Investors plead for a JSE buyback
It’s not as though the JSE wouldn’t have liked to avoid some questions at its recent AGM. As the first shareholder with his hand up was quick to point out, the exchange is surely having a demoralising time.
“After listening to the CEO’s account of all that is being done to underpin profit growth and deliver high-quality earnings and long-term value, don’t you find it demoralising that no-one is listening?” asked Howard Lowenthal. He pointed out that over the past 10 years the share price has halved, to R100. During the week of the AGM it reached a grim 10-year low.
Lowenthal pleaded with the board to consider repurchasing the company’s own shares in a bid to lift the share price. “We need to do something, and one thing to do that’s very easy, particularly in an environment like this, is to announce a buyback.” He argued that the JSE would need only to buy back 10,000 of its shares a day, spending R200m-R300m a year on the exercise.
“The JSE makes R1m a day, so that [the R200m-R300m] would be very quickly replenished … please let’s do something to get a rerating of our JSE shares.”
JSE chair Phuthuma Nhleko was cautious, and so it was difficult to know what he thought about a strategy that has almost as many detractors as supporters. But he said: “I want to give you comfort that we’re constantly trying to see what we can do differently within the various constraints to get that rerating.
“But I’m sure you also appreciate that if you have 10 people in a room and ask if they would support a buyback, you would get a split; there are good reasons and bad.”
Nhleko cautioned that the company has a very small balance sheet and therefore limited room to operate. “It’s different from large corporations; they can afford to do big buybacks and if things go wrong, they can sustain that. The JSE does not have so much latitude.”
In a note to clients late last year, Coronation’s Neville Chester summed up the arguments in favour of buybacks, describing them as a smart capital allocation decision that enhances shareholder value. “They offer a significantly lower risk alternative to other capital allocation choices. They do not fundamentally alter the business; rather, they increase value per share and return cash that investors can allocate elsewhere.”
Chester referred to research indicating that 70%-80% of merger & acquisition
deals fail and 50% of large capital expenditure programmes do not achieve their cost of capital.
His argument is that when a share is bought back at a discount to its intrinsic value, permanent value is created for shareholders.
Reasons for resistance to buybacks include the potential conflicts of interest when executives with valuable share-based incentives get to decide on a strategy that will boost the value of those shares without requiring any of the imaginative strategic effort needed to grow sales, expand operations or increase profits.
Instead of using capital to enhance a company’s long-term productivity, profitability and employee welfare, buybacks reduce the size of the company, though they increase the value of shares for those investors who haven’t sold out.
The potential conflicts are heightened by the generally poor levels of transparency about buybacks. Regular buyback Sens announcements by Prosus, Naspers, South32 and Glencore highlight the tougher requirements these dual-listed entities face. It means shareholders have a good idea whether or not they’re selling into a buyback. The prospect of selling to the company, which is the ultimate insider, is a significant consideration for any investor.
Current regulations, which provide only dated information, mean shareholders in companies listed on the JSE only are at a significant disadvantage.
Andre Visser, the JSE’s director of issuer regulation, disputes suggestions that local regulations are inadequate. “The JSE listings requirements have a robust framework that extends far beyond what is required by the Companies Act,” he tells the FM.
Shareholders have to approve a special resolution, and there are pricing limitations as well as restrictions to buying back during prohibited periods. As for disclosure, Sens announcements are required when a company has cumulatively repurchased 3% of the issued equity and for every 3% thereafter.
Since 2017 the annual report has also had to include details of any buybacks. “We continually benchmark the JSE listings requirements against international markets to ensure that our regulation remains fit for purpose, aimed at an effective and appropriate level of regulation,” says Visser.
He says that as part of this process
the JSE is considering the latest amendments from the US Securities & Exchange Commission (SEC), which were announced in early May and have sparked an outcry from the US executive class.
Those new disclosure rules are designed to increase the transparency and integrity of repurchases and allow investors to assess buyback programmes better.
After the rules come into effect early next year, listed companies will have to disclose a daily log of share repurchase activity at the end of each quarter, give a description of the rationale behind each buyback, state the goals of that buyback and explain the criteria used to determine how many shares to repurchase. They also have to state whether certain directors or officers of the company bought or sold any of the shares in question within four days before or after the buyback.
In 2022, SEC chair Gary Gensler says, there were share buybacks worth more than $1.25-trillion.
Research on the South African market is scant, reflecting the inadequate levels of disclosure required, but it is undoubtedly a large and growing business.