5 Stocks with Significant Share Buybacks in May

A company share buyback refers to when a company chooses to deploy its cash and repurchase some of its own stock. This can be done typically on the open market, issuing a tender offer or a private transaction between its shareholders.

Reasons behind Share Buybacks

There are several reasons why companies perform share buybacks, which are generally regarded favourably by the investment community. Here are 3 primary reasons why companies want to conduct share buybacks:

1) Deployment of Excess Cash

Successful companies have many things to worry about: constant innovation, marketing their brands and how to engage the shareholders. And there is one more thing to add to their plate – the “happy problem” of mushrooming cash reserves due to cash-generative business models.

One perfect example is Apple Inc. Facing a ballooning war-chest, the company faces a dilemma where the excessive cash would erode the overall returns of the company since cash earns a paltry return.

In Apple’s case, buying back shares seems like the most viable productive option since it has way too much cash to deploy into meaningful projects which can earn a better return. As such, Apple announced a US$100 billion buyback in May 2018 and authorized another US$75 billion for share repurchases during its 2QFY2019 earnings ended March 30, 2019.

2) A Signal that the Shares Are Undervalued

A strong motive for businesses to do share buybacks is when the Management Team believes that its shares are currently undervalued and worth much more over the long term.

This gap in valuation can happen for various reasons such as rumours, poor market conditions, failure to meet expectations of short-term earnings’ predictions - all of which does not affect the fundamental strength and future earnings potential of the company.

On top of that, the management team is also proactively sending a signal to investors that the company is confident in its own prospects and has the cash premium to support this cause.

3) Boost in Financial Metrics

When a company buys back its own shares, it is effectively reducing the number of outstanding shares. With that, its financial ratios such as Earnings per share (EPS) and Return on Equity (ROE) are boosted upwards, ceteris paribus.

Here’s one simple example:

Trading at a share price of $15, company XYZ earns $1 million in a year with 1,000,000 outstanding shares. It translates into an EPS of $1.00 and a P/E ratio of 15x.

Assuming it repurchases 10% of its shares, the shares outstanding drop to 900,000 and EPS will get inflated to $1.11. Its revised P/E ratio will look much better at 13.5x, even though its earnings stayed flat.

Given that stock valuations are often viewed through the lenses of EPS and the related price-earnings ratio, a higher EPS justifies (and can lead to) a rising share price.

With that, let’s dive into the following 5 Stocks with significant share buybacks in the past month (all data as of 28 May 2019).

1. AEM HOLDINGS LTD (AWX.SI)

Since the acquisition of Microcircuit Technology in 2002, AEM Holdings is the only plant in Singapore producing organic Ball Grid Array and Chipscale Packages (BGA/CSP) substrates for the electronics industry. The company provides solutions in equipment systems, precision components, plating and related manufacturing services across various industries.

AEM has 6 R&D centres and 8 manufacturing plants in Singapore, Malaysia and China with a market presence in 20 countries spanning Asia, Europe and United States.

Let’s start by looking at the overall financial health of AEM Holdings.

The above paints a good picture of AEM Holdings’ past financials with at least 15% growth in revenue over past 4 years. The profitability ratios are fantastic – ROE and ROA are above 20% over past 2 consecutive years and ROE is improving by 5% a year over past 3 years.

Profit margins are on the rise with gross and net margins improving by 5% and 10% over past 5 years. As a result, dividend pay-outs have also been increasing over the same period. AEM is well-positioned to cover its debt just by its current assets with current ratio between 1.5 to 10 across 3 consecutive years.

However, the Piotroski F score flagged out a “Be Alert” sign (see legend beneath the chart).

For a quick background, Piotroski F score is a distinct score between 0-9 that reflects nine criteria used to determine the strength of a firm's financial position. One point is awarded for every criterion met, with nine being the best and zero being the worst. Two criteria examples are positive net income (1 point) and a higher gross margin than last year (1 point). You can also found out more about it here.

In AEM Holdings’ case, it only manages to achieve a 3-4 rating out of 9 criteria when it comes to the Piotroski F score.

