This morning, I want to highlight the share buyback programme by Lewis Group as a wonderful example of how effective this strategy can be. Investors place a lot of importance on capital allocation by listed companies, especially businesses that are operating in tricky industries. When a company is generating cash but trading at a stubbornly low valuation, then share buybacks become appealing.
The concept of a share buyback can be confusing. Essentially, a company is investing in itself by repurchasing shares from shareholders. With fewer shares in issue, the value of the company is spread across a smaller number of shares and thus the net asset value per share increases. Theoretically, the share price should increase as well.
This is only true when a company is buying back shares at a low price. Like in any investment, buying at a cheap price is good! Since 2017, furniture group Lewis has bought back 26 million shares at an average price of R31.82 per share. With the share price now trading at around R50, this was clearly a good deal for the company.
The impact of an extensive buyback programme is that headline earnings per share (HEPS) is accelerated. Lewis grew revenue by 7.9% in the year ended March 2022 and HEPS grew by a far more impressive 37.7%. If there are fewer shares doing the rounds, modest overall earnings growth becomes juicy when measured per share.
If there's one company out there that understands balance sheets and capital allocation, it's Barloworld. The group did a fantastic job during the pandemic of navigating an economic disaster and emerging with an even stronger balance sheet than before. Now facing great uncertainty in Russia and a share price that has nosedived this year, the group announced a buyback programme for up to 10% of shares in issue. Barloworld is taking advantage of a low share price and is betting on th e situation in Russia improving at some stage. It's risky, but they know more about the situation than any of us do. Notably, the CEO of Barloworld has also bought shares. This news gave Barloworld a 5.4% boost yesterday.
Here's a quick update on the rand from Wichard Cilliers (Head of Market Risk at TreasuryONE):
"The rand was muted for most of yesterday but had a wobbly in the afternoon, trading above R15.80 for a while. The rand is trading slightly under pressure as USD weakness has slowed. We are still at the mercy of the world's biggest currency and will monitor developments on that front."
In a TreasuryONE blog yesterday, I noted that the hawkish tone of the Fed is being offset by disappointing new US home sales and aggressive rate hikes in other countries. The markets are ultimately a balancing act! To help you understand that balance, speak to the team at TreasuryONE about market risk solutions.
Yesterday was perhaps the busiest day I've ever seen on the JSE for company news and earnings. It took many hours to digest the information and write Ghost Bites for you. You'll need a strong coffee this morning to read everything. Believe me, I've saved you a LOT of time.
The flurry of SENS announcements was a good reminder of how interconnected many JSE companies are. For example, Johnny Copelyn's Hosken Consolidated Investments (HCI) is listed on the JSE and also controls Deneb Investments, eMedia Holdings and Frontier Transport Holdings, all of which released results or earnings updates yesterday. Just when I thought I was done w ith HCI, it popped up as a common thread in the Tsogo deal.
Speaking of Tsogo, you'll need to read that one carefully. I'm so glad that Tsogo Sun Hotels is changing its name to Southern Sun Limited, so it will be easier to distinguish it from Tsogo Sun Gaming.
Given the extent of the information this morning, I decided to hold off on the feature articles until Monday. I would prefer you to read Ghost Bites carefully this morning and learn about all these companies.
I would also like you to engage with the DealMakers content this morning, a Friday feature in Ghost Mail. DealMakers focuses on corporate actions rather than earnings, tracking the mergers, acquisitions, capital raises and other transactions that shape our market. I was pleased to see an article on capital allocation in the context of mergers and acquisitions, written by Sandra du Toit from EY Africa.
There's a fresh episode of Magic Markets for you today as well. With Petri Redelinghuys from Herenya Capital Advisors, we discussed techniques for surviving bear markets. In this environment, risk management is critical. We also talked about uranium, the broader resources index and the financials index as well. Give it a listen at this link.
Finally, there's some exciting news coming from Chris Gilmour, a name you'll recognise as a weekly contr ibutor to Ghost Mail. With a focus on analysing consumer and industrial stocks, Chris will soon be launching a platform called Salmour Research. Small- and mid-cap stocks will be analysed for mainly retail investors, while larger stocks will be covered for institutional investors. Of course, many institutions dabble in the smaller companies on the JSE where liquidity allows for this. Keep an eye out for further announcements.
Have a terrific weekend!
