Buybacks are when companies purchase their own shares in the market, which is often seen as a positive signal for investors. Pakistan stock market is witnessing a sudden influx of buybacks from notable sponsors, likely driven by record-low valuations and high profitability over the past two years. The trend is expected to continue, and we believe it could provide a floor to stock prices. What does this mean, and which industries will be the most affected? Continue reading to learn more.
What They Do: Sponsor Buybacks Signal Confidence
Buybacks are a way for companies to show confidence in their outlook and signal to investors that they believe their shares are undervalued. When companies buy back shares, it reduces the number of shares outstanding, which increases earnings per share and improves metrics like return on equity. This move can also improve stock prices, as demand for shares increases while the supply decreases.
Record-Low Multiples Drive Buybacks
Despite sharp earnings growth for the majority of the companies, their price performance has remained relatively muted. The KSE100 is trading at record-low multiples of 3.8x and PB of 0.6x, making it an attractive opportunity for buybacks. Other companies may also be potential candidates for buybacks, particularly in the banking and cement industries. To find out more about how different industries are performing, follow our Linkedin.
Who Are the Potential Buyback Candidates?
The banking industry is one of the most likely candidates for a buyback announcement due to its record-high profitability and very low multiples. The average PB of the banking industry is 0.70x, making it an attractive target for buybacks.
Additionally, the cement industry may announce buybacks instead of investing in new expansions given that their stocks are trading at 60-70% discount to their replacement costs. This means that buying back shares may be a more cost-effective way to boost shareholder value. If you want to learn more about the latest changes in the stock market, visit our YouTube.
Conclusion
The buyback phenomenon in Pakistan’s stock exchange is likely driven by record-low valuations amidst high profitability over the past two years. This move signals management confidence in the company’s outlook and will likely provide a floor to stock prices. The banking and cement industries are among the most likely candidates for buybacks due to their low multiples and high profitability. As the trend continues, it will be interesting to see how it impacts the stock market and investor sentiment in the coming months. To learn more about how you can tackle these changes, follow our Facebook.
