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CROWN PAINTS:  THE FIRST COMPANY TO TAKE ADVANTAGE OF THE BUYBACK TRANSACTION LAW AT THE NAIROBI STOCK EXCHANGE

For a very long time, NSE had banned share buybacks over fears that it could be used to manipulate prices of listed stock. After the law changed, allowing the buyback transaction, Crown Paints has become the first company to take advantage on it. This has seen the company’s stock gain 12.2 percent to trade at Kshs. 64.

A buyback (also known as a repurchase) is the purchase by a company of its outstanding shares. Effectively, this reduces the number of its shares on the open market. Companies buy back shares for a number of reasons, such as to increase the value of the ones still available by reducing their supply or eliminating any threats by shareholders who may be looking for a controlling stake. However, in this case, Crown Paints share price is one of the most expensive on the NSE as measured by its price to equity ratio of 34.5 times. This has made investors weary as they watch the company’s execution of the transaction and valuation of its stock to get an idea of the company’s intentions.

The company wishes to buy 10.6 million ordinary shares through CMA (Capital Markets Authority) from existing shareholders on a voluntary basis.  This will leave it with 60.5 million units trading at the NSE. This move will cost Crown Paints over Kshs. 600 million but will raise future dividend yields by reducing the market float.

The only issue that has brought debate on the bold move is that a small float of tradable shares combined with a buyback programme is purely designed to squeeze the share price higher and way above reasonable valuation levels.

Crown Paints is ready to buy its shares at any price set by the market.

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