The Tribune

Sub-Deck:

* Exchange chief says nothing to back price calculation method change

* Study being done, but says share prices in line with fundamentals long-term

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas International Securities Exchange (BISX) has “consistently” found evidence to support its method for calculating share prices, with most companies’ stocks never moving more than 5 per cent from the previous day’s close.

Keith Davies, BISX’s chief executive, told Tribune Business that while he was currently analysing the share price movements of listed companies, these had always remained consistent with the long-term fundamentals underlying the stock.

Mr Davies was responding to Gavin Watchorn, AML Foods’ chief executive, who last week told Tribune Business that BISX needed to alter its methods for calculating daily share prices to prevent ‘irrational’ retail sellers from “wiping out” huge swathes of shareholder value.

Mr Watchorn, who warned that a 1,200 share trade could eliminate $1.5 million of shareholder value, called for BISX to switch to a weighted volume average method for stock price calculation - something Mr Davies said the stock exchange already does.

“The calculation of the price is already based on the volume-average weighted price,” the BISX chief executive told Tribune Business. “The BISX closing price is already done where the weighted average price and daily volume are taken into account.”

Mr Watchorn had called for a “weighted average” method that uses a formula linked to trading volumes spread over several days, arguing that it would eliminate price swings caused by small retail sellers not trading on a company’s fundamentals and willing to accept any price.

But BISX’s current trading system restricts daily price movements to 10 per cent either side of the stock’s previous closing price - something that was itself implemented to prevent small retail trades from having a disproportionate impact on stock prices.

Mr Davies described the ‘10 per cent’ rule as “a circuit breaker” that combined with the ‘weighted average’ price calculation method, preventing irrational daily stock price swings.

“Our analysis has shown that the stock prices of most companies on BISX, the vast majority of companies, their stock price tends to move less than 5 per cent up or down in any one day,” the BISX chief executive told Tribune Business.

“That’s actually the average consistent with stock exchanges around the world........ I’m doing an analysis right now of companies, their movements and determining what is happening in the market, and determining whether adjustment is needed.

“We’ve consistently found there’s never been a need to adjust. Over the long-term, price discovery occurs and there’s a level of pricing and sentiment in the market that takes place.”

AML Foods last week announced the reinstatement of its share buy back programme, in a bid to put a ‘floor’ under its stock price and send a signal it feels the market is undervaluing it.

The initiative is also designed to wipe out the ‘overhangs’ that frequently occur when sellers of a particular stock massively exceed willing buyers, and prevent small investors - willing to accept any price to exit - from depressing the share price.

“A lot of people have asked the regulators to move to a weighted average that is not moved by small volumes,” Mr Watchorn told Tribune Business.

“We’ve got to look at a different system where someone wanting to sell 1,200 shares because they are travelling to Miami for the weekend can wipe out millions in shareholder value.

“It also leaves share prices open to manipulation, because you can quite easily manipulate share prices up and down.”

One source, though, suggested the way AML Foods had distributed its 16 million in issued ordinary shares had left it more vulnerable than others to ‘distortions’ created by small retail sellers.

Unlike many BISX-listed companies, the food retail and franchise group does not have a single controlling shareholder or controlling group of like-minded investors, meaning there are many more retail investors holding small amounts of stock.

AML Foods’ share price has also slipped from a 52-week high of $2.10, achieved last July, to its current 52-week low of $1.64 - another factor likely influencing the share buy back re-start.

Mr Davies meanwhile, while acknowledging the Bahamian market’s liquidity woes, said most BISX-listed stocks ultimately gravitated towards long-term prices consistent with their earnings performance and underlying fudamentals.

“Our market is small but it works. I sympathise with Gavin, I understand what he’s saying, but there are more factors that go into it,” he added. “I intend to engage him and find out what his thoughts are.”

Apart from a company’s own individual performance, Mr Davies said other factors affecting share prices included the overall economy and willingness of institutional investors to participate in the capital markets.

He added that sudden changes in share prices were magnified more in the Bahamas because of the market’s relatively small size.

“The difficulty, given the size of the market, is that it shows up more in a small market like this,” Mr Davies told Tribune Business. “Our analysis has shown that over time the movement of prices is consistent with the market, and the securities in the market over the long-term.

“I understand that when you look at the market in small timeframes, you can always point to instances when prices are here or there. I totally agree that every company should be engaged with their shareholdersa, watching the share price and monitoring the markets.”

AML Foods is far from the first BISX-listed company to initiate a share buy back programme, with Cable Bahamas, Bahamas Waste and Bank of the Bahamas among the others.

In a market where there are relatively few buyers and sellers, such as the Bahamas, these buy backs create liquidity, help set a ‘floor’ under the stock price and indicate what the company believes is the true market value, and take out small retail investors willing to sell at any price.

AML Foods’ original share buy back programme saw it repurchase 292,104 shares, which it subsequently cancelled, prior to its January 31, 2014, end.

Following a May 20, 2014, Board meeting, the BISX-listed food retail and franchise group has moved to reinstate the programme, which is due to launch imminently, has no end date and limits it to repurchasing no more than 10 per cent of its outstanding shares.