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QuestionsCategory: Financials QuadrantWhat is the effect of capital repayment?
LOK CHEE CONG asked 2 years ago

Hi Victor,
May I know what is the effect of capital repayment to the shareholder?
I do google it, but not really sure though. For example, if I use RM100 to buy 100 unit of the stock, now the company repay capital RM50 to me, so now I still owning 100 unit of stock but only worth RM50? Will the stock price go down after capital repayment?
 
Recently Uchi Technologies exercise the capital repayment to the shareholder, then the ROE is increasing from 20% to 40%, is that a good sign? I am not sure of the effect of this exercise.
 
Thanks.
 

3 Answers
Chor Loo answered 2 years ago

Hi all, 
Just sharing my understanding. Let me know if there’s any misconception.
For capital reduction, technically speaking, it should reduce the share price by similar amount. But there’s also a market perception issue…eg. future similar payout, improved dividend yield etc…the price correction may then be lesser.
With reduced capital base, ROE should improve (assuming returns stable n lower base). Other factors to consider could be the use of moderate borrowings or share buyback program.  
Higher ROE is always a good thing. 
For Uchi, perhaps other factors to consider are the following:
– Management seems to have no wish to grow the company further (else Money can be for acquisition)
– If trend continues (net cash n growing), likely candidate for privatisation.
– being a technology company, whether continuous investment is made to keep ahead of competition.
Regards
Chor Loo
 
 

Victor Chng replied 2 years ago

Good Job Chor Loo. Keep it up :)

LOK CHEE CONG replied 2 years ago

Thanks for your explanation Chor Loo.

Chor Loo replied 2 years ago

Most welcome.

Victor Chng answered 2 years ago

Hi Chee Cong, 
 
As what Chor Loo had explained after the capital reduction most of the time the share price will reduce based on the dividend amount. 
 
The method is just a way of capital allocation which means that the management think it is better to return money back to shareholder then to keep it or like what Chor Loo had mentioned management may not wish to grow their business already. 

LOK CHEE CONG replied 2 years ago

Thanks Victor.

Victor Chng answered 2 years ago

Hi Chee Cong, 
 
Just in case you are shareholder of Uchi, do take note that they have a customer concentration risk. You can find more detail in our article under point number 3.
 
https://fifthperson.com/2019-uchi-technologies-agm/

LOK CHEE CONG replied 2 years ago

I had read about it. Thanks for reminding Victor.

Victor Chng replied 2 years ago

welcome :)