grahamsdisciple wrote:VituVingiSana wrote:grahamsdisciple wrote:As a shareholder, my biggest issue with the stock is that its over-capitalised. They need some debt to balance out the capital structure. An action management could take is to raise 1.5 billion through a corporate bond and buy half of its shareholding back. This will double EPS and ROE significantly.
As a Ben Graham disciple, you should be ashamed of thinking this! There's nothing like 'over-capitalized' considering the current cost of borrowing. Why borrow at 25% when they can invest excess cash at 23%?
If they have excess cash, they can distribute it as a dividend but asking Carbacid to borrow at 25% (or higher) is crazy.
BTW, stock buybacks are not allowed in Kenya. Even if there was a stock buyback, it should only be done when the price is lower than the intrinsic value.
First of all stock buy backs
are about to be re-introduced Wake me up when the long-time-in-limbo Companies Bill becomes the Law. Until it is law it will not matter.(http://www.theeastafrican.co.ke/business/Will-share-buybacks-save-Kenyan-companies--stock-/-/2560/2691460/-/13b7n2l/-/index.html).
Secondly, no body said anything about borrowing now, but with the amount of free cash flow Carbacid has,
they can borrow at 12% in bad times and maybe lower in good times. The new 'normal' is higher. Banks have been issuing bonds at 12+% when things looked good post-Eurobond. GoK issued tax-free IFBs at 11.75%. If Carbacid was to borrow at 12% then the earnings yield should exceed 12% on a consistent basis. What the current earnings yield of Carbacid?
Third,
you are the kind of people who read the summary of a book instead of reading the whole book.
Ad hominem attack, eh? I'd invite you to read Security Analysis particularly part III when he focuses on equity analysis. There are plenty of times when he says that
sometimes debt is good if its properly managed Yes, sometimes, if managed properly and yes, he even alludes to a company being over-capitalised. I maintain that the company is over-capitalised.
They have ROE of around 22% and net margins of 50% if you take last 5-year average so how is borrowing at 14-15% not prudent??? Sigh. I have read Security Analysis. The ROE is irrelevant unless the price = ROE. What the Earnings Yield? Is it 22%?
A firm's ROE is irrelevant when the PRICE is much higher than the NAV/share. The NAV = Equity = Shareholders' Funds.
The net margin of 50% is bolstered by income from deposits/bonds/bills. Nevertheless, I want to hear you out on how you came to a NET MARGIN (also define what the NM is) of 50%. Furthermore, please use actual numbers so we compare apples to apples.
History is history. Until we go back to long-term rates of 12-15% [you said 12% then you said 14-15%] we should look at 25% to be prudent. What Graham called the Margin of Error.
What I said [& I am happy to refer to Security Analysis] is what Warren Buffett calls 'excess cash' which is yielding less by remaining with the firm than it would for the shareholders.
If shareholders can get 22% (less 3.3% w/holding tax) from CBK then it makes little sense for Carbacid to buy 22% bonds, pay 6.6% tax on the interest then shareholders pay 5% on the dividend.
Buying back shares using debt is Financial Engineering. It may may sense in a STABLE market but not when things are volatile. Carbacid shares trade at a substantial premium to NAV.
Greedy when others are fearful. Very fearful when others are greedy - to paraphrase Warren Buffett