Apr 2013 Financial News

GK to buy back 8.4m shares over 12 months - Market rewards decision

Apr 05, 2013

Food and financial-services conglomerate GraceKennedy Limited plans to buy back 2.5 per cent of its stock over 12 months amounting to more than eight million shares valued at close to half-billion dollars at Thursday's closing price.

GraceKennedy believes its shares are undervalued and that the buy-back would boost company and investor returns.

The GraceKennedy board of directors yesterday announced the approval of the buy-back over a period of one year. The move will result in retiring more than 8.38 million shares from the public, which will raise the earning per share and "better reflect the value of the shares," according to group chief executive officer Don Wehby.

The company announced the share purchase at market close Wednesday. On Thursday, the stock traded 6.25 per cent or J$3 higher to close at J$51 per share. The buy-back is valued at J$427 million at that price.

GK's cash resources amount to just under J$10 billion.

More than 335.3 million GK shares trade on the Jamaica Stock Exchange, as well as on the Trinidad exchange.

The stock traded as high as J$120 nine years ago.

The price at which the conglomerate will buy back the shares will remain confidential, Wehby told the Financial Gleaner.

The company said in its mid-week market filing that it will execute the repurchases over a one-year period, when its "share price is deemed to be below its true value and an opportunity exists to enhance shareholder value."

Wehby said the stock trades at half its book value: Roughly J$16-17 billion in market capitalisation compared with J$33 billion in equity.

J$4.2b net income

Additionally, Wehby indicated that the group's 27 per cent annual net income growth, at J$4.2 billion, remains lost on the market.

"We are trading at half of the book value, and when you look at our earnings per share we are trading at 4.5 times earnings; but in developed markets, a company like Grace would trade at a minimum 10 times earnings," said Wehby.

The company is bullish on its growth prospects - especially with its foray into new markets such as Ghana, and its net earnings in foreign exchange.

"We believe, when you factor all those things, that the buy-back will be beneficial to shareholders and the group," said the GK CEO.

Grace decided on the 2.5 per cent share repurchase, in order to balance its capital expansion needs and that of shareholder value.

"We see great value in the market; that is why we are buying back," Wehby said.

The announcement follows an impromptu public discussion on the matter between Wehby and Jain last November at an investors' forum held by Stocks & Securities Limited in Kingston.

"In any foreign stock market, the buy-back of shares is a standard feature whenever the board and management recognise that the share price is undervalued for whatever reason," Wehby said at the time. "I would like to get Sushil's view on a market for buying back of shares".

Jain, a former treasurer and corporate secretary at Seprod Limited, responded at the forum: "You should have already done it. Directly or indirectly. You can buy back shares indirectly from your pension fund, through your management fees, through your directors".

First share buy-back

Wehby, in recalling that discussion indicated that GraceKennedy, in 2007, initiated plans to conduct its first share buy-back, but never executed those plans as the stock price temporarily rallied to satisfactory levels.

GK shares closed the 2004 financial year at J$118.

"That was a bull market and ... I recall it peaking at about $120 in 2004," Wehby recalled.

The stock price did not stay at that level for long. It had a spectacular fall to J$87 in 2005; and dropped further to J$63 in 2006.

Equity trader Dayton Thomas said buy-backs generally receive positive responses from the market.

"It usually sends a good signal to the market that the company believes that stock will perform well over time," said Thomas, a trader with Stocks & Securities Limited.

"Seprod proposed one a few months ago, but they didn't have to because the price of the stock started to go back up after the announcement," he recalled.The schedule for the buy-back is pending a decision by Finance Minister Peter Phillips on a tax waiver for subscribers to the offer.

"Grace got prior approval for the buy-back in 2007 and we were advised that when we were going to execute the buy-back that we needed to write or advise the minister of finance," said Wehby. "It's a legal issue."

GraceKennedy, in its market filing on Wednesday, said the share repurchase would "serve to utilise excess liquidity in the company and raise earnings per share. We believe that investing in our own company is the best use of capital as we see this as a good investment for long-term returns and that the repurchase will be a major advantage to our shareholders".


Source:
steven.jackson@gleanerjm.com
Steven Jackson, Business Reporter
Jamaica Gleaner
Friday April 5, 2013

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