As Adris published last week that they are ready for another big share buyback programme, which ends today, we are bringing you an overview of what share buybacks are, their potential consequences and how much of the total traded volume they accounted for in 2018 in the Croatian and Slovenian market.
Key reasons for a buyback:
- used to return cash back to its shareholders.
- the company wants to award their employees and management through stock rewards and option
- The management deems that the stock is undervalued
- The management wants to boost the company’s financial ratios (such as EPS)
- To prevent other shareholders from acquiring more shares (or a takeover)
Percentage of Share Buybacks in Total Traded Volume in 2018 (%)
Source: InterCapital Research
Share Buybacks in the Region
When observing the past couple of years in the Croatian and Slovenian market, one can notice that not many companies were performing share buybacks, at least not on a significant level. In these markets, companies still prefer paying out dividends over buybacks, as a way to return cash back to their shareholders. As visible on the graph above, in 2018, ZABA had the highest percentage of share buybacks in total traded volume, of the observed companies (but note that ZABA’s liquidity is generally lower than many other shown companies). When looking at the Slovenian Market in 2018, Krka was the only company to perform share buybacks.
Contrary to the regional market, in the United States, share buybacks are preferred to dividends. When observing the S&P 500 companies since 2000, they have always returned more to their shareholders through buybacks than through dividends, with the exception of the year 2009. In 2018, more than 60% of the cash returned by S&P 500 companies was done in the form of buybacks.
Turning our attention to Adris, the company published that they are ready for another big share buyback programme. They are targeting up to 1m ordinary shares ADRSRA (10.40% of their total number) and up to 200,000 preferred share ADRSPA (2.95% of their total number). Bids were open from 18 February until today.
Note that in 2018, preferred Adris’ buyback accounted for 40% of the total traded volume.
Shares Bought Back in 2018 Compared to Total Shares Issued (%)
Source: InterCapital Research
What is a share buyback?
A share buyback refers to the repurchasing of the shares by the company that originally issued them. A buyback occurs when the company, which initially issued the shares, pays their shareholders a market value for the shares and in return gains back the shares that were previously dispersed among investors. Just like dividends, a share buyback can be used to return cash back to its shareholders.
Whether buybacks have a positive effect on the company’s performance has been
The Good
When companies are run reasonably, the cash return decision comes as the final step in the process, meaning that the cash that they return to shareholders, through dividends or buybacks, should reflect a residual cash flow. Such buybacks do not have a negative impact on the company, as they are just another way of returning cash to their shareholders, without impacting “good” investments (that make more than their hurdle rate).
Furthermore, buybacks can be helpful in a low liquidity environment. In such an environment, the investors bear the risk of not being able to sell their shares at a given point, as there are not many buyers at every point to buy the shares (at least at the market price). Buybacks can help reduce that risk as they add additional bids. Next, note that share buyback can be more beneficial from a tax perspective for certain investors. Besides that, share buyback is usually a strong signal from the management that the share is undervalued.
The Bad
One negative side of share buybacks is that companies may use them for short term boosts, neglecting the long-term effect. As mentioned above, one of the reasons share buybacks are performed is to improve the company’s financial ratios. When a company performs a buyback, they reduce the number of shares outstanding in the market. This results in an increase in earnings per share, which would (under the assumption that the P/E ratio stays constant) hike the share price up.
The Ugly
Another way buybacks can be negative for the company is when they become the main objective of the company. When this happens, companies generate as much cash as possible to conclude more share buybacks. This means that the companies would, in order to generate cash, be prone to taking more debt, cutting employee wages and not taking on good investment opportunities. In the long run, such behavior could not only adversely affect the company, but also the economy as a whole. Note that such behavior has not been seen in any of the regional
In 2018 INA observed an increase in sales revenue of 20%, increase in EBITDA of 3% and a decrease in net income of 4%.
In 2018, INA recorded a 22% increase YoY in operating income amounting to HRK 23.2bn. Of that, sales revenue amounted to HRK 22.3bn, which represents an increase of 20%. Such an increase could be attributed to higher crude oil and product prices and increased total sales volume on domestic and B&H market.
Note that Upstream, as the main cash generator of the company, benefited from the increased Brent price as well as growth projects.
