Ann: Changes relating to buy-back - Appendix 3D, page-2

In my opinion, share buy-backs make sense for a company that has a relatively strong balance sheet, low corporate debt, and if it is in a cyclical sector. There will be times when FRI, which has fairly low fixed running costs, has funds available due to the ratio of settlements to new project starts being biased in favour of the former. If there is no obvious purposes to which excess funds can be deployed, then for reasons X (explained later), there is little purpose to keep a stash handy to take advantage of a cyclical improvement later.

If the spare cash is paid as dividends, that sets up an expectation of future dividend flows, and disappointing that expectation would engender shareholder discontent. By buying back shares, and cancelling them, the DPS and EPS can be kept steady, even though the total dividend payout and the NPAT decline for a while. The stock market likes steadiness, so in the long-term a steady track record should help the SP. In a cyclical industry, buy-backs do not signify that the company has reached the plateauing stage, or the decline, of its economic life cycle.

Reasons X are as follows:

• FRI's financial ability substantially lies in its relationship with potential JV partners and Tier One banks. This is because most projects are undertaken within JVs, where the JV partners supply the land, and Tier One lenders supply much of the capital required for construction. Consequently, FRI does not need a large reserve of funds to proceed with projects – it's the demand for the end product that is the significant factor that determines if projects proceed, or not.
• In boom times the SP tends to rise, and cash inflows tend to lag outflows. Consequently, the matter of buy-backs tends not to be an issue.
• In cyclical troughs, optimal construction capacity may call for more projects to proceed. For one, FRI's ability to allow Hanssen to keep its construction teams occupied is part of the quid pro quo that allows FRI to keep construction costs low via favourable pricing from Hanssen. Also FRI's cash flow may actually improve as new construction starts slow relative to property settlements, so in the absence of sufficient JV projects proceding, FRI could look at each potential FRI-only project, and compare it as an investment relative to buy-backs. On balance, in cyclical troughs we can expect some FRI-only projects, and some share buy-backs.