did private placement where their share capital was increased to N1B i believe and Mutual Benefits are taking up a 20% stake in the company and a couple of offshore investors have been lined up to aqcuire a slice of the action as well.

They are planning to increase the share capital to about N20B through a combination of public offers debt and equity capital injection.

I suppose this is a strategic alliance between Mutual benfits and Abbey building society if you take into consideration that you need life insurance before you can take up a mortgage so the next growth area might conceiveably be in mortgage after Insurance for 2008. Incidentally in the FCMB offer prospectus they are hoping to grow the mortgage portfolio/business substantially and they hope mortgages will be contributing a very large chunk to the bottomline

@ Tonymony,
Definitely costain.

@ Roughcut

i would like to send u a mail. hw do i get your email add.

many thanks

Tmoni:

our beloved WEMA was up the maximum 5%, nobody even tried going lower

Get ready! I understand they will go on TS either this Wednesday or next wednesday.

motai:

to all gurus,
what do you think about capital oil plc?please any avaliable info on this coy will be appreciated.just want to know if this is god for long term and if they have prospect?

motai,
though i dont have info about the company because there is scanty info online and stockbrokers with online web pages dont do second tiers securities however i have a few questions why would you go to capital oil?
Is it becaus you are looking for small cap coys or just small funds?
My suggestion is invest in sectors which you can easily sell when wish (liquid stocks).  If their head office is in Ikeja and they deal in petroleum products (see http://goliath.ecnext.com/coms2/product-compint-0000503031-page.html or http://www.mbendi.co.za/orgs/ce48.htm) then they are not known and are not major players,
Hope that helps

Hello guys,

I had to take a short time away to fine tune my year end buying strategy. I see that a lot of water don pass under bridge.

Guys Dangote Sugar is the stock to watch for the following  reasons.

1.  its near future EPS is over 2.65 (compare the price with other stocks that the market has bidded up at about thesame expectation of earnings; Zenith at EPS expectations less than that a few weeks ago was bidded up to N65 , it is now at N46, 7up with earnings expectation less than dangote is at N45, see other stocks in this category on the nigeriansecurities website.


2. We know for a certainty that they are doubling capacity in the next few months (infact work is almost complete on that)  hence doubling revenue and possibly PAT, assuming this is the only growth that occurs, EPS will no be less than N5.2 sometime next year. Their contemporaries  that have about thesame earnings potential (EPS); FLOUR MILL at now 73.00, AP at N84, OANDO at N78.92

3. They are opening two new factories in Ghana and Angola (an economy which is expected to grow 31%). This will also increase revenue and possibly PAT

4. There are feelers that Dangote Sugar may likely give bonus shares. I will not be surprised cause in my own opinion asides the reasons that may be responsible for those feelers,  the man knowing that people feel they know what to expect at the end of the year may likely trump people by doing this.

The man has also been quoted in his assurance to investors in his sugar business that this stock is a $1 stock. Even with the dollar out in the cold, this is still over N100


My personal expectation is this,

Projected PE for their year end this Dec is as at today 13.21X  (source;my calculations, IBTC report,          nigerinasecurities.com)


Projected PE for nestle in thesame industry is 24X


so if dangote at PE      13.21               equiv to       N35.00

assuming that nestle which shows a comfort level of trading at 24X in thesame industry
an inference we can draw is that given the right conditions as shown above, the market can bid
dangote up to    24X.

The question nowat 24X, what will dangote's price now be


Answer = 35/13.21     X  24  =  N63.50.
This is the amount thesame people buying Nestle now are potentially ready to push dangote to in its first lap.

easimoni:

Get ready! I understand they will go on TS either this Wednesday or next wednesday.

This is stock marrket game push up prices, go on TS raise more funds then go again, Its time to look before you leap in the NSE.


dollarmani,
thanks for that piece

yet to see Costain prospectus but I will go with FCMB. Cosntruction is not a high margin sector. I know they are diversifying into Furniture but still, not convince about the margins. Hype is what is pushing them up.

