Share buyback trend likely to continue

The share buyback that EFG Hermes announced today is not likely to be the last as share values plunge.

Critics say share buybacks erode shareholder wealth.

The share buyback announced by EFG-Hermes yesterday is likely to be the first of many in the region, as companies take advantage of market turmoil that has left a number of shares undervalued. Mohammed Salih al Hashem, the executive director of asset management at the Abu Dhabi Investment Company, said more share buybacks were to be expected given the low values. "Prices have now come down to 2005 levels and a number of businesses have not seen damage to their businesses despite their share price falling," he said. "A number of infrastructure projects are out there, especially government-backed ones. There are a lot of companies that feed off that, and they are not suffering. If one believes in the continuing economic strength of the country, then share buybacks will continue." EFG-Hermes, the investment bank based in Cairo, said it would buy back 10 million of its shares on the Cairo stock exchange after its stock lost nearly half its value this year. This comes just weeks after the UAE property developer Emaar said it would be buying up its shares from next month because it saw them as underpriced and a good investment opportunity. With so many shares in the GCC undervalued following the financial meltdown and a terrible summer, companies are looking to cash in. However, some critics accuse companies of buying back shares to prop up their own share price and suggest they should be doing more worthwhile activities with their money. The key measure for companies likely to start share buybacks is the price-to-book value ratio - the company's share price relative to it assets minus its liabilities. A low figure means the market does not value the company highly, but that in turn makes it more attractive for the firm to start buying its own shares. EFG-Hermes, for example, is trading at a ratio of 1.40, the seventh lowest on the Egyptian stock exchange. On the Dubai Financial Market (DFM), nine companies are trading below 1.40, including the investment bank Shuaa Capital and Emaar Properties, with three of them below 1.00. The lowest on the DFM, representing the most underpriced, is Shuaa at 0.66. Stock on the Abu Dhabi Securities Exchange looks even more attractive for companies to start buying their own shares - eight companies have a ratio of below 1.00. When Emaar announced its share buyback, its chairmen, Mohammed Ali Alabbar, said it "reflects our firm belief that those shares are currently undervalued in the marketplace". "Recent declines in regional markets are largely not in line with the fundamentals of the majority of companies listed here, including Emaar. Rather, the recent performance of the markets here reflects global trends such as the credit crisis and global economic slowdown that affect investors' sentiments," Mr Alabbar said. In the US, listed companies are starting buybacks - Nike, Microsoft and Hewlett Packard all announced this week that they would start buybacks of millions of shares. Their stock prices subsequently soared. Abu Dhabi Commercial Bank has a price-earnings ratio of 1.2, but its chief executive, Eirvin Knox, said he was not planning a share buyback, especially as the rules were different for banks, which are not allowed to hold their own shares for longer than a year. Walid Shihabi, the head of research at Shuaa Capital, said if share buybacks were successful, they could play a significant role in propping up the market or act as a spur to a recovery. "Stocks have discounted on a lot of negative expectations, everything is now priced in," said Mr Shihabi. "If companies announce share buybacks, these will be a very important driver of the market." [e-mail]