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Thursday, 9 July 2020

The coronavirus is fuelling a stock buyback boom in Egypt

The coronavirus is fuelling a stock buyback boom in Egypt: Since March, EGX-listed companies have been buying back their own shares amid turmoil in global financial markets prompted by the pandemic. As the benchmark EGX30 index fell to three-and-a-half-year lows, experiencing single-day routs unlike anything seen since the political turbulence of 2012, companies jumped at the opportunity to repurchase stock, in what is for the Egyptian market a novel corrective measure in the face of a financial crisis.

First things first: What are buybacks? Share buybacks are when a company repurchases stock from shareholders at market value, reabsorbing that portion of ownership of the company. It has been a common practice since the 1980s globally, and has since reached levels that are setting off alarm bells among some analysts.

What’s the point? It’s a way to drive up your share price while also returning excess cash to shareholders who want out of your stock entirely. More on all of that in a moment.

Buybacks are common in developed markets, but were rare here until the Financial Regulatory Authority stepped in at the beginning of March. As shares around the world slumped in the early days of covid, the FRA made buybacks easier by suspending a three-day notice requirement and allowing companies to buy back shares on the same day, giving companies the ability to buy back their own shares without overtly signalling that sellers might want to drive up the price.

This opened the floodgates: More than 20 EGX-listed companies have bought back anywhere from 0.5-2.5% of their floating shares since the FRA’s announcement. Blue chips including Orascom Development Egypt (ODE), Elsewedy Electric, GB Auto, Palm Hills and Madinet Nasr have all lined up to buy back shares, some immediately after rules were relaxed (see here and here).

What’s the logic underpinning the surge in buybacks?

Supporting share prices: Buybacks help to prop up a company’s share price (even if only temporarily) by decreasing the number of floating shares — available to public investors and not “locked in” and held by company executives, governments or private parties — causing the earnings per share (or EPS ratio) to increase and (the theory goes) demand to rise.

Taking the panic sellers out of the market: “There were people who were in “panic mode” and selling at any price. This of course made other investors nervous. So you go in and buy these shares and eliminate the panic sellers. Now there’s renewed activity around the stock and investors are buying the stock again,” says Hany Berzi, CEO of Edita, which since March has purchased 2.3 mn shares, 0.32% of the company’s total outstanding shares.

It is also a way to telegraph confidence to investors: For private equity outfit B Investments, the market crash in March made it imperative to “send a clear signal” to investors that the company believed its stock was undervalued, Investor Relations Manager Omar Labban told Enterprise. The company’s buybacks communicated confidence in the stock, and that was reflected in investor demand which he says increased more than eightfold. “Before the buybacks began on 29 March, the daily trade was around 6.5k shares a day, that increased to over 50-60k after the buybacks.” The company has bought back around 800k shares, or 0.51% of all outstanding shares, since late March.

Buybacks became an attractive proposition as stocks slid: Companies can use buybacks to invest in themselves when they believe their shares are undervalued. MNHD, for instance, bought back some 7 mn shares, 0.5% of the company’s capital, since the market crash in March. “We believe it was a good opportunity to buy. The price was very low, and we had extra cash. We believe in the value of the company so we wanted to ‘put our money where our mouth is’ as the expression goes,” said Investor Relations Manager Salah Katamish.

Analysts agree: “In March [equities] looked very underpriced … and with the CBE having cut interest rates aggressively in March, the opportunity cost of stock buybacks has fallen,” Simon Kitchen, head of global strategy at EFG Hermes, tells us. “The demand outlook was also unclear at the time, so perhaps companies felt buybacks would be a good use of cash.” Allen Sandeep, head of research at Naeem Brokerage, also said that companies were seeing more value in buybacks than capital investment. “Egyptian stocks have been hammered. Pandemic-driven concerns have led to a severe mispricing of stocks … so we now have a situation wherein companies find more value in investing within, by making buybacks, than making new investments,” he said.

The FRA loosened the rules: Kitchen stressed that the FRA’s move to ease regulations was itself a driving factor behind the surge in buybacks, a view shared by the regulator. “We wanted to make the right policy decision at the right time,” an FRA official told us, speaking on condition of anonymity. “Given market volatility in March, providing companies with the opportunity to buy back stocks right away instead of having to wait 72 hours made a world of difference.”

Buybacks aren’t without their critics: Detractors say buybacks artificially boost share prices while adding no real earned value. They also run the risk of sapping liquidity: “Buybacks can be supportive for stock prices in the short run, but they also reduce freefloat, which can be negative in the longer run,” says Kitchen. There’s also an opportunity cost: Could the money have done more had it been invested or saved to help companies cope during a downturn? “It is arguably better for the economy that companies invest in fixed assets — generating employment and boosting real demand — rather than financial assets,” Kitchen says.

It all comes down to timing, says Berzi: “You have to strike a balance,” says Berzi. “The stock had reached a very low price, and we needed to give support to our stock so we decided to buy shares back. Also to create demand for the stock in light of the covid-19 circumstances and the major deterioration that occurred for all stock prices. It wasn’t the time expansion,” he added.

More on the horizon? With the EGX stabilized and volumes high, buybacks aren’t on the agenda at Edita or MNHD in the near term. MNHD’s Katamish says the company capitalized on a window of opportunity and that there are no upcoming plans to buy more stock. Edita’s Berzi is playing his cards closer to his chest. B Investments, however, is looking at another buyback once it has board approval.

The FRA can always close the door: The suspension of the three-day notice period, while temporary, will remain in effect until an announcement terminating the policy is made. The FRA source says that while it has no plans to do anything to make buybacks even easier, the market regulator has not ruled it out either. “We don’t believe [facilitating buybacks] is necessary at this time, but we are keeping a close eye on the market and we’ll see how things develop,” the source said. “We will make the best decision for what best supports the market at any given time.”

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2021 Enterprise Ventures LLC.