An Ill-Advised Repurchase

THE ANNOUNCEMENT YESTERDAY that Century Properties Group Inc made to repurchase 800 million shares at current price is an ill-advised move and defeats the very purpose of a buyback program that aimed at increase the value of shareholders.

 

At the high-price of P1.77, the company would be paying an expensive price for reacquiring those shares. And that's not increasing the value of shareholders but diminishing it. For a buyback to be value enchancing it must be purchased at a time when the shares are selling at a discount to its book value. At a book value of P0.88, based on the 3rd Quarter Financial Report, it is practically paying double its worth; paying P1.416 billion for a value of only P704 million. This move will deplete cash resources, which the company subtly admitted it does not have; thus, the spread of the buyback program for two years starting this month. These resources could be profitably used in rolling out developments that can make profits for the shareholders.

 

These facts hint an advise from someone who based the recommendation for the buyback on the low Price/Earnings Ratio of below 10.0. In speculators' parlance, a low P/E makes the selling price cheap, regardless of the true book value. The fact is, the P/E was low because of the high net income, and not on the cheap price. A bull period like we have right now seldom gives cheap prices even among value-laden enterprises. Price valuation based on P/E provides a false cheap price that makes repurchase decisions like this costly to the shareholders, instead of being profitable.

 

The increased earnings can be treated as a bonus. But to be profitable to the shareholders, the decision to buyback must be based on the book value of the company not on the market price adjusted for the earnings.