Sunday, March 11, 2012

Pelikan: A case of wrong buyback decision?

I have in the past written on preferring Jobstreet to do more buyback with the cash it has.

However, I am a sceptic over Pelikan's buyback. Just look at the overview of some of its recent financial numbers.

Pelikan has repurchased not less than 10.43 million of its own stocks and in the process spent more than RM10 million. Part of the shares it bought back will be distributed to shareholders in the form of share dividend from its latest proposal of 1 for 50 stocks owned.

Excess cash?
Buyback should normally be good for investors especially if the management feels that its stock is undervalued. However, what I would like to see is that buyback should only be done when the company has excess cash. Based on table above, does Pelikan has excess cash? I do not think so. Cash against borrowings ratio is 1:4.6. This is hardly a situation of spare cash to be used for buyback.

Is the controlling shareholder trying to support the share price?
One of the things I hate the most is that the controlling shareholder in trying to control the floor of its shares uses the company's cash to do so. Why some shareholders do this?

In this case, Loo Hooi Keat being the President / CEO (also owns shares through PBS Office Supplies) and substantial shareholder may be using the company's cash to do buyback for the support of his own shares.

If you look at the record of depositors above, you will notice a substantial amount of the controlling Director's (Loo Hooi Keat) shares are pledged. I have a suspicion that the director has to support the share price so that his shares are not forced sold. (Note that financiers normally have the right to force sell shares once it goes above certain gearing ratio)

When the shares pledged is under tremendous pressure because of price drop, I commonly see the substantial shareholder whose shares are pledged do not act right as they see to protecting themselves first than their shareholders. Look at the chart below, this is the case where potentially Loo Hooi Keat's pledged shares are under pressure.

Rights issue in 2010, why buyback now?
Another question I have is that Pelikan just raised around RM185 million via rights issue in February 2010. A company normally issues rights to raise more funds for its operations. That's what Pelikan did! I do not like to see the company using the money it raised to do buyback especially it just raised them not too long ago.

(Shareholders should look at the process of rights issue as management's request to shareholders to participate in raising more funds for the company's growth.)

Actions like this, if what I observe is true although sometimes may not be against the law is what you question whether management is into protecting the shareholders. This is because I hate to see once a potentially good company being used as a tool for personal gain / self-protection. It is against minority shareholders who in this case may not have a strong self defence. I also feel for Lembaga Tabung Haji as they are the largest shareholder but one who is purely an investor.

Serious Investing!

1 comment:

K C said...

Just read. Excellent writeup.