Eagers Automotive shares rally on $240m share buy-back

Eagers Automotive (ASX: APE) briefly rallied 11% in early trade after announcing its intention to carry out an on-market share buy-back of up to 10% of its issue capital, worth approximately $240m.

The company said the buy-back will commence on 30 June 2022 and is expected to occur progressively within 12 months from commencement, subject to market conditions. 

What’s good about a buy-back?

The buy-back “reflects the Board’s prudent focus on active capital management and is testament to the company’s strong balance sheet," Eagers said in this mornings announcement.

Eagers Automotive shares are down more than -30% since the beginning of April, in part due to volatile market conditions and also due to an earnings downgrade on 18 May.

The company said it expects a reduction in the number of new vehicles delivered to customers in the first-half of 2022, downgrading half-year FY22 to the range of $183m to $189m compared to $214.8m a year ago.

Lower vehicle deliveries was primarily due to “multiple global events” including on-going semiconductor shortages, the Russia-Ukraine conflict and Chinese covid lockdowns.

Looking to the "unclear" timing of vehicle deliveries to customers, Eagers Automotive said it is well positioned to "deliver a strong second half performance, subject to supply constraints easing."

The buy-back could be viewed as a vote of confidence from the board in the face of near-term earnings volatility due to supply-chain related issues. After all, why would a company declare a share buy-back if it didn't have the financial capacity to do so?

What does a buy-back do?

Companies sometimes conduct share buy-backs because they genuinely feel their shares are undervalued.

In the same way investors might buy the dip, the company can opt to reign in some of its outstanding shares, essentially investing in themselves.

A reduction in outstanding shares will also concentrate financial metrics, including earnings and dividends per share.

Eagers Automotive share price chart