Every now and then, I like to keep track of companies which have been buying back their own shares. That’s because share buybacks may be a sign that a company’s stock is undervalued. Peter Lynch, the legendary manager of the U.S.-based Fidelity Magellan Fund, also included buybacks as one of the criterion in his investing checklist. To Lynch, it’s a good sign if a company or its insiders are buying shares. Of course, management may be tasking the company to buy back shares for other reasons other than its stock being undervalued (some other reasons would be to offset dilution)….
Every now and then, I like to keep track of companies which have been buying back their own shares. That’s because share buybacks may be a sign that a company’s stock is undervalued.
Peter Lynch, the legendary manager of the U.S.-based Fidelity Magellan Fund, also included buybacks as one of the criterion in his investing checklist. To Lynch, it’s a good sign if a company or its insiders are buying shares.
Of course, management may be tasking the company to buy back shares for other reasons other than its stock being undervalued (some other reasons would be to offset dilution). And even if management feels that the stock’s undervalued, they may well be wrong in their assessment too. But, companies that have been buying back their own shares are still worth digging further into.
With these in mind, let’s take a look at two companies that have been engaged in buybacks these past few weeks:
1. Lum Chang Holdings Limited (SGX: L19)
Lum Chang has a history of more than 70 years having been founded as a construction company in the 1940s. While the firm’s still involved with the construction business today, it has expanded over the years to deal with property development and investments as well.
Lum Chang’s construction arm, Lum Chang Building Contractors (LCBC), is one of Singapore’s leading construction outfits. Its projects are in many different sectors including commercial, retail, and leisure. LCBC is also the “first local contractor to successfully clinch a Design & Build contract for an MRT project independently.”
Lum Chang’s real estate development business has seen it work on projects including Emerald Garden in Singapore’s District 1 and the prestigious Kuala Lumpur Golf and Country Club (KLGCC) in Malaysia. The company’s real estate investment portfolio include two properties in Singapore and two properties in London.
The table below shows Lum Chang’s share buybacks in the month of September:
Source: Lum Chang’s filings
As you can tell from the table above, Lum Chang has bought back a total of 1.495 million shares of itself from the open market for more than $568,000. For some perspective, the company currently has 383.3 million issued shares outstanding (excluding treasury shares).
Based on Lum Chang’s closing price of S$0.385 last Friday, the stock’s valued at just 5 times its trailing earnings and has a dividend yield of 5.3% thanks to an annual dividend of S$0.02 per share for the fiscal year ended 30 June 2015.
2. PACC Offshore Services Holdings Ltd (SGX: U6C)
Headquartered in Singapore, PACC Offshore Services Holdings (or “POSH” in short) is the largest Asia-based international operator of offshore support vessels. The company currently has a fleet of over 100 offshore vessels that service many different segments within the oil & gas value chain.
POSH has four business divisions and their names can give us a good idea of the types of services that the company’s fleet of offshore vessels provide. The divisions are namely Offshore Supply Vessels, Transportation & Installation, Offshore Accommodation, and Harbour Services & Emergency Response.
POSH has been buying back its own shares in earnest starting from 11 August 2015, with the buybacks happening in every week since. To date, the company has bought back 4.886 million shares of itself; that works out to be around 0.27% of the firm’s current total share count of 1.815 billion (excluding treasury shares).
POSH’s shares closed last Friday at S$0.315, down nearly three-quarters from its listing price of S$1.15 (POSH had its initial public offering only in April 2014). At S$0.315, POSH sports a trailing price-to-earnings (PE) of 39 as a result of depressed earnings. Investors may want to take note of how the low price of oil (a barrel of oil was at more than US$100 per barrel in mid-2014; it’s at less than US$50 now) may affect POSH’s business going forward.
A Fool’s take
Companies that are engaged in share buybacks are just a good starting point for investors looking for opportunites. It’s the investors’ job to dig further and determine for themselves whether a company’s shares are cheap or not.
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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 contributor James Yeo doesn’t own shares in any companies mentioned.