The paints manufacturer becomes the first company to take advantage of the change in the law that allowed the buy-back transactions.
The Crown Paints share price is, however, one of the most expensive on the NSE, as measured by its price to equity ratio of 34.5 times.
The Companies Act says a company shall only buy back its shares if it determines the minimum and maximum prices that may be paid for the shares.
The move by Crown Paints to buy back its own shares has re-opened the debate on the benefits and risks of share buybacks at the Nairobi Securities Exchange (NSE) #ticker:NSE, which for a long time had been banned by the regulator over fears that it could be used manipulate prices of listed stocks.
The paints manufacturer becomes the first company to take advantage of the change in the law that allowed the buy-back transactions.
Investors will, however, be watching the company’s execution of the transaction and its valuation of the stock to get a hint of its intention, and what it believes to be the future prospects of the company.
Share buybacks are ideally implemented when a company’s share price is trading below its intrinsic value, with such transactions intended to benefit continuing shareholders whose claims on future earnings are enhanced at a discount.
The Crown Paints share price is, however, one of the most expensive on the NSE, as measured by its price to equity ratio of 34.5 times.
The firm says it also plans to be trading its own stock, meaning it will make a profit by selling shares to new investors.
Crown chief executive Rakesh Rao declined to comment on the planned transactions, terming them “technical”.
The Capital Markets Authority (CMA) had also not responded to our queries by the time of going to press.
Investment analyst Aly Khan Satchu says share buybacks are a good thing in principle but noted that their utility depends on a company’s intentions.
“The issue will be where there is a small float of tradable shares and where such a buy-back programme is in fact purely designed to squeeze the share price higher and past reasonable valuation levels,” said Mr Satchu.
“Crown Paints trades on a price-to-earnings ratio of more than 30, that is expensive.”
News of the planned share buyback has seen the company’s stock gain 12.2 per cent to trade at Sh64 on Friday, giving it a p/e ratio of 34.5 and which beats Safaricom’s 19.2.
The Companies Act says a company shall only buy back its shares if it determines the minimum and maximum prices that may be paid for the shares.
Crown says it will pay a minimum of an average of one year’s trading price and a maximum of one year’s trading price plus a 50 per cent premium.
This means it is ready to buy its shares at any price set by the market.
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