BSE operation challenged following BHL sale
Prominent economist Dr Justin Robinson has raised a number of questions regarding trading on the Barbados Stock Exchange (BSE), following the recent acquisition of over $52 million worth of BHL shares by St Lucia registered company SLU Beverages Limited (SLU).
Last month SLU, which is owned by Companhia de Bebidas Das Américas (AmBev), purchased13,170,728 BHL shares traded at $4 per share, paying some $52,682,912.00, and making that company the single largest shareholder in the Barbados-based drinks manufacturing company with approximately 40 per cent of the shares.
BHL is the parent company of Banks Breweries, Pine Hill Dairy, Barbados Bottling Company Limited and Banks Distribution Limited.
However, in a statement to Barbados TODAY this afternoon, Dr Robinson questioned the rate at which the shares were sold, stating that on the day of the purchase BHL’s share price on the stock exchange was $2.49 per share.
“AmBev therefore paid a substantial premium of about 60 per cent over and above the most recent stock market price on the Barbados Stock Market. However, BHL’s Balance Sheet for the nine months ended May 31 2015, valued the shares at BDS$4.81 each. The Balance Sheet reports shareholders’ equity of $311,812,000, and with approximately 64,853,760 shares outstanding, the book value per share was approximately $4.81,” the Dean of the Faculty of Social Sciences at the University of the West Indies (UWI) Cave Hill Campus stated.
“Therefore, on September 22, 2015 BHL’s balance sheet valued the shares at $4.81 each, the Barbados stock market valued the shares at $2.49 each, while AmBev was willing to pay $4.00 per share. Is AmBev really paying a premium or getting a steal of a deal? They are paying 60 per cent more than the stock market valuation, but paying a 20 per cent discount on the book value of the company,” he explained.
He said the balance sheet value or what is termed the “book value per share” is typically viewed as “a backward looking measure based on the book value of the companies’ assets and liabilities.”
“It does not account for the market value of assets and liabilities or future earnings potential. The stock market valuation is supposed to do that and reflect the book value plus future growth potential. When you sell a company you not only sell the company as is but you also sell the future growth potential, and investors normally expect to be compensated for such, and buyers typically pay a premium,” explained Dr Robinson.
He said the stock market price of $2.49 on the surface compared to a book value of $4.81 suggested that investors on the BSE viewed the future growth potential of BHL as being negative. He pointed out that companies’ shares being sold at prices below their book values was extremely rare on most stock markets, adding that such cases were typically associated with companies in financial distress and facing bleak futures.
“I doubt investors see a bleak future for BHL and negative growth potential. I think the low market value is due to the infrequent level of trading on the Barbados Stock Exchange,” he said, stressing that stock prices only changed when trades of certain volumes were made.
He said the infrequent trading meant that stock prices were not being regularly updated to reflect the current book value and future growth potential of companies.
“I am sure we have lots of informed investors in Barbados and the Caribbean; what we appear to lack is sufficient trading, or a group of what economists call ‘marginal investors’. Marginal investors are investors who are willing to buy and sell shares regularly at prices based on their estimates of the future direction of a stock price. Marginal investors are typically institutional investors such as mutual funds, insurance companies and other professional investors.
“Why with so many informed and sophisticated institutional investors is there such infrequent trading on the Barbados Stock Exchange? Is this lack of marginal investors leaving companies on the Barbados Stock Exchange seriously undervalued? If this is so, investors are unable to reap the full benefits of their investment and companies are vulnerable to cheap takeovers. Why should I buy shares when market prices only approach realistic levels when there is a takeover bid? Why should local companies be sold at relatively low prices because of consistent undervaluation on the local stock exchange? Oh for some marginal investors!” (MM)