EVS issued an update on its share buyback program, which was announced on October 24, 2018. The buyback was announced concurrent with the transparency notification detailing Evertz’ acquisition of a 3.1% equity interest in EVS.
The below table reviews the ownership situation of EVS as of October 25, 2018. Evertz issued the transparency notification because it passed the 3% ownership threshold. The next tier of notification is at 5.0%.
Source: EVS Investor Relations
Returning to the EVS buyback, between October 25, 2018 and November 1, 2018 EVS acquired 28,125 of its shares at an average price of €19.25 for a total €541,475. The purchases took place across six individual transactions, listed in the below table.
Source: EVS Investor Relations
The purchase activities are expected to continue. The share buyback program announced by EVS on October 24, 2018 is for a maximum of €10 million over a period of two years. The purchases are taking place in open market transactions (i.e. buying shares from active sellers). Daily purchases are then limited by the overall volume of transaction activity in EVS shares.
There are additional limitations on the timing and logistics of the buyback. EVS’s board of directors is acting under the authority granted in a December 2017 shareholder meeting. The shareholder authorization limits stock purchases to prices above 20% of the lowest stock price during the preceding 12 months (ahead of a purchase) and below 20% of the maximum price during the 20 days preceding a purchase.
For the upcoming trading session (November 6, 2018), EVS can then only repurchase its shares within the range of €12.74 – €24.72. EVS’s shares closed on the Euronext exchange at €20.1.
The intended effect of any share buyback is to increase the share price through both limiting the supply of shares and changing the future expectations of supply of shares. Since the combined announcement of the Evertz investment and the EVS buyback, EVS shares have appreciated by over 25%.
Evertz’ has made no public statements about its motivations or its expected next steps. On the EVS side, Chairman and interim CEO Pierre De Muelenaere offered some commentary in a brief interview with the Belgium business newspaper, L’Echo, on October 26, 2018. In response to the question ‘Do you fear a hostile takeover?’ Pierre indicated it is possible Evertz has intentions of additional investment past the current 3% level. (We are being careful to not quote Pierre directly since the interview is in French, and we would not want to introduce an inaccurate meaning based on a flawed translation).
While we can only guess at Evertz’ motivations, there is ample data available to investigate the timing of both the Evertz investment and now the EVS buyback. EVS indicated in its public statements that management and the board were already contemplating the buyback ahead of the EVS announcement.
Our chosen time frame is a six year time period beginning November 5, 2012 and concluding with today’s trading period (November 5, 2018). The choice of late 2012 is deliberate. Evertz announced its competitive replay solution, Dreamcatcher, at the 2012 NAB Show and subsequently demoed the solution at the 2012 IBC Show. Dreamcatcher began shipping in the first quarter of 2013. We are not attempting to suggest any causation between Dreamcatcher and EVS stock, but rather this is a good timeline for the investment contemplated – and ultimately made – by Evertz.
Below is a plot of the daily closing price of EVS shares over the aforementioned six-year period. We have highlighted the historical gap between the EVS stock price on each anniversary of November 5th versus the price of EVS’s stock prior to the announcement of Evertz equity position (€16.0 on October 24, 2018).
If you are going to purchase something (either to own or to profit), then the most advantageous time to purchase is when the asset is relatively less expensive. Put more succinctly: buy low. In the case of EVS, the stock was (and is) trading at a price substantially below its observed levels in the recent past.
The above chart compares the stock price versus historical levels. When considering the relative attractiveness of a stock price, it is always useful to evaluate the relative valuation. We have prepared the below graph of EVS’s price to earnings (P/E Ratio) level over the same time period. The P/E ratio measures a stock price relative to a company’s earnings per share. To better illustrate the trading levels (in relation to P/E), we have added a trend line for the average P/E ratio during the 11/5/2012 – 11/5/2018 timeframe.
Again, the same conclusion is reached when reviewing the P/E ratio of EVS over the preceding six year time frame. The low levels of October 2018 were almost half the valuation level of the average P/E ratio for the entire six-year period and also substantially below the peak valuation levels during the same time frame.
Of course, prior stock performance is no guarantee of future performance, but relative valuation levels is an important data point when considering an investment. The current lower pricing level of EVS stock is the justification (for the timing) used by the EVS team. “The recent fall of the share price of EVS has led the Board to consider a share buyback program” stated Pierre De Muelenaere in EVS’s buyout announcement. At the same time, the buyback is a vote of confidence in the business by the EVS team.
It is worth pointing out that EVS last bought back shares during June 2014 at an average price level of €36.8. If you believed €36.8 was an attractive price for the asset, you will tend to find €16.0 even more attractive. To complete the thought, the P/E ratio was around 17.0x at the time of the 2014 buyback.
Evertz’ position – as of October 25th – is worth an aggregate €8.5 million at today’s closing price of €20.1. There is no direct disclosure of the average price paid for its 424,936 shares of EVS. Here then begins a series of assumptions. We know Evertz acquired ‘marketable securities’ during the three months ending July 31, 2018 at a cost of CAD 10.8M. The account treatment of the securities marks the asset to the prevailing market price at the balance sheet date of July 31, 2018 (the balance was zero at the start of the quarter). This resulted in a slight gain. Assuming 100% of the expenditure by Evertz during its fiscal first quarter was on EVS stock, then applying the knowns of EVS’s stock price and the CAD / EUR exchange rate yields an average price paid of approximately €19.7 (remember we are working from a BIG assumption). Adding to this assumption, a further assumption of Evertz acquiring the balance of the shares at average EVS share pricing between July 31, 2018 and October 24, 2018 yields a cumulative average price of approximately €19.6 for its position.
ASSUMING those ASSUMPTIONS Evertz has already benefited from a slight gain in its EVS position equivalent to roughly €230,500 or CAD $345,000. That is not a particularly material figure to a CAD $1 billion+ market cap company, which suggests this is going to be an interesting market development to continue to follow.
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