CAPL, made a lot of money selling assets. So, don't base your long term projection on last year and this years result.

Flour Mills is good but I will root for BAGCO. The margin is wonderful.

Longman is good but not for the long term. They are so susceptible to changes in government education policy (that changes too frequently for me)

BETA glass is returning back to profitability but the competition is high and the market environment is changing. Will not hold them for the long term.

Dangote Sugar is currently fairly priced. Will go for it for the long term. Just hope Dangote will stop this quarterly dividend payment. It is affecting the price too much!!!!


Wema, definitely not for the LONG term. It is a prme candidate for acquisition.

I don't BUY mostr offers. I don't get carried away with the hype. Being in the market LONG enough not to make emotional decisions.

Guys,

I am in deep suspicion of Zenithbank. A record was broken last week in the speed at which their results were announced and their shares placed on technical suspension.

I read the article on zenithbank on www.nigeriansecurities.com which underscored this. Like the writer speculated, could they be in the market to secure funds to buy another bank. Also a lot of the shares is a rights issue. What does Jim and his fellow shareholders know that we dont ooo. This was just too quick

If this was the case i wonder who the banks they could buy are. WEMAnians on this blog  beware (just kiddin, that may be more reason you should hold on to your stocks, if that was the case.)

I know that such a time would come when the much talked about second round of market induced consolidation will start. If large banks like AMRO are being bought, and a bank with a somewhat profile similar  STB of those days which acquired UBA to begin a great success story, why will Zenith may not be thinking on that approach.?

wanaj0:

yet to see Costain prospectus but I will go with FCMB. Cosntruction is not a high margin sector. I know they are diversifying into Furniture but still, not convince about the margins. Hype is what is pushing them up.

CAPL, made a lot of money selling assets. So, don't base your long term projection on last year and this years result.

Flour Mills is good but I will root for BAGCO. The margin is wonderful.

Longman is good but not for the long term. They are so susceptible to changes in government education policy (that changes too frequently for me)

BETA glass is returning back to profitability but the competition is high and the market environment is changing. Will not hold them for the long term.

Dangote Sugar is currently fairly priced. Will go for it for the long term. Just hope Dangote will stop this quarterly dividend payment. It is affecting the price too much!!!!

Wema, definitely not for the LONG term. It is a prme candidate for acquisition.

I don't BUY mostr offers. I don't get carried away with the hype. Being in the market LONG enough not to make emotional decisions.

Your comments about Dangote is the more reason why we should expect a shocker. A 4 for 1 is all it needs to take it to its rightfull place

@ easimoni,
you see what i told you about costain they are applying for about 700 million shares. that will drastically reduce the eps and i dont see it making such a mad amount of profit to maintain its current eps.
bank phb or fcmb are looking like much better offers.
BTW, diamond banks results look pretty solid today, that might be another solid offer.

dollarmani:

Your comments about Dangote is the more reason why we should expect a shocker. A 4 for 1 is all it needs to take it to its rightfull place

Bonus with 10bn issued shares is a no no!!!! Dangote wants dividend. he is collecting N2.8bn every quarter. he is not bothered about the price on the NSE since he si not willing to sell nor is he planning for an offer!

Diamond will surprise people. Selling WEMA to buy Diamond now.

@ wanajo, please i have two questions for you;
1) with BAGCO going public ,do you feel there is any point still taking position in flour mills, or should one take position in both?HuhHuh??
2)i have been thinking about buying a stock with december year end such as, wapco, beta glass or dangote sugar, and then by march i will use the profit from these coys. to take a stake in flour mills. do you think this is a good idea?Huh?
and which of these would you recommend;
1.wapco @ 64n
2.beta glass @ 14n
3.dangote sugar @ 35n.
4.longman @ 14n.
and finally, which other good stocks would you recommend for good long term or medium term value.
thank you very much. please reply

shigidi:

@ easimoni,
you see what i told you about costain they are applying for about 700 million shares. that will drastically reduce the eps and i don't see it making such a mad amount of profit to maintain its current eps.

