WH Group, the world’s largest pork producer, surged to a 14-month-high after the company offered as much as HK$14.95 billion (US$1.93 billion) to buy back 13 per cent of its capital at a premium as the stock underperformed the market in 2020 and this year.
The stock rose 11 per cent to an intraday high of HK$7.54 on Monday, its highest level since April 2020, before closing at HK$7.33 on Monday. Hong Kong’s benchmark Hang Seng Index fell 0.5 per cent on the same day.
The share price rose after the firm offered to pay HK$7.80 each to cancel 1.92 billion of its outstanding shares in the buyback to “enhance shareholder value”, according to an exchange filing on Sunday. BofA Securities and Morgan Stanley are the agents conducting the buyback on its behalf, it added.
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The cash offer represents a 17.3 per cent premium to its price on June 1, and 12.6 per cent above its June 2 level before the stock was halted pending the announcement, according to Bloomberg data.
Wan Long, the 81-year-old chairman and chief executive of WH Group, said the offer provides an opportunity for the shareholders either to cash in their investments or to enjoy a higher return on equity per share if they opt to retain their holdings.
“The offer provides the shareholders a mechanism which allows them to decide upon their preferred level of investment in the company and allows the shareholders who do not wish to exit from their investments in the company to enjoy the benefits of enhanced shareholder value,” Wan said in the exchange filing.
While the stock has risen 4.7 per cent this year through Friday, it trailed the Hang Seng Index’s 6.2 per cent advance. The stock slumped 19.3 per cent in 2020, compared with the index’s 3.4 per cent loss.
WH Group has been under pressure in the last two years as the Chinese meat processor struggles with rising pig costs following the outbreak of Africa swine fever. The disease, first reported in China in August 2018, caused pork prices to surge in 2019 and 2020. The bulk of WH’s revenue is derived from processed pork, while pig production accounted for just 3.9 per cent of sales in 2019.
The group has operations in both mainland China and the US, running pig farms and selling pork and other meat product. It reported a 35.6 per cent drop in net profit to US$1.09 billion last year, the filing on Sunday said.
After the buyback, the company will cancel the issued shares. The controlling shareholder, Heroic Zones, and related parties will see their holdings increase from about 34.14 per cent to 39.24 per cent. It will request for a waiver from having to buy the rest of the company.
The buyback plan would need shareholders’ approval in a meeting to be scheduled, the company said.
Analysts are positive about the buyback plan.
“The share buyback will enhance the earning per shares of the company. Investors have already rushed to buy the stock on Monday,” said Louis Tse Ming-kwong, managing director of Wealthy Securities, a local brokerage firm.
The cancellation of shares bought back is likely to increase earning per share by 15 per cent, or 9 to 10 per cent in near term after interest expenses, according to Kerith Chen, equity analyst of Jefferies Hong Kong in a research note on Monday. The buyback plan can hand back retained earnings to shareholders, he said.
WH Group said it would finance the buyback plan by internal resources and bank credits. Chen said the company had a debt to equity ratio of 27 per cent at the end of 2020, implying it has much room to increase debt.
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