INA Operating Revenue (2015 – 2018) (HRK m)
When observing operating expenses, they also increased by 22%, amounting to HRK 21.6bn. Of that, costs of raw materials and consumables accounted for 55.6%, amounting to HRK 12bn (+33%). The increase could be explained with higher processing and higher crude prices.
Furthermore, cost of goods sold increased by 23%, amounting to HRK 3.6bn, resulting from different sales structure.
In 2018, INA’s EBITDA (as reported by the company) amounted to HRK 3.5bn, which is an increase of 3%. In 2018, INA’s financial income decreased by HRK 398m (-88%) and amounted to HRK 53m. Consequently, their net financial result went from HRK 146m in 2017 to HRK -167m. To be specific, net foreign exchange loss reached HRK 38m in 2018, while in 2017 net foreign exchange gain reached HRK 223m. Further, interest payable amounted to HRK 68m and interest received to HRK 3m in 2018, while in 2017 they amounted to HRK 57m and HRK 4m, respectively.
As a result, INA’s their EBT decreased by 3% (even though the company recorded an increase in EBITDA).
In 2018, INA reported a net income of HRK 1.2bn, which represents a 4% decrease.
INA EBITDA & Net Income (2015 – 2018) (HRK m)
*EBITDA as reported by the company
INA’s CAPEX spending increased by 30%, majority of which in Refining, mostly focused on Propane-Propylene Splitter project in Rijeka as well as other refining development projects. In 2019, the management expects further company investments alongside with the comprehensive INA Downstream 2023 New Course program implementation.
In 2018, ZABA observed a decrease of 1.6% in net interest and fees, an increase of 4.7% in net fee and commission income and a 95.5% increase in net income.
As ZABA published their 2018 preliminary results, we are bringing you some key takes from the report. According to it, ZABA recorded operating revenues of HRK 5.6bn, which represents an
Furthermore, net fee and commission income amounted to HRK 1.4bn, which is an increase of 4.7%. Such an increase could be explained by a rise in card fees, transaction fees and other fees.
When observing operating expenses, they increased by 2.4%, amounting to HRK 2.6bn. Next, ZABA observed a decrease in value adjustments and provisions of 57.1%, amounting to HRK 646m in 2018. Such a decrease could be attributed to ZABA recording very high provisions in 2017 (+65% compared to 2016), and also a decrease in share of bad credit.
This consequently led to an increase in operating profit of 87.1%, amounting to HRK 2.3bn, while net income amounted to HRK 2bn, representing an increase of 95.5%.
ZABA Performance (2015 – 2018) (HRK m)
In 2018, the L/D ratio has continued its declining trend and currently amounts to 79%, as deposits have continued to increase (+11% YoY). Loans, on the other hand, have also increased 6% in 2018, but when observing a longer period, they remain flattish.
Loans & Deposits (2015 – 2018) (HRK m)
L/D Ratio (2015 – 2018) (%)
In 2018, Petrokemija reported a decrease in operating revenue of 6%, a decrease in EBITDA of 124% and a decrease in net income of 95%.
As Petrokemija published their 2018 preliminary results, we are bringing you some key takes from the report. According to it, in 2018, the company reported operating revenue of HRK 1.87bn, which represents a decrease of 6% YoY. In 2018, Petrokemija recorded a decrease in fertilizer sales of 11.9%, coupled with a decrease in mineral fertilizer sales of 6.6%. Note that the production of mineral fertilizer amounted to 1,034 thousand tons, which is a 13.2% decrease.
Petrokemija Operating Revenue (2015 – 2018) (HRK m)
When observing their operating expenses, they remained the same at HRK 2.2bn.
In 2018, Petrokemija observed a negative EBITDA of HRK -210.5m, which is a decrease of 124%. Such a high decrease could be attributed to above-mentioned decrease in revenues (HRK -118.4m).
Meanwhile, net income amounted to HRK -473.5m, which represents a decrease of 95%. In Q4, the company observed a net loss of HRK -130.2m. Such a high net loss could be attributed to both an unfavorable market condition coupled with HRK 28.8m of value adjustments and provisions for future operating risk occurred in the previous period.
Petrokemija EBITDA & Net Income (2015 – 2018) (HRK m)