MENU

This Software Solutions Provider Has Been Buying Back Its Own Shares

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. 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, chosen at random out of a list, which has been engaged in buybacks these past few weeks.

The company in question is Silverlake Axis Ltd  (SGX: 5CP). 

As a quick introduction, Silverlake Axis is a software solutions provider to primarily the banking and financial services sector. The company’s major business segments include software licensing, software project services, and maintenance and enhancement services.

Silverlake Axis has bought back shares of itself on nine different occasions thus far in the month of July, spending nearly S$5.18 million in total on 9.356 million shares.

In Silverlake Axis’ latest third-quarter earnings that was released in May, the company had recorded a 10% increase in revenue to RM157.0 million compared to the corresponding quarter a year ago. But, its net profit saw a 20% decline to RM61.5 million instead, owing to a 38% increase in income tax expense and additional operating expenses from the consolidation of the October 2015 acquisition of Symmetri Group.

Nonetheless, the company’s management team appears sanguine about its future prospects. Dr. Raymond Kwong, Silverlake Axis’s managing director, gave the following comments in the earnings release:

“Due to efforts in prior years, SAL [Silverlake Axis] is benefitting from a growing recurrent revenue base as Merimen Group broadens its insurance processing services and expands into new growth markets in the region. Following the initial business transition of the Symmetri Group, we are increasing efforts in cross-selling services and streamlining operating procedures to improve profit margin.

Silverlake Axis’ shares closed yesterday’s trading session at a price of S$0.57.  At that price, the company is valued at 16 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.

For more investing insights and to keep up to date on the latest financial and stock market news, you can sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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.