Is anyone else feeling concerned about the $300 million share buy back?
@vontrader has raised some valid points re the buy back;
Buy back increases DMP's long term borrowings from $313 M to $613 M
Buy back is buying back stock at a PE of 30 times
Why buy now when growth is slowing to 20%
The buy back represents 250%+ of the current net profit of DMP
Given the CEO's comments and his potential conflict of interest with the buy back, I thought I would do my own calculations to confirm his claim that the buy back will increase earnings per share.
Column 1
Column 2
Column 3
1
NPAT (a)
118,500,000.00
2
Buyback Proceeds (b)
300,000,000.00
3
Buy Back Price (assumed) (c)
$ 42.50
4
Issued Shares - pre buy back (d)
88,870,000.00
5
EPS - pre buy back (e)
$ 1.333
(a divided by d)
6
Shares Bought Back (f)
7,058,823.53
(b divided by c)
7
Issued Shares - post buy back (g)
81,811,176.47
(d minus f)
8
Company borrowing rate (assumed) (h)
5%
9
Additional Interest to Company (i)
15,000,000.00
(b multiplied by h)
10
Adjusted NPAT - post buy back (j)
103,500,000.00
(a minus i)
11
EPS - post buy back (k)
$ 1.265
(j divivided by g)
12
Reduction in EPS
5%
(e divided by k)
Conclusion - Earnings Per Share falls from $1.333 (pre buy back) to $1.265 (post buy back) - a 5% reduction in EPS.
In trying to understand Don Meij's claim that the buy back increases EPS, I thought perhaps I am not using the correct NPAT (current year's NPAT) and perhaps management's calculations were based on next year's NPAT which is expected to grow by 20%. So I do the same calculation above but use NPAT of $142.2 M (20% higher), but EPS still falls from $1.60 to $1.555 - a 3% reduction in EPS.
Column 1
Column 2
Column 3
Column 4
1
NPAT (a)
142,200,000.00
(a increased by 20%)
2
Buyback Proceeds (b)
300,000,000.00
3
Buy Back Price (assumed) (c)
$ 42.50
4
Issued Shares - pre buy back (d)
88,870,000.00
5
EPS - pre buy back (e)
$ 1.600
(a divided by d)
6
Shares Bought Back (f)
7,058,823.53
(b divided by c)
7
Issued Shares - post buy back (g)
81,811,176.47
(d minus f)
8
Company borrowing rate (assumed) (h)
5%
9
Additional Interest to Company (i)
15,000,000.00
(b multiplied by h)
10
Adjusted NPAT - post buy back (j)
127,200,000.00
(a minus i)
11
EPS - post buy back (k)
$ 1.555
(j divivided by g)
12
Reduction in EPS
3%
(e divided by k)
I am not an expert in calculating EPS. Can somebody please explain if my above analysis is wrong. Perhaps the NPAT to be used, is based on NPV of future profits (which is higher than next year's NPAT), and that is why the buy back is EPS positive?
Apparently, the buy back occurs during the same time that the CEO is forced to sell down a large amount of his DMP shares for purposes of his divorce settlement, which is convenient. Given this potential conflict of interest, I think the management need to explain to shareholders how they have managed this potential conflict of interest in respect of the buy back. I also see that the CEO is a board member of DMP.
1. Who raised the prospect of the buy back? The CEO or another board member?
2. How many shares in DMP is the CEO expected to sell and when is the timing of this expected to occur?
3. Was the CEO present and allowed to participate at the board meeting when the buy back was being discussed?
In my opinion, management have lost a lot of credibility in the past 6 months. I have sold my shareholding this morning on open trade ($44.40) and moving this money to top up my shareholding in another company with better management and a major shareholder who is very respectful of other shareholders (Andrew Forrest).
I intend to write to management and request that they provide clarity as to how the share buy back is EPS positive. Good luck to the remaining share holders, I hope management can lift their game, and the share price trend can be reversedmillio .
(20min delay)
