Sri Lanka DIMO price drops after share buy-back

July 04, 2008 (LBO) – The share price of Diesel and Motor Engineering (DIMO) dropped below 100 rupees Friday amidst investor concern that last month’s share buyback at 160 rupees would push up debt and trim profits. The overall market ended lower, continuing the weak trend as investors believe high inflation and interest rates could erode corporate profitability, brokers said.

The All Share Price Index fell 0.64 percent (15.52 points) to 2,404.54 while the more liquid Milanka Price Index dropped 0.76 percent (22.25 points) to 2,891.52.

Market turnover was 259 million rupees.

DIMO fell 2.49 percent or 2.50 rupees to 98 rupees Friday with 5,600 shares changing hands.

Brokers and analysts said investors were concerned that last month’s share buy-back would dilute earnings per share, despite the number of shares in issue falling after the buy-back

Investors were worried that the share buy-back would increase the already indebted DIMO’s debt and interest costs, especially at a time when sales of its expensive, high-performance vehicles were being affected by soaring fuel costs.

The firm sells the Mercedes, Chrysler, Jeep and TATA brands.

Analysts said DIMO’s earning per share before the share buy-back was 17 rupees but are forecasting that EPS may drop to about 14 rupees if its interest burden increased by 80 million rupees as a result of funding the buy-back through debt.

Analysts said cash reserves of 51 million rupees at the last balance sheet date indicated that the share buy-back may require the firm to borrow more than 400 million rupees.

DIMO’s share price had fluctuated below 100 rupees for most of the past 12 months but rose steeply towards the end of May and even hit 130 last month when the share buy-back at 160 rupees took place, according to stock exchange data.

The buy-back took place on June 30 with 3.4 million shares going at 160 rupees.

The DIMO share was traded on the stock exchange between 108 and 135 on the day of the transaction.

DIMO said in a stock exchange filing that it was spending 544 million rupees to buyout the 28 percent stake held by Hayleys Limited using provisions in the island’s new company law that permits share buy-backs.

DIMO said that the board of directors had made the decision following a request from shareholders at its annual general meeting on June 20.

Under a share buy-back a company uses its own assets to buyout shareholders in a transaction that reduces net assets of the company but can increase earnings per share and price of remaining shares if the company can maintain profitability.

But when a company is not cash-rich such a move could also increase its debts and depress future earnings, especially in a high interest rate environment, analysts said.

Analyst say in other markets share buybacks are usually offered to all shareholders as a way of giving liquidity without diluting their stakes in the investee firm.