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

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.