Let's hold judgement till we see the prospectus. After all, we are basing our projections on only the 1Q results.

shigidi:

@ easimoni,
you see what i told you about costain they are applying for about 700 million shares. that will drastically reduce the eps and i don't see it making such a mad amount of profit to maintain its current eps.
bank phb or fcmb are looking like much better offers.
BTW, diamond banks results look pretty solid today, that might be another solid offer.

Not sure again if Diamond will go for an offer now. Learnt they are planning a GDR. That said, Diamond currently holds a lot of value.

shigidi:

@ wanajo, please i have two questions for you;
1) with BAGCO going public ,do you feel there is any point still taking position in flour mills, or should one take position in both?HuhHuh??
2)i have been thinking about buying a stock with december year end such as, wapco, beta glass or dangote sugar, and then by march i will use the profit from these coys. to take a stake in flour mills. do you think this is a good idea?Huh?
and which of these would you recommend;
1.wapco @ 64n
2.beta glass @ 14n
3.dangote sugar @ 35n.
4.longman @ 14n.
and finally, which other good stocks would you recommend for good long term or medium term value.
thank you very much. please reply

Will recommend Dangote based on fundamentals. But you will need to beg the man to stop this quarterly dividend payment!!!!!!

BAGCO is solid but we need to wait for the prospectus. Go for Flour Mills. They are also a well diversified company.

Longman is attractive. Not so enamoured with Beta Glass. If NAFDAC should go ahead with the threat then beta Glass is toast.

wanaj0:

Bonus with 10bn issued shares is a no no!!!! Dangote wants dividend. he is collecting N2.8bn every quarter. he is not bothered about the price on the NSE since he si not willing to sell nor is he planning for an offer!

Diamond will surprise people. Selling WEMA to buy Diamond now.

I also think Diamond is undervalued, I really don't understand why the share price is below N20, honestly to me it is ridiculous.

Someone mentioned their result been released? nayone have a link.

I have been thinking of buying Diamond for a while now,

Are their numbers on Nigeriansecurties correct, especially the outstanding shares. I need to do some number crunching.

Costain has lost me as a follower. Their offer will definitely dilute the EPS and honestly, I really do not see them generating so much profits to make them as attractive as they are today.

wanaj0:

Will recommend Dangote based on fundamentals. But you will need to beg the man to stop this quarterly dividend payment!!!!!!

BAGCO is solid but we need to wait for the prospectus. Go for Flour Mills. They are also a well diversified company.

Longman is attractive. Not so enamoured with Beta Glass. If NAFDAC should go ahead with the threat then beta Glass is toast.

Is GTB still giving 1/2 yearly dividends?
I see Dangote changing strategy soon.  The coy does command some presence though hope they keep making the huge profit they are making.

Getting suspicious of this Costain offer. Will wait till the prospectus though. Not planning to pay dividend until the next two years. Jerked up the price from <1.50 to over 18.00 this year alone. Had 400m shares before now issuing additional 700m shares.

This kind of offer are the ones I tend to avoid. Just like NAHCO, why join the party with minutes to the end??

Geees:

Is GTB still giving 1/2 yearly dividends?

I believe so I have received my dividend like clockwork.

By the way question for all
wITH ALL THESE  BANKS GOING TOWARDS GDR's what is the likelihood of making good returns judging form the effect of GDR's on a strong bank like GTB,
Are we not opening up to credit crunches?

Thanks Yodiyokun,
Then we'll just live with Dangote that way

yodiyokun:

I also think Diamond is undervalued, I really don't understand why the share price is below N20, honestly to me it is ridiculous.

Someone mentioned their result been released? nayone have a link.

I have been thinking of buying Diamond for a while now,

Are their numbers on Nigeriansecurties correct, especially the outstanding shares. I need to do some number crunching.