With that, let’s zoom into the history of AEM’s share repurchases.

AEM Holdings has initiated with a total of 37 share buybacks since 2017 till now. We can also quickly see the buybacks (denoted by the “B”) on its frequency, timing and prices just from the chart above.

Investors can also get the whole picture from the table shown above. At one glance, we can see that AEM Holdings has re-initiated a series of share repurchases during May 2019 after the last buyback was done on 04 Jan 2019.

Based on its share price of S$0.865 per share, the group trades at around 7 times its price-to-earnings and has a trailing dividend yield of 3.9%.

2. OCBC Bank (O39.SI)

Incorporated in Singapore on 31 October 1932, Oversea-Chinese Banking Corporation Ltd is the result of a merger of three local banks, the oldest of which was founded in 1912.

OCBC group operate its banking business as OCBC Bank, Bank OCBC NISP, OCBC Wing Hang China, OCBC Al-Amin, and Bank of Singapore in over 18 countries and territories, and has strategic stakes in other financial services businesses operating under independent brands:

  • Insurance: Great Eastern
  • Asset management: Lion Global Investors
  • Brokerage: OCBC Securities and OCBC Sekuritas

Below is the overall financial health of OCBC Bank at a glance.

OCBC has seen increased revenue and profits over past 2 years with ROE above 10% over the same period as well. In addition, the firm can achieve a high net profit margin of at least 20% for 3 years and uplifted dividend pay-outs across last 5 years.

Meanwhile, there are 2 “Be Alert” orange signals for the Piotroski F score and Debt to Cashflow metrics. In this instance, these metrics do not prove useful for financial institutions like OCBC Bank because of factors like "change in gross margin" and "change in asset turnover ratio".

With that, let’s zoom into the history of OCBC’s share repurchases.

The chart above shows a flurry of share buybacks executed by OCBC – 106 of them in Year 2017, 119 in Year 2018, 46 this year and counting.

While there are too many buyback transactions to be displayed, the table above shows that OCBC has been very consistent at buying back around 200,000 shares almost every day in the past month.

Based on its share price of S$10.87 per share, the group trades at 1.09 times its price-to-book value and has a trailing dividend yield of 3.96%.

3. China Sunsine (CH8.SI)

Listed on SGX-ST on 5 July 2007, China Sunsine Chemical Holdings Ltd is a leading specialty rubber chemicals producer selling accelerators, anti-oxidant, vulcanizing agent. China Sunsine is the largest producer of rubber accelerators in the world and the largest producer of insoluble sulphur in China.

Its production facilities are located at Shanxian, Weifang and Dingtao in Shandong Province, the PRC, with a total capacity of 172,000 tons per annum. It serves more than 65% of Global Top 75 tire manufacturers, such as - Bridgestone, Michelin, Goodyear, Pirelli, etc.

Below is the overall financial health of China Sunsine at a glance.

The above picture is commendable as China Sunsine can achieve a Good or Excellent rating for all fields except for Competitive Advantage (which may be subjective). It has no debt at all and possesses a strong financial strength according to Piotroski F Score.

Gross and Net profit margins are pretty decent at 20-40% and 15% respectively. We can also see gains in revenue and profit growth in the last 3 years. Lastly, China Sunsine also managed to increase dividends over the past 5 years.

With that, let’s zoom into the history of China Sunsine’s share repurchases.

China Sunsine has bought back shares on 4 occasions last year but recently resumed the buying again after its 1st quarter results ended 31 March 2019 on 29th April. In the table below, it is a clear sign that the repurchases are done between the price range of S$1.09 to S$1.18 in the month of May itself.

Based on its share price of S$1.16 per share, the group trades at 4.43 times its price-to-earnings and has a trailing dividend yield of 4.76%.

4. Raffles Medical (BSL.SI)

Founded in 1976 with two clinics in central Singapore, Raffles Medical Group (RMG) has grown consistently over the years to become a leading integrated private healthcare provider in Asia across 13 cities such as Singapore, China and Cambodia.

