INDULGENCE in share buyback may soon become a “new normal” for glove makers should the industry players feel that their stock prices “have bitten the dust”.
On Wednesday (Dec 16), Kosan Rubber Industries Bhd has joined the footstep of Top Glove Corp Bhd to embark on such exercise after having acquired 2.57 million of its own shares (or 0.11% of its total issued shares) between RM4.94 and RM5.09.
As per Bursa Malaysia’s Listing Requirements, public listed companies (PLCs) can conduct share buybacks up to a limit of 10% of their issued shares.
However, before PLCs can conduct such buybacks, they need to obtain a shareholders’ mandate at a general meeting to carry out such an exercise.
In Top Glove’s case, for example, the company bought back slightly above 2% of its issued shares as of Dec 14 which is within the 10% limit. Furthermore, Top Glove has obtained its shareholders’ approval to carry out such buybacks at it last annual general meeting (AGM).
Back to Kossan, the company’s buyback coincided with its ‘official’ Bursa Malaysia filing on the same date pertaining to the detection of 427 COVID-19 cases in its Meru, Klang production facility following a screening exercise of closed to its 7,000 employees which began on Dec 4.
Kossan has initially come under criticism for disclosing the COVID-19 cases to a group of analysts who broke the news in their research notes instead of making public such findings.
The affected plant premise is temporarily closed to carry out disinfection and sanitisation procedures and is expected to resume operations in stages starting from Dec 21,” Kossan said in its Dec 16 Bursa Malaysia filing.
“As a result of the temporary closure of the affected plant premise, the capacity loss is estimated to be less than 1% of the total annual output volume. Other production facilities at different locations are operating normally.”
Manipulation or value investing
There are two main intentions for share buybacks – to support the share prices or to invest because the shares are cheap, ie there is value, according to the Minority Shareholder Watch Group (MSWG) CEO Devanesan Evanson.
“Share buy backs with the intention of supporting the share price is tantamount to manipulation as such activities interfere with the price discovery mechanism of the market,” he told FocusM. “The share prices are being propped up by the buyback exercise.”
On the other hand, Devanesan said that share buybacks with the intention of investing in its own shares because it is cheap (in terms of value) is a permitted corporate action.
“The choice of the word ‘intention’ is deliberate as it is the intention that determines whether it is manipulation or investing,” he further justified. “And as we know, ‘intention’ is hard to prove.”
Thus, some PLCs carry out share buybacks to support the share prices but pass it off as investing as they purport to see value in the shares; again ‘value’ is a subjective matter.
Thus, the market generally gives these PLCs the benefit of the doubt, ie they are investing because they see value when their intention is to support the share price.
Referring to Tropicana Corp Bhd’s recent acquisition of Top Glove’s shares (note that Top Glove’s executive chairman Tan Sri Dr Lim Wee Chai is also Tropicana’s chairman and major shareholder), Devanesan expounded:
“Neither Top Glove nor Tropicana have stated that their buybacks and investments respectively is to support the share price: they merely stated that ‘seeing value’ is the justification for their decisions.
“If their value-investing has a collateral/incidental element of support for the share price, it should not be concluded that the main reason for their decision is to support the share price.” – Dec 18, 2020
