Companies with excess capital can reward shareholders by buying back shares, where they purchase their own shares in the open market, thereby reducing the number of outstanding shares. In doing so, shareholders see their stake in the company increase.
A company’s management may also choose to do share buybacks instead of paying a special dividend when it believes its shares are undervalued. With that in mind, here are two companies that recently conducted share buybacks.
1. AEM Holdings Ltd
AEM Holdings Ltd (SGX: AWX) provided an earnings surprise in the quarter ended 30 June when it posted a 64.5% increase in net profit. The group’s revenue also increased by 34.8% due to higher demand for its test handler system.
The manufacturing company said its main customer (believed to be Intel) introduced new products based on advanced semiconductor nodes. As AEM’s test handlers are optimised for testing complex logic chips, its customer increased its orders substantially.
On top of that, its recurring segment, where it provides consumables and services for its systems, also increased year on year and quarter on quarter.
However, the company continued to caution that it has limited income visibility for 2020, as the orders for the test handler system are highly dependent on the needs of its key customer.
Nevertheless, based on trailing earnings, AEM shares seem to be fairly cheap. They currently trade at around 7.5 times trailing earnings. AEM’s management recently announced that the company bought back shares on the 27th, 28th and 29th of August. The most recent share buyback was for 100,000 shares at S$1.05 per share.
2. Raffles Medical Group Ltd
Raffles Medical Group Ltd (SGX: BSL) opened its first hospital in China — Raffles Hospital Chongqing — earlier this year. As expected, the new hospital continued to be a drag on profits, resulting in a 12.7% operating profit decline in the quarter ended 30 June 2019.
On top of that, higher finance cost resulted in its profit attributable to shareholders falling 15.6%. Its net cash position a year ago has also turned into a net debt position of S$23.1 million due to the high capital expenses required for Raffles Hospital Chongqing and the soon-to-be-opened Raffles Hospital Shanghai.
However, long-term investors should continue to be patient because once the China hospitals pass their gestational phase (which management believes could take up to three years each), they should contribute a healthy level to profit and cash flow for the company.
The healthcare company’s exposure to China is also one of the reasons for the negative sentiment surrounding the company; its shares have declined 11% year to date.
On 27 August, Raffles Medical bought back S$197,295 worth of shares for S$0.985 each. The company has purchased 400,000 shares since its share buyback mandate was initiated. At its share buyback price, Raffles Medical traded at 31 times its annualised earnings.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore recommends shares of Raffles Medical Group Ltd and AEM Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares of Raffles Medical Group Ltd and AEM Holdings Ltd.