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. Soup Restaurant Group Limited (SGX: 5KI)
Soup Restaurant, as its name might suggest, runs restaurants for the bulk of its business. The company currently has 19 restaurant outlets in Singapore and Malaysia and three franchised outlets in Indonesia.
Lovers of Chinese cuisine might recognise the company’s epnonymous Soup Restaurant outlets that serve dishes like the Samsui Ginger Chicken (the restaurant’s signature dish) and herbal soups.
On 15 March 2016, Soup Restaurant had bought 139,500 shares of itself for an average price of S$0.1874 each.
Soup Restaurant closed today at a price of S$0.20. At that price, the company’s valued at 58 times trailing earnings. The firm’s full-year results, for the 12 months ended 31 December 2015, was released in late February. The F&B outfit experienced a 3.7% increase in revenue in 2014 with its profit up by 6.1% to S$0.967 million.
In the earnings release, Soup Restaurant commented that it’s in the process of restructuring its business partly to improve its profitability. Time will tell if this succeeds. The past few years have been a pretty troubling time for the company with its profit from continuing operations falling from S$4.92 million in 2010 to just S$0.29 million in 2012, according to data from S&P Global Market Intelligence.
2. Sembcorp Marine Ltd (SGX: S51)
SembCorp Marine, which is majority-owned by conglomerate SembCorp Industries Limited (SGX: U96), provides integrated offshore and marine engineering solutions and is a prominent global player in the business of building oil rigs.
Over the past two weeks, Sembcorp Marine had bought back a total of 800,000 shares of itself on three occasions (15, 16, and 18 March) for a sum of S$1.37 million.
Sembcorp Marine’s shares last exchanged hands today at a price of $1.68. At that price, the firm has a trailing price-to-book (PB) ratio of 1.4. The company had a tough year in 2015 when it racked up S$271 million in losses attributable to shareholders as a result of provisions made. The provisions in turn had happened because of headwinds in the oil & gas industry – as you may have heard, the price of oil has today collapsed by over half from its 2014 peak of more than US$100 per barrel.
But, Sembcorp Marine’s management remains optimistic on the company’s long-term prospects as they feel that “its facilities have been built to cater to the industry’s demand for the long term.”
Companies that are engaged in share buybacks are just a good starting point for investors looking for opportunities. It’s up to us to dig further and determine for ourselves whether a company’s shares are actually 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.