From the general practice and as a market tool, a Share Buyback Scheme is activated into action when a public company or its Board of Directors :

1. believes that the fair or intrinsic value of the company's own shares are trading grossly below the prevailing market price.
2. ​has a huge pile of cash. Buying back the company's own shares will increase the earning, dividend yield, NTA and etc of the company if those shares that were purchased from the open market are later cancelled.
3. needs to maintain a certain level of market price due to the covenance on financial derivatives that were issued and are presently in circulation.
4. major shareholders' financial obligation with financial institutions (eg banks and IBs) in their borrowing in the form of margin or shares trading facility are breaching or nearing the Forced Sellout threshold and they are short of cash. Activating the Share Buyback Scheme will help bringing up or putting a floor to the sliding shares price. However, this may be a criminal act as by using the public company's monies to support or bringing up the shares price is akin to using the company's monies to ward off forced selling on their personal shares which were pledged to the financial institutions. 

​Heveaboard has on yesterday 11/2/2016 announced through Bursa Malaysia that it has purchased 60,000 of its own shares at prices ranging between RM1.23 and RM 1.28 a share. This must be the first time it is buying back its own shares. 

I believe the Board of Directors made the decision to activate the Shares Buyback Scheme for the very first time after witnessing the big crash in HEVEA shares price from the all-time high of RM1.79 a share on 6/1/2016 to yesterday's lowest price of RM1.23, a steep loss of RM0.56 or 31.2% a share within a month. And the downward spiral continued today to RM1.12. That worked out to be a loss of RM0.67 or 37.4% todate.

On the other hand, there were a long list of warrant conversions for HEVEA shares, the latest being 1,900,000 warrants conversion to HEVEA mother shares on 4/2/2016. As per the Listing Prospectus and according to the profile of HEVEA-WB therein, the conversion ratio will be on a 1:1 basis, ie one HEVEA-WB for one HEVEA mother share by tendering the HEVEA-WB together with a cash of RM0.25 to the company.

This raised an interesting subject as to why Heveaboard invoked the Shares Buyback Scheme at this time.

Warrants conversion will increase the supply of HEVEA mother shares, whilst the Shares Buyback Scheme will decrease the supply of HEVEA mother shares as it becomes treasury share. Of course, the company can always resell these treasury shares at a later stage when the shares price increased. However, profit made from these shares trading cannot be a regular source as the company's revenue nor can it be used as one, for it will defeat the idea of listing the company in the first place.

Based on Heveaboard purchase of the 60,000 shares yesterday, it will cost the company a gross purchase amount of minimum RM73,800.00 (assuming it bought at the minimum purchase price of RM1.23 a share). With this 60,000 shares bought in as treasury shares, the overall supply of HEVEA issued shares has effectively reduced by 60,000 shares.

As meantioned above, any investor can tender a HEVEA-WB in exchange for a HEVEA mother share with the enclosure of a cash of RM0.25. Effectively, Heveaboard will issue an additional HEVEA mother share for every 25 sen that it received.

That said, the RM73,800.00 that Heveaboard paid for the 60,000 HEVEA shares bought from the open market, can be taken as through the issuance of 295,200 new HEVEA mother shares (ie RM73,800.00 divided by every 25 sen that Heveaboard received from the warrant conversion).

To put simply then, Heveaboard paid RM73,800.00 to get 60,000 HEVEA shares from the open market, but issued 295,200 new HEVEA shares into the open market for the same amount of RM73,800.00. What cow's sense is this?

If the intention of the Board of Directors or the top management of Heveaboard invoking the Shares Buyback Scheme is to stabilise HEVEA shares price, then such moronic market action buying back its own shares has not only defeated the primary objective but aggravated the situation knowing fully well that there have been a litany of warrants conversion over the past months.

Let's find out the real reason why the Board of Directors or the top management of Heveaboard Berhad fumbled on this in my next article on Monday.

12.2.2016