TRG Outperforms Stocks on Expectation of Dividends and Share Buyback: Report

The Resource Group International Limited Pakistan (TRG Pakistan) has continued to outperform stocks at the benchmark KSE-100 index on the expectation of dividends, buyback of shares, and a depreciating rupee.

According to a report by Topline Securities, TRG Pakistan has railed 27 percent since September 01, 2022, increasing from Rs. 90 per share to Rs. 114 per share as of September 21, 2022. This is happening at a time when Pakistani and global markets are all under significant pressure,

The average daily traded volume and value have also increased by 86 percent and 100 percent to 11.4 million shares and Rs. 1.2 billion respectively in the last 21 days. Compared to the previous month’s volume and value of 6.1mn shares and Rs. 0.6 billion, respectively. It has been observed that a rally is also led by buying in a deliverable future market (TRG-Sep).

Increasing leverage position in TRG: The report stated that TRG’s future open interest position in the deliverable future surged to Rs. 4.4 billion as of September 21, 2022 (32 percent of total market future open interest position) compared to Rs. 2 billion (19 percent of the total future open interest position on September 1, 2022). This shows that the recent run-up in TRG was also led by buying in the futures contract.

Short Sell: Short sell position in TRG has also increased from 1.5 million shares as of September 1, 2022, to around 7 million shares as of September 21, 2022, as per PSX data. Similarly, the short sell value in TRG increased from Rs. 135 million on September 1, 2022, to Rs. 767 million as of September 21, 2022. This shows an increased short-sell position after a strong price rally in the stock as investors would have shorted after the price rally, added the report.

Related Party buying: Topline’s report added that there are rumors of related party buying that have also led to increased prices and activity in the name. JS Infocom, recently notified the acquisition of 432,158 shares on September 2, 2022, taking its total holding to 12.75 percent of the total issued voting shares of TRG. Other than that no major notification has been made regarding any buying of TRG shares by major sponsors/directors.

There has been gossip about buying by substantial shareholders/directors/executives of the company but no notification on the same has been made on PSX. As per rule 5.6.1. (d) of PSX rule book, buying of shares by the director, CEO, or a substantial shareholder of the company must be notified to the exchange.

Greentree Holding buying & dividend expectations: The report further added that Greentree holding (SPV setup by TRG) has thus far acquired a 21 percent stake of TRG with an estimated amount of around US$50-60 million out of the total of US$120 million allocated post-E-Telequote sale. If it acquires an additional 9 percent stake in TRG that will take its total holding in TRG to 30 percent.

To note, the acquisition of more than 30 percent stake requires a Tender Offer as per the Listed Companies Substantial Acquisition of Voting Shares and Takeover Regulation 2017. As per market noise after reaching 30 percent, outstanding funds left from proceeds of US$120 million of E-Telequote could be used for potential dividend payment. This translates into Rs. 16-21 per share if the company decides to distribute it as a dividend, said a report.

To recall, the purpose of setting up the Greentree Holdings SPV was to acquire TRG Pakistan shares from the market in order to utilize the proceeds from the sale of its stake in E-Telequote and to maximize the value & capital return to its shareholders, the report added.

TRG is scheduled to announce its financial results for FY22 on September 29, 2022, at 6 PM Pakistan time. Financial results and any announcement regarding the future outlook of the company will be keenly followed.

Buy Back of Share: Topline’s report further stated, “With excess funds available, the possibility of Buyback/Treasury shares is another possibility. If management believes that the current stock price does not reflect its true potential value then the company can announce a buyback.”

So far companies, like Lucky Cement (LUCK), Maple Leaf Cement (MLCF), and Netsol Technologies (NETSOL) have announced buyback after amendment in buyback regulations in Dec 2021 through amendment in companies act 2017 where the purchase of shares can only be made through the securities exchange and not through a tender offer.

The Fall in PKR also resulting in increased liquidity available for deployment: “Pakistan’s currency has come under severe pressure recently as it has come down by 14 percent since June 2022 and is down 26 percent in 2022 to date against US$. This has made buying TRG Pakistan relatively cheaper as the funds available for deployment in TRG Pakistan or available for dividends have increased in PKR terms. When the SPV started buying TRG Pakistan shares in Feb 2022, PKR was at around 175 against US$ and now it is around 240 against US$,” stated the report.

The report further added that, “As per available information, no major development has taken place on the fundamental front which could be perceived as a major trigger for stock movement. There is no official update from the management on the potential listing of Affiniti, the Artificial Intelligence arm of the company.”

Valuations of global tech companies have been down recently and it will be interesting to see when TRG opts for IPO as Affiniti’s current valuations may not be as attractive as it was previously eyed. C3. and Plantir, which were used as comparable companies for Affiniti valuations now trade at a Price to Sales ratio of 5.5x and 9.0x respectively versus valuation in excess of 20x a year back.

“Even, if we assume, Price to Sales ratio of 7x, the valuation of Affiniti comes to around US$1.6 billion which is much lower than initially anticipated,” said Topline Securities in its report.

Affiniti is the Artificial Intelligence Arm of TRG International (TRGIL). It discovers and predicts patterns of interpersonal behavior to optimally pair customers with call center agents.

IBEX is another related company of TRG and is quoted on the Nasdaq exchange. The share price of IBEX has also come down 4 percent since September 1, 2022. Its price movement is reflected in the books of TRG Pakistan through Profit & Loss Statement in terms of mark-to-market gains/losses.

TRG Pakistan indirectly holds Affiniti and IBEX through TRGIL and its SPV.

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