Centum Investments has changed its rules to allow it buy back shares from the market at a time the management and board believe the stock is undervalued at the Nairobi Securities Exchange (NSE).
The listed investment firm has in its annual report placed its net asset value per share at Sh59 compared to current trading price of Sh38.50 per unit, which would represent a 35 per cent undervaluation.
“The company may acquire its own shares in accordance with Part XVI of the Act,” reads a new article which the management hopes will be approved by shareholders during the annual general meeting scheduled for the end of September.
Repurchase of own shares reduces the volume of outstanding stock (supply) as some investors sell their holdings to the company. Those remaining have a greater claim to the firm’s assets and future cash flows on their enlarged stake—now including portion held by the company.
This makes the company an extra class of traders in the market, with their boards and majority owners having some flexibility in deciding when to buy shares and at what price.
“It is prudent for a company not to allow its shares to be disenfranchised just because the market lacks sentiment for them,” said Centum’s director and largest shareholder Chris Kirubi.
Centum, formerly ICDC Investment, has in the meanwhile surrendered 51 million shares worth an estimated Sh1.9 billion at current trading price of Sh38.50 per share to the Unclaimed Financial Assets Authority (UFAA) in line with regulatory requirements.
Shares and dividends are classified as unclaimed if no action is taken on them by the owner for a period exceeding three years and are to be handed over to the government agency UFAA.
The control of the surrendered shares means the UFAA now has a 7.7 per cent stake in the company which makes it the third largest shareholder behind Mr Kirubi who has a 28.3 per cent holding and government owned Industrial and Commerce Development Corporation (ICDC) with 22.9 per cent.
UFAA is required by law to sell the shares within a year, indicating that if the shares are bought as a block by one investor, the company may be shoved into a union with a large investor who may not share its current vision.
Passage of the clause would give the company powers to buy the shares from UFAA.
Centum becomes the first firm to change its clauses to allow for the share repurchase.
Mr Kirubi noted that listed banks —which have seen their share prices slump following signing of a law capping interest rates — should consider buying back their shares to salvage their value.
The window for companies to repurchase their shares was opened last year following passage of a new Companies Act. The practice is common in the developed markets.
Companies making up the Standard & Poor’s 500 Index spent $165 billion (Sh16.5 trillion) in share repurchases in the first quarter of this year alone.
Analysts estimate were it not for the buybacks the S&P index would have fallen by double digits in the first quarter compared to 8.5 per cent.
While share buybacks are expected to be implemented by firms with obviously undervalued stocks, some companies have repurchased shares on the basis of the market price being lower than their own assessment of the intrinsic value. This means that repurchases can be carried out at a premium to book value, with the justification that the purchase price is still below the optimal price.
But this has generated controversy, with some companies accused of using share buybacks to support their share prices, benefiting those selling and eroding value for continuing shareholders.