Today, RMG serves over 2 million patients and more than 6,800 corporate clients each year with a staff strength of 2,500, including 360 physicians. It is the only private medical provider in Singapore that owns and operates a fully integrated healthcare organisation comprising of a tertiary hospital, a network of family medicine and dental clinics, insurance services, Japanese and Traditional Chinese Medicine clinics, and a consumer healthcare division.

The overall financial health of Raffles Medical reflects a mix of responses as per below:

RMG has demonstrated increased revenue in the past 5 years and improved profits over last 3 years. Gross profit margins are also healthy, coming in at a consistent rate between 20-40% in the previous 3 years.

In contrast, we are seeing that RMG’s dividend trend is heading down due to a decline in earnings. The most recent year also flagged out a “Be Alert” orange signal when it comes to its high debt to cashflow. Investors should be aware that its long-term and short-term borrowings are on the rise in the past 3 years as shown below.

With that, let’s zoom into the history of Raffles Medical’s share repurchases.

Things are slightly muted for Raffles Medical as it has only bought back shares 2 times just 2 weeks ago. This share buyback probably comes after a 20% drop in share price compared to its peak price of S$1.20. Raffles Medical has spent around S$100K buying 100,000 shares at S$1.01 each.

Based on its share price of S$1.04 per share, the group trades at 26.3 times its price-to-earnings and has a trailing dividend yield of 2.4%.

5. DBS Group Holdings (D05.SI)

Headquartered and listed in Singapore, DBS is one of Asia’s leading banks with over 9 million customers in 18 markets. DBS has a growing presence in the 3 key Asian axes of growth: Greater China, Southeast Asia and South Asia.

In a first for a Singapore and Asian bank, DBS Bank has overtaken larger, more established banks to be named ‘Best Bank in the World’. DBS was also named the ‘World’s Best Digital Bank’ in 2016 and 2018 and the ‘World’s Best SME Bank’ in 2018 by Euromoney. Last but not least, DBS has also been named "Safest Bank in Asia" by Global Finance for nine consecutive years from 2009 to 2017.

Here’s a glance of its overall financial health below:

DBS Bank has seen some minor fluctuations in its revenue over the past years. That said, the company have maintained a high net profit margin of at least 20% for 3 years and paid out increased dividends across last 5 years. Profits are also growing in the last 2 consecutive years.

Meanwhile, there are numerous “Be Alert” orange and “Watch Out” red signals for the Piotroski F score, debt and cash flow metrics. Similar to OCBC, these metrics do not prove useful for financial institutions like DBS Bank because their debt corresponds to customer bank deposits and they then lend them out to borrowers.

With that, let’s zoom into the history of DBS Group’s share repurchases.

DBS has seen 17 share repurchases last year and only 4 in this year. That said, the 4 share buyback transactions are done just a few weeks ago after the share price came down sharply from a high of around S$28.50.

We can also see a trend from the table above that DBS generally purchases its own shares at an estimated range between S$24 to S$25 this year.

Based on its share price of S$24.85 per share, the group trades at 1.32 times its price-to-book value and has a trailing dividend yield of 4.82%.

Conclusion

While share repurchases is considered a good sign for shareholders, one should be mindful that share repurchases can often end up being ill-timed. This is because companies are more likely to buy back shares when they are flush with cash during economic boom periods. That would mean that the repurchases are being done at expensive share levels, which would be detrimental to the shareholders.

That said, share buybacks is still viewed positively and should be lauded. This is because it restores confidence in the company’s prospects and improve ‘per share’ metrics e.g. lower P/E ratio due to higher Earnings per share (EPS). Lastly, it is also a good alternative to let companies put their capital to better use rather than miscalculated business ventures or hoarding cash at sub-par returns.

Check out ShareInvestor’s webpro to access timely updates to empower your investment research - http://www.shareinvestor.com/sg

Happy investing!

 

Archive

2019
December
November
October
September
August
July
June
May
April
March
February
January
2018
December
September
October
November
October
November
October
September
August
July
June
May
April
March
February
January
2017
October
September
August
July
June
May
April
March
February
January