Atlan- a case against share buyback

Background

Atlan Holdings Berhad ('Atlan') is involved in trading duty free goods and non-dutiable merchandise; property & investment; provision of hospitality management; and, the manufacturing and marketing exhaust systems and other automotive component parts.

Recent Financial Results

Atlan's latest financial results is 3Q2010 (or, QE30/11/2009). It reported a net profit of RM59.3 million on a turnover of RM03 million. EPS for 9-mth ended 30/11/2009 was 26.3 sen, while NTA per share was at M1.39 as at 30/11/2009.

Financial Position

As at 30/11/2009, Atlan's financial position can be described as be reasonable. Its liquidity position is satisfactory with current ratio at 1.1 times, while its gearing ratio is high with borrowings to shareholders' funds of 0.9 time.

Aggressive Share Buyback

As at 30/11/2009, the amount expended for purchase of Treasury Shares was RM52 million. The latest filing with Bursa dated Feb 25, 2010 revealed that the number of Treasury shares held was 23.5 million units (equivalent to 9.26% of the issued share capital of 253.65 million units of RM1.00 each).

The share buyback program started on October 2007. From that date until this week, there were only 26 weeks where the weekly volume exceeded 400,000 units. The bulk of the active trading happened within the last 6 months. If we add up the volume for these 26 weeks, we can see that the volume traded was 27.3 million. The weekly volume of the remaining 100 weeks, which varies from 100,000 to 400,000 units, is mostly less than 100,000 units. Assuming that all these remaining 100 weeks average volume was 100,000 units, then the total volume traded for the quiet weeks are 10 million units. Based on the above, Atlan's share buyback program accounts for 63% of the volume traded.

From the chart, we can see that the share buyback program could have cushioned the decline of this stock from August 2008 to February 2009 and could have pushed up the share price thereafter. While it is arguable that share buyback may be used to support the price of a stock due to severe downturn, the use of such program to drive up the price of a stock is highly undesirable.

Technical Outlook

Atlan's chart is like an artist's canvass. You can see a downward price channel, a symmetrical triangle and an expanding triangle. This week, the stock has just broken above the expanding triangle as well as the strong horizontal resistance of RM3.40. With these upside breakouts, the stock's outlook is decidedly bullish. But, beware...


Chart: Atlan's weekly chart as at Mar 4, 2010_10.50am (Source: Quickcharts)

Conclusion

A stock making new high due to aggressive share buyback cannot sustain. While you can justify this practice to your shareholders, you cannot justify this to your bankers. They would be wondering why should they stand by this company, with high gearing, while the directors are busily rewarding the shareholders. Sooner or later, the buying will cease. Avoid Atlan!