• Mark Watson-Mitchell

I have a question for you concerning your portfolio constituents

What do D4T4, Tremor, Vertu Motors, Forterra, Somero Enterprises, Foxtons, Inland Homes, Speedy Hire, MP Evans and Driver Group have in common?


Yes, they are all quoted companies.


Yes, they are all companies that I have previously profiled in these columns.


Yes, they all have various investment attractions.


Yes, they have all seen their shares falling back in price, but so too has the market eased generally.


Here is a clue


They have all been doing it this month.


Have you guessed yet?


The above companies are all involved in ‘buying back’ their shares.


Is that a good or bad thing for any companies in your portfolio doing the same?


Will you gain from such processes getting underway?


Why do companies buy back their shares?


There are many reasons why companies undergo such procedures.


As a shareholder in any company that does will you gain?


Will the Board gain?


Or will the company’s broker gain?


And do that company’s market makers benefit from those dealings?


The process


After a company’s Board and its advisers have devised and agreed that a share buyback programme is appropriate, it will be put to shareholders at a Meeting to approve.


Generally, a figure in value is defined for the spend, or it may be up to a fixed per centage of the company’s equity.


The reasons


There can be many reasons why the Board considers a share buyback programme.


One of the main reasons is that the company’s shares are undervalued by the market.


The general thesis is that buying back its own equity helps to reduce the number of shares in issue and by doing so that helps the price to improve.


The consolidation of equity, albeit fractionally, does help to increase earnings per share.


Some companies cancel the shares that have been repurchased, while other may build up a treasury of their own equity for further issue for funding, reward or acquisition programmes.


Another reason can be that the group has built up significant cash balances for which it has no immediate use.


Dead cash can be very costly for a company’s balance sheet.


A real ‘no-no’ is that a company uses borrowed funds to buy back its equity.


I think that if the company’s management cannot use such cash balances appropriately on behalf of furthering the business, then a cash payback to shareholders would be right.


But it rarely happens like that.


A balance sheet has to be strong enough to forge ahead despite a chunk of its cash balances being defrayed to buy-in its own stock.


Not all are making profits


But not all companies handling buybacks are profit-making, which is probably why their shares have been falling back and being ignored by the market.


I know one such company in the above list that is loss-making, has borrowings, and where ‘insiders’ bought more shares before the buyback programme got underway.


The shares went up about 15% at one time before easing back to almost a third lower today.


That particular company has a broker that is weak in its corporate finance side and despite its shares being below value, the broker has not been wheeling it around banging the drum to its clients.


A ‘closed circuit’ of supply


Company brokers earn from buybacks and so too do their market-making colleagues – being buyers in a market in the knowledge that you have someone to take you out is guaranteed business.


Too many cases are apparent when buybacks are in process where the shareholders never get a ‘look-in’ because the market already has its supply of stock from ‘friends’ helping to complete each day’s order. Especially from friendly institutional holders.

In such cases the little man does not see the offer.


A sign of corporate weakness?


The real question on a share buyback centres around any possible weakness in the company itself.


Is it desperately trying to ‘shore-up’ its overall value, as well as its balance sheet?


If borrowings increase to handle such exercises, then, in my view, that company should come severely under the spotlight.


However – now the real reason for this article


On Friday morning an excellent example of how to treat shareholders was declared by Town Centre Securities (LON:TOWN).


With assets of over £360m, the Leeds-based group is a property investor, car park and hotel operator.


It creates mixed use developments close to transport hubs in major cities across the UK.


It has a strong commitment to sustainable development and has a reputation for quality and innovation.


I profiled the group in November last year when its shares were trading at 130p, fixing a price aim of 165p, they touched 177p in January this year.


Last Thursday it published a Year End Trading Update for the period to end June. It was quite impressive, and analysts have subsequently estimated its shares to have been trading on a 52% discount to the group’s net tangible assets.


The company also revealed that its rent collection has been robust, with 99.5% collected.

Furthermore, the company stated that it had agreed to sell its investment stake in YourParkingSpace for £20.7m, of which cash of £9.6m was immediate and the balance over the next two years or so.


That equity stake stands in the group’s balance sheet at £1.47m.


That stake sale was apart from a number of other disposals that the group has planned over the coming months.


Those moves will all help to strengthen the group’s balance sheet.


So, Friday morning’s announcement is even more impressive, and in my opinion, shows exactly how companies wishing to do a share buyback, should handle such a process on behalf of its shareholders.


A Tender Offer


No not ‘a sweetheart play’ but instead a cracking plus for the group’s shareholders, if they wish to take advantage.


The company announced that it intends to return up to £7.40m to its shareholders by way of a Tender Offer for cash.


Up to 4.0m shares are looking to be purchased under the Tender Offer, representing approximately 7.61% of its equity, at a price of 185p per share.


That was a 31.6% premium to the average market price over the previous 30 business days.


It was also a 19.4% premium to the group’s closing price on Thursday night.


Now that is how a company should ‘play right’ with its shareholders, allowing large and small to take benefit.


It is an example that should be followed and encouraged.


It is also a swift process and not one that drags on in the market, while a company proceeds to complete the programme authority that its shareholders have granted.


What is more, such a Tender Offer, gives the market a very clear indication of just how strong a company really is – paying a cash premium to all of its participating shareholders, not just buying shares from ‘friends’ of its broker and market maker.


Brokers View


Analyst Chris Spearing at Liberum Capital, the group’s joint broker, rates the shares of Town Centre Securities as a ‘Buy’ looking for 210p.


His estimates for the last year to end June are for sales of £25.6m (£20.0m), pre-tax profits of £4.1m (£0.3m), with earnings of 7.8p (0.6p) and paying a dividend of 6.4p (3.5p) per share.


For the current year to end June 2023 he sees £27.1m sales, £4.9m profits, 9.3p earnings and 8.3p in dividend per share.


My View


After the Tender Offer was announced the group’s shares closed up 11% on Friday night at 172.5p

.

This group has a lot of development work on hand in Manchester and Leeds, with a gross value several times its current £90m market capitalisation.


Its shares are a solid hold.


Well done Town Centre Securities – more than full marks!


(Profile 17.11.21 @ 130p set a Target Price of 165p*)


(Asterisks denote that Target Prices have been achieved since Profile publication)

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