The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

AML Foods’ chief executive yesterday called for the Bahamas International Securities Exchange (BISX) to change the way it calculates daily stock prices, warning that a small 1,200 share trade can currently “wipe out” $1.5 million in value for his company’s investors.

Gavin Watchorn, explaining the rationale for the group’s decision to re-start its share buy-back initiative, told Tribune Business that the Bahamian capital markets’ chronic illiquidity left long-term investors exposed to “significant”, unwarranted swings in the value of their holdings.

Warning that this also created a risk that BISX-listed share prices could be “manipulated”, Mr Watchorn suggested that the exchange switch from its current system to one where prices were calculated using a “weighted average”.

This would be based on a formula using trading volumes spread over several days, and Mr Watchorn argued that it would eliminate price swings caused by small, retail sellers not trading on a company’s fundamentals and willing to accept any price.

“Unfortunately, in our capital markets the ability of a 1,000 share trade to adjust your share price 10 per cent can have a pretty significant impact on shareholder value,” Mr Watchorn told Tribune Business.

BISX’s current trading system restricts daily price movements to 10 per cent either side of the stock’s previous closing price - something that was itself implemented to prevent small retail trades from having a disproportionate impact on stock prices.

But, with 16 million shares in the market, Mr Watchorn said a 1,200 share trade that dropped AML Foods’ stock price by the maximum 10 per cent can “wipe out” $1.5 million of shareholder value.

“A lot of people have asked the regulators to move to a weighted average that is not moved by large volumes,” Mr Watchorn told Tribune Business.

“We’ve got to look at a different system where someone wanting to sell 1,200 shares because they are travelling to Miami for the weekend can wipe out millions in shareholder value.

“It also leaves share prices open to manipulation, because you can quite easily manipulate share prices up and down.”

AML Foods’ original share buy back programme saw it repurchase 292,104 shares, which it subsequently cancelled, prior to its January 31, 2014, end.

Following a May 20, 2014, Board meeting, the BISX-listed food retail and franchise group has moved to reinstate the programme, which is due to launch imminently, has no end date and limits it to repurchasing no more than 10 per cent of its outstanding shares.

“The logic behind it is that we think our share price is undervalued. Given the results and cash flow, we think our share price is undervalued, and at the same time we have an obligation to protect shareholders here for the long-term, and not have the subject to significant swings up and down because a small shareholder wants to liquidate 1,200 shares,” Mr Watchorn told Tribune Business.

“That’s why most people do share buy backs. It may not drive shareholder value, but it helps protect shareholder value.”

AML Foods is far from the first BISX-listed company to initiate a share buy back programme, with Cable Bahamas, Bahamas Waste and Bank of the Bahamas among the others.

In a market where there are relatively few buyers and sellers, such as the Bahamas, these buy backs create liquidity, help set a ‘floor’ under the stock price and indicate what the company believes is the true market value, and take out small retail investors willing to sell at any price.

The reduction in issued shares will also boost earnings per share (EPS) for the remaining investors, and AML Foods said in a statement: “The Board of Directors has deemed it prudent, given the illiquid state of the market, to buy back available ordinary shares and, thereby, provide increased earnings per share and maintain stable or increased selling prices for those shareholders needing to divest their portfolio.”

Dionisio D’Aguilar, AML Foods chairman, told Tribune Business that the share buy back was an attempt to remove the market “anomalies” identified by Mr Watchorn.

“We’re trying to keep the share price at a value where we think it reflects the true value of the company,” he said. “We think the value it’s at now is low, and you obviously don’t introduce a share buy back programme when it’s high.

“There are two ways to generate shareholder value; you generate profits and dividends, and a buy back drives up EPS because you’re reducing the number of shares.

“We want to provider our shareholders with a greater return, and the share price to reflect what we think is the true value of the company. If there is an overhang, we’ll seek to diminish the anomalies that occur from small sellers.”