Share BuyBack to boost warrant exercise

StarBiz: Many listed companies buy back their own shares. There are many reasons why companies buy back their own shares. Some of the more common reasons include better cash utilisation, stabilising share price, more efficient way to reward shareholders than paying dividend etc.

There is also another reason why companies buy back their shares that is relevant for companies with outstanding company warrants. When a company buys up its own share to the effect that the share price rises above the warrant’s exercise price, it has a chance to recoup the cash spent buying back its own shares via proceeds from warrants exercise.

Last year, there was one listed company which appeared to been using shares buy back to encourage warrants holders to exercise. The company, Hil Industries Bhd, had 95.3 million warrants which was to expire on April 15 2007. Hil Industries only started the buy back program in Feb 28 2007 and has already accumulated about 8 million shares as at April 3 2007, the last day it bought back its shares before the warrant expired. That was quite aggressive as it represented a significant portion, about 21%, of shares traded during that period. The share price of Hil Industries rose from below 50 sen to as high as 65.5 sen a week before the warrant was to expire.

HIL-WA, which in early February 2007 was reduced to a few sen, also enjoy a late-stage pre-expiry rally which saw the warrant price rose to as high as 19.5 sen just days before the company started its aggressive share buyback exercise. It should be noted that the warrant then retreated to close at 0.5 sen when it ceased trading in late March last year when the mother share was still hovering at about the exercise price of 50 sen.

The subsequent surge in HIL share price after HIL-WA stopped trading managed to attract more than 17 million warrants to be exercised and in the process brought more than RM8.5mil cash to the company. For Hil Industries, the buy back made sense as it spent RM3.73mil cash to buy back the 8 million shares but got back RM8.5mil from warrant exercise. Hil Industries actually managed to sell all the 8 million shares that it bought back just days before the warrant expired and got back RM4.4mil. So, the entire exercise brought in about RM9.2mil cash to the company.

So, what can we learn from this case study? The answer is to look at another company which is in the same situation as Hil Industries last year. The company to watch is Ancom Bhd. This company has about 98 million warrants (Ancom-WA) that will expire on June 23 2008, which is about 2.5 months away. Ancom shares have been thinly traded over the last few months and the share price managed to hold at just below the warrant exercise price of RM1. This company has in the past been active in shares buyback and other treasury shares operations.

It would not be surprising to see some actions in the company’s share price prior to warrants expiry. After all, the major shareholder and managing director of Ancom had told the Exchange that he intends to deal in the securities of Ancom during the closed period ahead of the company’s financial result expected at the end of the month. He and another director of the company still hold a significant amount of Ancom-WA. Their intention on what they will do with their warrants is likely to create some volatility in the prices of Ancom securities before the warrant expires.


MyTake: Below is an analysis based on the warrants expiring this year with the aim to identify warrants that are in the money or out of money currently and weight them based on chances of share buy back or potential capital gain, if any. From the analysis, Ancom and the stocks highlighted in yellow are the shares that are almost or already in the money, in which not much money to be made by investor now unless it drops. The ones highlighted in blue are more interesting as they have a higher possibility amongst others that the share price may go up due to share buyback towards the expiring of the warrant, but it is really up to the companies and controlling shareholders. The stocks are PohHuat, Sunway and Harnlen. Time to monitor them? Why not?

* The 14th Dalai Lama of Tibet. The spiritual leader has asked nations not to boycott the Beijing Olympics and also said that he is not politically motivated for the separation of Tibet from China. He is pressing on the "human rights"treatment in China which he considers very poor. The list of dignitaries not attending the Beijing Olympics is growing and this has put China in an awkward position as this Summer Olympics is supposed to be a showcase of coming out party for China to the world. In short, we should never mixed politics with sports, just like we should never mixed politics with business.