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This Retail Group 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 company I’ve chosen at random from a list of companies that have been engaged in buybacks these past few weeks.

The company in question is Zhongmin Baihui Retail Group Ltd  (SGX: 5SR), which owns and runs department stores in China under the name “中闽百汇” (pronounced “Zhong Min Bai Hui”).

The company opened its first store in 1997 and since then, has expanded to 12 stores, according to its 2015 annual report.

Zhongmin Baihui has been actively buying back its shares in the month of October. It has spent nearly S$1.233 million to purchase 1.0163 million shares in total on 11 occasions.

In the firm’s latest earnings release (for the three months ended 30 June 2016), it reported a 0.8% year-on-year decline in revenue to RMB 200.9 million. But, its net profit had surged by 309% to RMB 54.0 million, mainly due to a write-back of free-rent incentives and step rental provision that came from the closure of its Nanjing Nanzhan Store. The closure had also offset revenue from new-store openings, leading to the lower top-line.

In the earnings release, the company gave some updates on its future plans:

“We expect to add two new stores over the next six months in Fujian. A new 16,900 sq m self-owned store in Quangang District, Quanzhou City will be added while the existing 4,000 sq m managed store nearby will be closed. The management agreement with the old Quangang store will hence be terminated. The second store scheduled to be open is a 3,700 sq m store in Anxi County in Quanzhou.

Upon the opening of these two stores and the closure of the old Quangang store, we will have 14 stores in Fujian with a total gross floor area of over 180,000 sqm.”

Zhongmin Baihui’s shares closed at a price of S$1.21 each on Tuesday. At that price, the firm’s valued at just 12.6 times its 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 doesn’t own shares in any companies mentioned.