Ashford W. Meikle, Staff Reporter
WEHBY
GRACEKENNEDY LIMITED (GK) says that its decision to purchase two and half per cent of its outstanding shares is an attempt by the company's board to demonstrate its confidence in the conglomerate as it seeks to facilitate a more efficient equities market for its shareholders.
On Monday,GraceKennedy's chief financial officer (CFO) told Wednesday Business that GK was "following a worldwide trend" in its decision to purchase some 8.1 million shares over a three year period, of which it notified the Jamaica Stock Exchange (JSE) last week. "As you know, the market will go up and down. When the market goes down then the intrinsic value is not reflected in the market price so one of the ways that directors and senior managers show their confidence in a company is to buy back shares."
Last February, the JSE amended Rule 413 to allow companies to buy back their shares. However, the company must give the JSE a 21-day notice of its decision to make any purchase. Wehby argued that the amendment to the JSE rules will allow companies like GK to buy up excess shares "to mop up the liquidity in a weak market" so that the shareholders' value is protected.
The CFO has, in the past, lamented the steep drop in Grace's stock price, which, over the past eighteen months, has performed worse than the main JSE Index. For example, GraceKennedy, which traded at $59 on Monday, has lost some 52 per cent since January 2005, when it traded as high as $120. In contrast, in the same period, the Stock Exchange's main index had declined by 29 per cent.
RATIO DOWN
Wehby admitted that the ratio of price to earnings of companies such as GK has gone down because, "the earnings of listed companies ... have not met the expectations of investors. If you look at the JSE now, if you look at the multiples of the companies, a lot of them are trading under (a price to earnings ratio of) ten. The historical trading value of GraceKennedy is [9.64] and that is considered low."
It is this confidence in the company that GraceKennedy's board wants to recapture.
"The philosophy is that once the stock is below what you consider to be a true intrinsic value, which is the judgement by the board, then it would make sense to buy back," he said. "What is going to happen is that the confidence is going to drive the multiples of your stock which is going to result in an increased value in your shareholders going forward," said Wehby.
Pointing to the potential value to shareholders, the executive predicted that the company's earning per share (EPS) would increase with the share buy-back.
"One of the benefits of buying back [our] shares is that because you have to retire them out of the issued share capital, the EPS, assuming the earnings remain the same or increase, will increase and therefore the multiple will go up."
CURRENT BEAR MARKET
But while Wehby expressed concern about the current bear market, he underscored that the percentage of shares being bought back was not a token gesture and the company had not ruled out making additional purchases.
"The 2.5 per cent is a decision by the board which we felt was appropriate. It was not a token gesture because if you do the calculation you will see it is 8.7 million shares. And, based on our market, that can be considered adequate over three years if you do purchase two or three million shares per year. At the end of three years, we will review it to see the impact," he said.
