Buyback: a buy signal or what?

22:43, Nov 19 2012
Rob Fyfe
TOP DOG: Investors will follow outgoing Air NZ chief executive Rob Fyfe's new role on the Icebreaker board with interest.

Keen investors can develop strong feelings about a company's managers, and it is rarely love at first sight.

Like dogs in the park, there is a lot of circling, barking and sniffing to be done before a manager gets the lick of approval.

However, once licked, a manager will be keenly followed from one park to the next, on the grounds that he or she may have a nose for success.

One such top dog will probably be Rob Fyfe, who steps down as Air New Zealand chief executive at the end of this year.

It's not clear how he intends to fill his time after the summer hols but investors' attention may follow him to specialist clothing maker Icebreaker, where Fyfe took a board seat in June this year.

As an Icebreaker fan - the gear is top-notch, if expensive - I think the company would make a fine addition to the stock exchange and Fyfe has good credentials to help it through the next phase of growth.


At Air NZ, he has steered the company through a great deal of turbulence and leaves it in good shape. In particular, its involvement in Australia looks to have growing significance.

After buying 15 per cent of what was then Virgin Blue in January last year, Air NZ's interest has grown to about 18.5-19.9 per cent in Virgin Australia, depending how you count it.

At the same time, Virgin Australia has developed strong partnerships with Etihad and Singapore Airlines, who now own 10 per cent each, as well as buying into smaller outfits Skywest and Tiger.

As a result, Air NZ looks to be in a much stronger position to compete with its big rival Qantas than it was at the time of its abortive merger attempt in 2004.

Announcing its full year result on August 30, chairman John Palmer left investors in no doubt that an improvement was coming.

"We have come through some tough times and the worst impacts of natural disasters like the Christchurch earthquake and tsunami in Japan are behind us, which means growth opportunities are no longer suppressed," he said, before announcing pre-tax earnings could double in the coming year.

The share price reacted accordingly, gaining 21 per cent to $1.09 within a couple of days.

It wasn't enough though. A month later, with the shares at $1.10, Air NZ's board announced a share buyback because "it believes that the current share price does not fairly reflect the underlying value of Air New Zealand's shares".

Cue another jump to around $1.25. Last week the company was buying at $1.25, so it seems the price is yet to reach acceptable levels.

Since announcing the buyback Air NZ has bought about 3.2 million shares at around $1.25 a share - about $4m on its own stock. The plan allows it to buy up to 33 million, or 3 per cent of its overall shares, so a great deal more could yet be spent.

Over the same period it has issued about 671,000 shares to its own executives through a long-term incentive pay scheme.

According to some studies of share buybacks, investors should pay attention to the price signal the company is trying to send - although there are some caveats.

For example, paying out cash increases a company's risk profile because it reduces the proportion of low risk assets on the balance sheet. It's also far from clear whether buybacks make any difference to future earnings per share, as is often claimed.

Meanwhile, a company's message that its shares are undervalued can be weakened if its own executives are selling shares into the buyback at the same time.

At Air NZ, several executives appear to have done so - NZX notices show three of them profited by $408,411 from selling shares since early October.

Does this matter? Maybe not - the shares are part of executive pay and they can use the money as they see fit.

In addition, the executive long-term incentive scheme is designed to reward senior staff only if the share price exceeds a benchmark related to the NZX All Gross Index and the Dow Jones World Airline Total Return Index.

Coincidentally, the buyback is likely to make the executive option scheme more rewarding. The annual report showed there were 17.9 million executive options capable of being exercised as of June, at a weighted average exercise price of 91c.

Fyfe's options didn't vest until September this year so no details were given in the annual report on their exercise prices, but with 19 million options to his name there could be some money to be made if the share price performs.

Still, Air NZ's top brass can justifiably say they've done better than others in tough times for aviation. In the last year, for example, helped by the buyback, Air NZ's shares have gained 21 per cent while Qantas shares have lost 25 per cent. The NYSE Global Airline Index, meanwhile, gained 18 per cent (the Dow World Airline Total Return Index is not publicly available).

Air NZ's good relative performance is naturally a team effort, but as team leader Fyfe has played a big part. Icebreaker's future looks promising.

Two weeks ago I said I was applying for stock in the Fonterra Shareholders Fund. Unfortunately high demand meant I couldn't buy a viable amount, so I will have to watch from the sidelines.

Tim Hunter is deputy editor of the Fairfax Business Bureau.

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