Forum Archive Index - April 2001

["Peter Maiden" <pmaiden@xtra.co.nz>]

I am watching the progress of the Nufarm share price closely to see whether the buyback has much impact - or whether other market activities prevail. Sellers do not appear to queuing up in droves at the moment.

Nufarm have decided to undertake the buyback because they feel the market price of the shares does not reflect the 'intrinsic value' of Nufarm.

Recent reports suggest that the directors believe that the company is undervalued by 33% - quote spokesman Reiss '.... in light of the company's profitability and growth opportunities its shares had been unfairly tarnished by the same brush as the rest of the chemicals sector, notably Orica Ltd which has issued a string of profit warnings. Orica is still trading on a price-earnings ratio of 12-plus, while we're on a p-e of seven-plus, Clearly there's a task ahead of us to show that we're significantly undervalued,"

What Reiss is saying that, based on analyst's forecast earnings of  48 cents per share this financial year, the Nufarm share price should be at least $5.70. This would give it a PE of 12.

If the directors of Nufarm are convinced that the company is undervalued to this extent then why are they only buying back 5% of the  shares?  Total shareholder returns from a share buyback would be greatly enhanced if more shares were purchased.

Therefore the share buyback is only an attempt by Nufarm to 'signal' to the market that they feel the company is undervalued. However as Nufarm has failed in the past to convince the market of its fair value then cynically you have to ask why a share buyback will succeed..

Any share buyback is an economic non-event until the share price stops trading at a discount to its intrinsic value. Unless Nufarm achieves its objectives it has shrunk the business - both enterprise value and total equity value are each diminished by the amount of cash disgorged.

If the share buyback is successful ( ie it is the reason that drives a share price increase to reflect intrinsic value) than the $30-$40M odd spent by Nufarm will have benefited the remaining  shareholders.

Another recent share buyback has been Contact's. I wonder if the current Contact shareholders feel any richer as a result of that company's share buyback. The $70M spent to buy back shares is the eqiivalent to 13 cents a share.  When these shares are cancelled  (assuming they will be)  the remaining shares will, in theory, be worth 13 cents more. If already built in to the price, which is very likely, then the price will remain where it is (today $2.90)

Do the current Contact shareholders appreciate that their shares would be 13 cents less today (ie $2.67) if the buyback had not occurred? Do they feel they have benefited from a buyback ( using $70M of their own money) of the company's shares?

I don't think so.

 

Having some Nufarm shares I do hope the buyback drives the price up. Rebecca appears to be pretty close to the action and seems pretty convinced (Forum April 14) that the price will move up - that's a good sign

 

Let's watch developments.

 

Cheers

 

Peter