Undervaluation fuels share buybacks among plantation stocks

A massive share buyback of more than RM1 billion by Top Glove Corp Bhd, the world’s largest rubber glove manufacturer, between September 2020 and February 2021 has cast a spotlight on the corporate exercise, which allows listed companies to support their share price during periods of sluggish market conditions or when their shares are undervalued or thinly traded. However, some investors would frown on companies putting cash to work through shares buyback when they believe it should be better utilised for business operations or expansion. A share buyback usually occurs when a company thinks the valuation of its shares is too low compared with its underlying value. The shares bought back will be retained in the form of treasury shares. The treasury shares will be sold in the market for a profit, distributed to shareholders via a dividend payment, or cancelled to reduce the shares outstanding.

In a recent research note, Hong Leong Investment Bank Research noted that IOI Corp and KLK are among its top picks, with target prices of RM4.67 and RM26.42 respectively. This is despite a “neutral” rating for the plantation industry as the near-term share price sentiment is likely to remain weak, owing to lingering environmental, social and corporate governance (ESG) concerns. It also highlights that there has been increased scrutiny on the palm oil sector over labour exploitation issues, especially among Malaysian planters. Fortress Capital Asset Management’s CEO Thomas Yong says that as the equity market softens, more companies are set to embark on share buyback exercises, and they may include property, construction and even manufacturing companies. Other notable share buybacks on the local bourse this year were by IJM Corp Bhd, MyEG Services Bhd and Datasonic Group Bhd, among others.