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 criteria 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 criteria 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.
Remember, a company’s management team is made up of humans too – that means they are never perfect. 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 one company – chosen at random out of a list of many – that has been engaged in buybacks these past few weeks.
The company in question is iFAST Corporation Ltd (SGX: AIY), a relatively new company in Singapore’s stock market, having been listed only in late 2014. iFast is an internet based investment products distributor with two business divisions: the B2C (business-to-consumer) division and the B2B (business-to-business) division.
The B2B division caters to the needs of financial institutions such as banks and financial advisory companies. Meanwhile, retail investors in Singapore might be familiar with the company’s consumer-facing platform fundsupermart.com. The platform allows retail investors to buy and sell a wide variety of investment funds.
In the month of July thus far, iFast has bought back shares on three different occasions, spending nearly S$319,000 on 319,800 shares. The company has actually been buying back shares for a few months now. It has a buy-back mandate that started on 8 April 2016 and since then, iFast has bought a total of 885,500 shares of itself.
iFast’s latest earnings were for its fiscal first-quarter, the three months ended 31 March 2016. The company’s quarterly revenue declined by 10.6% year-on-year to S$18.7 million, driven by poor market sentiment from the “stark sell-off in global financial markets at the beginning of 2016.”
The lower top-line had a big ding in the bottom-line as net profit fell by 58% to S$1.25 million. Despite lower revenue, iFast’s staff costs, depreciation and amortisation charges, and operating expesens, all grew in preparation for the launch of a new business in China. These pressured the company’s net margin.
iFast warned in its earnings release that its China business “is expected to have a negative impact on the overall operating profit” in 2016 and 2017. But, the company thinks that “it is important… to maintain a healthy balance between ensuring the short-term profitability and doing enough to ensure the long-term growth of [iFast], especially in tackling big markets with good growth potential such as China and India.”
iFast also believes that “any improvement in market conditions will have a favourable impact on the profitability of the Group excluding China in the next few quarters.”
IFast’s shares closed yesterday’s trading session at a price of S$1.00 each. At that price, the company is valued at 25 times trailing earnings.
A Foolish conclusion
Companies that are engaged in share buybacks are just a good starting point for investors looking for opportunities. It’s up to the individual investor to dig further and determine for him or herself 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 owns shares in iFast Corporation.