These 3 Blue Chips Are Buying Back Their Own Shares – And They Look Cheap

Earlier today, my colleague Stanley Lim had written about a list of six companies that had been buying back their own stock in recent weeks.

As Stanley mentioned in his piece, stock buybacks can happen for a number of reasons and one of them is that management thinks their stock is cheap.

I wanted to see which of the blue chips in the group are carrying low valuation figures in relation to their own historical numbers as that can be a good place to start with for bargain hunting.

The six companies in Stanley’s list are DBS Group Holdings Ltd (SGX: D05), Keppel Corporation Limited (SGX: BN4), Wilmar International Limited (SGX: F34), SembCorp Industries Limited (SGX: U96), Singapore Airlines Ltd (SGX: C6L), and Silverlake Axis Ltd (SGX: 5CP).

Of them, the first five are actually blue chips as they’re all part of the 30 constituents of Singapore’s market benchmark, the Straits Times Index (SGX: ^STI).

Given that DBS is a bank – and Singapore’s largest bank by asset size no less – a suitable valuation metric would be the price-to-book (PB) ratio. As you can see in Chart 1 immediately below, the PB ratio DBS had as of yesterday’s market close is not anywhere near the lows that were seen since the start of 2010.

Chart 1 - DBS's price-to-book ratio (PB ratio) from start of 2010 to 9 Sep 2015

Source: S&P Capital IQ

Coming to the other four blue chips, a valuation measure based on their price-to-earnings (PE) ratio can be useful. Using that metric, Keppel Corp, Wilmar International, and SembCorp Industries (the trio are abbreviated as KC, WI, and SCI, respectively) are near or at their cheapest they’ve ever been over the same time period as we saw with DBS. You can see these in Chart 2 below.

Chart 2 - Keppel Corp, Wilmar, and SembCorp Industries' price-to-earnings (PE) ratios from start of 2010 to 9 Sep 2015

Source: S&P Capital IQ

Having a PE ratio that’s low by historical standards can be a good starting point for an investor who’s out looking for investing opportunities. It helps too when the company’s buying back its own stock as it may be a sign of management’s faith in the future of the business.

But before any investing decision is made, we have to be aware of the fact that it’s a stock’s business performance which ultimately matters. A cheap share that has seen buybacks happen can still become an expensive mistake if its underlying business falters in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.