SCA Property Group buy-back: How will it work out?
SCA Property Group (ASX code: SCP) announced on February 14, 2014, its intention to undertake an on-market buy-back of up to 5% of its shares at a price of up to its current net tangible asset value (NTA) which is currently $1.59 per share. The buy-back will be funded from cash and drawing down on debt facilities. The current share price is $1.555 which is up 3.5 cents from the price prior to the announcement.
Companies buy-back issued capital as part of a capital management strategy. This is appealing when the stock is trading at a discount to NTA as it is investing at a discount.
A buy-back of shares can increase earnings per share, NTA per share and return on equity. A buy-back will reduce the equity on issue and increase the gearing level. This can be positive when borrowing costs are low. SCA Property Group’s earnings yield is 7.05% per annum and its borrowing rate is 4.8% thereby creating a positive outcome from gearing for the company.
Table one (below) shows how SCA Property Group’s earnings per share (EPS), NTA per share and return on equity (ROE) following a buy-back of shares. It is assumed that the full 5% of shares are bought back at the close price on 17 February 2014.
Table one – SCA Property Group buy-back
| Pre buy-back | Post buy-back |
Share price | $ 1.520* | $ 1.555** |
Total net assets | $ 1,031m | $ 981m |
Shares on issue | 648m | 616m |
Reported earnings | $ 43m | $ 43m |
ROE | 4.2% | 4.4% |
NTA (per share) | $1.590 | $1.592 |
EPS | 6.7% | 7.1% |
Source: IRESS, Atchison Consultants
* Close price on February 13, 2014
** Close price on February 17, 2014
As shown in table one the return on equity would increase from 4.2% to 4.4%, NTA per share would increase from $1.59 to $1.592 and earnings per share would increase from 6.7% to 7.1% following the buy-back.
Paul Easton is a senior analyst at Atchison Consultants.