 Unloaded container ship at berth
SHARE BUYBACKS are a way of improving value for shareholders given a sluggish economic outlook, or at least that’s what Yangzijiang Shipbuilding believes.
Yangzijiang is the fourth largest shipbuilding group in China. 75% of its container ship and bulk carrier new-building is for orders placed by European customers.
Other than buying back its own shares to improve value for shareholders, the company also paid dividends of S$51.7 million for last year’s earnings, which work out to a dividend yield of 2% to 3% based on current stock price levels.
In the four months after shareholders passed a share buyback resolution on 25 April 2008, the shipbuilder has spent some S$39 million repurchasing 49.6 million shares.
For Yangzijiang, this is only 4.3% of its cash hoard of some S$920 million as at Jun 30, but share buybacks that use up significant cash reserves actually improve some financial ratios.
| Date of share repurchase | No. of shares purchased | Price/share
(S$) | Total value (S$) | | 21-08-2008 | 14,500,000 | 0.595-0.60 | ~8.6 m | | 18-08-2008 | 1,690,000 | 61-62 | ~1.04 m | | 15-08-2008 | 1,000,000 | 0.63 | 630,000 | | 22-07-2008 | 3,000,000 | 0.77 | 770,000 | | 18-07-2008 | 700,000 | 0.78 | 546,000 | | 17-07-2008 | 3,279,000 | 0.79-0.795 | ~2.6 m | | 16-07-2008 | 2,438,000 | 0.795 | 1.938 m | | 15-07-2008 | 3,000,000 | 0.795 | 2.385 m | | 14-07-2008 | 357,000 | 0.815 | 290,955 | | 08-07-2008 | 997,000 | 0.795 | 792,615 | | 02-07-2008 | 1,000,000 | 0.79 | 790,000 | | 01-07-2008 | 3,000,000 | 0.82 | 2.46 m |
How do share buybacks improve shareholder value?
Here’s how, using Yangzijiang as an illustration during the third quarter to date. The company paid about S$24.5 million to buy back 35 million of its own shares between 1 July and 22 Aug.
| | Before Buyback | After Buyback | Impact | Cash
| S$694 million | S$670 million | Less cash on balance sheet | Assets
| S$3,423 billion | S$3,398.5 billion | Assets drop, ROA improves | Shareholders Equity
| S$784 million | S$759.5 million | Equity drops, ROE improves | Shares Outstanding
| 3,283,297,000 | 3,251,336,000 | Dividend yield improves |
Table: NextInsight
Return On Asset, Return On Equity, and dividend yield improved marginally as a result.
However, the stock continued to slide some 45% from S$1.10 when the EGM was held, to close at 60.5 cents last Friday.
At what price is share buyback a good buy?
Yangzijiang paid an average price of about 78.5 cents per share to date or 13.5X for its share buyback program, which is higher than the sector average of 12X historical rolling price earnings based on Bloomberg calculations.
The wave of negative sentiment however, persisted.
CLSA initiated coverage on the stock on 5 August with a sell recommendation, when the stock was at 80 cents or 13.8X PE.
Since then, the stock price has slid past CLSA’s fair value of 64 cents, to 10.4X PE.
| | Stock Price | Mkt Cap S$mln | Sales
S$mln | Historic PE | ROE% | Free cash per share | | KEPPEL CORP LTD | $10.28 | 16,366.6 | 10,431.3 | 13.8 | 24.0 | 1.080 | | COSCO CORP SINGA | $2.12 | 4,747.2 | 2,261.7 | 11.1 | 41.8 | 0.500 | | SEMBCORP MARINE | $3.90 | 8,078.5 | 4,513.1 | 26.7 | 16.0 | 0.060 | | YANGZIJIANG SHIP | $0.605 | 1,997.0 | 795.6 | 10.4 | 39.6 | 0.530 | | JAYA HLDGS LTD | $1.24 | 955.0 | 307.2 | 6.4 | 36.7 | -0.280 | | ASL MARINE HLDGS | $1.06 | 319.5 | 400.4 | 5.0 | 31.0 | -0.020 | | | | | Average | 12.2 | | |
Table: Bloomberg, NextInsight
For bargain hunters considering Yangzijiang, here is some downside to consider:
 Yangzijiang's stock price has dipped 25% since CLSA's sell recommendation.
(1) Slow down in growth of order book
Revenues for 2008-2012 will be driven by its US$7.4 billion order book. However, as Yangzijiang’s yards have been booked to full capacity for the next 3 years, upside on order book growth is limited.
CLSA believes new contracts to be signed for FY08 will drop to US$2.1 billion compared with US$5 billion in FY07.
Unlike Keppel FELS and Sembcorp Marine whose revenues are driven by demand for oil exploration and production, Yangzijiang serves the sea cargo community.
Supply of container and bulk carrier vessels is set to exceed demand in the next two or three years, according to CLSA.
This, plus a global credit crunch dampens outlook for orders of new containerships and bulk carriers.
(2) Margins pressure from many areas
- Continued appreciation of the RMB against US$ is expected, and this is bad for Yangzijiang as its revenues are fixed in US$, but the majority of its costs are in RMB.
- Steel prices have increased 60% year-to-date, instead of the 20% that Yangzijiang has forecasted.
- Rising costs of labor and manpower shortage will put pressure on margins. - Some of Yangzijiang’s tax breaks are ending, which will raise its consolidated tax rate and depress net margins.
Recent share buyback stories:
CSE GLOBAL: Solid results, active share buybacks
SGX: Signficant share buy-back moves
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