Costain has lost me as a follower. Their offer will definitely dilute the EPS and honestly, I really do not see them generating so much profits to make them as attractive as they are today.

In a market that is facing liquidity (learnt that no PFA funds for now), <20.00 is good enough for Diamond. 6 montsh result is PAT of N5.8bn. I expect the last two quaters to be better since they will ahve teh ACTIS fund to invest. Oustanding shares 9.4bn is one of teh smallest in the industry. This is inclusive of the ones issued to ACTIS.

Will give a BUY order tomorrow! Was waiting for it to drop to <17.00 before but now, delay may be dangerous.

Geees:

By the way question for all
wITH ALL THESE BANKS GOING TOWARDS GDR's what is the likelihood of making good returns judging form the effect of GDR's on a strong bank like GTB,
Are we not opening up to credit crunches?

Thanks Yodiyokun,
Then we'll just live with Dangote that way

GTB's problem has nothing to do with GDR. There is liquidity problem in the market. So most stocks have suffered losses.

BTW, anyone checking Chellarams for me

wanaj0:

GTB's problem has nothing to do with GDR. There is liquidity problem in the market. So most stocks have suffered losses.

BTW, anyone checking Chellarams for me

Wanaj0
Does this mean GDR's are good?
Like some education on its effect on such coys
Cheers

wanaj0:

In a market that is facing liquidity (learnt that no PFA funds for now), <20.00 is good enough for Diamond. 6 montsh result is PAT of N5.8bn. I expect the last two quaters to be better since they will ahve the ACTIS fund to invest. Oustanding shares 9.4bn is one of the smallest in the industry. This is inclusive of the ones issued to ACTIS.

Will give a BUY order tomorrow! Was waiting for it to drop to <17.00 before but now, delay may be dangerous.

Well it closed at 17.98 and traded as low as 17.31. I will place an order for it at 17.50 lets see if I get lucky.

Dosent the GDR affect the no of outsstanding shares?

As per the Actis investment, they still have almost 6 months to put it to good use since their yr end is in April.

yodiyokun:

Well it closed at 17.98 and traded as low as 17.31. I will place an order for it at 17.50 lets see if I get lucky.

Dosent the GDR affect the no of outsstanding shares?

As per the Actis investment, they still have almost 6 months to put it to good use since their yr end is in April.

Nothing really special about GDR. UBA started a GDR many years ago.

Yes it leads to increase in outstanding shares just like a PO or rights. Note also that you also have more funds (CAPITAL) to work it.

Will jsut buy tomorrow. 17.00-19.00 does not amke much difference to me in the scheme of things.

Geees:

Wanaj0
Does this mean GDR's are good?
Like some education on its effect on such coys
Cheers

gtbs gdrs will come good as from next year. they have only 13 billion shares and i expect profits to rise as from next year. will wait till next year to enter though

Wanajo, easimoni,
Did anybody outlaw discussions on Oceanic bank? The shares have consistently dropped for three straight weeks (from =N= 34 to =N27= ) and nobody seems to mind that; I hope I am not sailing that sea alone.
Please, I am bleeding here is it time to abandon ship? What is going on with the bank?
And pumping, thanks for your response the other night.

I have been buying diamond since last week. The results I saw today gives even more reason to buy. The bank is doing GDR. Possibly people are selling for fear of TS. I really can't figure it out.

The insurance companies keep churning out rosey Q-3 results. Custodian and Oasis also seem to have come out strong today. Regarding Custodian, does anyone have the projected PAT for year end? I think there will still be even better results from the main players.

I think we got the info that Flour Mills will retain majority interest in Bagco? So I'd say buying Flour Mill means you are getting the chicken and the egg coupled with the good price of Flour Mills right now.

Wema going on TS this Wednesay? Authentic? Wow. Maybe man needs to act sooner than later.

Costain, Costain, Costain? Hmm. Well, I'll wait for the prospectus. I'm not taking that out of my radar yet.