SGX sees share buyback boom: Why and what does it mean for investors?

SGX sees share buyback boom: Why and what does it mean for investors?

An office worker walks past a logo of SGX outside its premises in Singapore
File photo of the Singapore Exchange. (Photo: Edgar Su/Reuters)

SINGAPORE: Singapore-listed companies have been repurchasing more of their own shares this year, with stock buybacks hitting a near three-year high last month, and analysts think this trend could continue for the rest of 2018 amid a volatile market. 

As many as 30 companies bought back 44 million shares worth S$245 million in August – the highest value of corporate share buybacks in 35 months, according to a recent market update from bourse operator Singapore Exchange (SGX). 

This more than doubled July’s buyback consideration of S$109 million, and marked an increase of over four-fold from the same period last year. In August 2017, share buybacks totalled S$59.7 million. 

Year to date, share buybacks over the first eight months of the year have exceeded S$1 billion in value – eclipsing the figure for the whole of 2017, which saw 82 companies repurchased S$425 million shares, according to data compiled from SGX. 

WHAT ARE SHARE BUYBACKS?

As the name suggests, share buybacks involve companies repurchasing their own shares from the open market, capped at 10 per cent of the firm’s total issued shares. 

Once bought back, these shares are converted into treasury shares and no longer categorised as outstanding shares. 

Industry experts said buyback transactions are typically done when company executives believe their stock is undervalued, while other reasons could include reward schemes for the management and employees. 

This year, a “key catalyst” for listed firms to embark on buyback programmes has been the softer market for local equities, noted CMC Markets analyst Margaret Yang.

Echoing that, Phillip Capital Management’s senior fund manager Tan Teck Leng said: “We didn’t see much share buybacks in 2017 because it was a good year with share prices well supported. But fast forward to 2018, the market has become rather pessimistic.”

Amid a storm of risk factors, such as a flare-up in trade tensions and worries over the pace of US interest rate hikes, the benchmark Straits Times Index (STI) has tumbled more than 8 per cent year-to-date.

READ: Take shelter in Singapore banks, defensive stocks amid trade worries, 'ghost of August': Analysts

Analysts said this has prompted companies, particularly those flush with cash, to dip into their pockets to prop up stock prices and reduce volatility. For property firms, the sharp pullback following the announcement of surprise property curbs may have also fuelled share buyback trades, added Mr Tan.

So far in 2018, buyback value on the local bourse has exceeded S$100 million every month, with the exception of January. Transactions crossed the S$200 million mark twice; apart from August, the month of March saw 26 counters repurchasing some 86 million shares at S$222 million. 

By contrast, the highest buyback consideration for 2017 was August, followed by June with about S$51 million worth of shares repurchased. Last year, the STI was on a fillip with two-digit gains. 

SGX statistics showed blue chips driving the buyback scene thus far, including CapitaLand, United Overseas Bank, Oversea-Chinese Banking Corp and Keppel Corp. 

For August, DBS topped the chart with a staggering buyback of 5.95 million shares worth S$150.8 million. 

Property heavyweight City Developments also marked its inaugural share buyback exercise when it bought 300,000 shares at an average price of S$9.485 on Aug 16.

In a media release, group CEO Sherman Kwek said CDL sees “deep value” in its shares and maintains confidence in future growth potential. “Our robust balance sheet enables us to initiate our share buyback exercise to enhance returns for shareholders.” 

FOR INVESTORS, GOOD OR BAD?

Market watchers told Channel NewsAsia that the boom in share buybacks can be seen as a positive sign. 

Describing the trend as “a vote of confidence” from companies, Ms Yang said: “If the management isn’t confident of its own future, they won’t buy back their shares. Furthermore, this shows that companies still have fairly healthy cash flow with plenty of cash in hand.” 

Still, retail investors should pay heed to a firm's long-term strategy, said CGS-CIMB remisier Ernest Lim. 

“For me, share buybacks are good when the companies have a well-thought plan on how to use their cash since there’s plenty of uses for it, such as research and development,” he explained. 

A less ideal situation will be when a company with a precarious balance sheet carries out share buybacks. “If the companies don’t have enough cash in the near term and are already highly-geared, then (buybacks) don’t make sense,” added Mr Lim. 

Other warning signs include companies embarking on share buybacks just to improve financial ratios, such as earnings per share.

Fortunately, market watchers said that does not seem to be the case in Singapore as the share buyback spree has thus far been dominated by cash-rich blue chips. 

Moving ahead, the buyback momentum will likely persist for the rest of the year as the market remains uncertain, experts said. 

Still, they are quick to add that while share buybacks can provide some support, they may not necessarily translate into upward movements. 

“Some of these companies have been buying back shares over the last few months yet the market continues to fall. This shows that the selling momentum has been quite strong,” said Mr Tan. 

“So while retail investors can take heart from these companies stepping in to buy back their own shares and provide some liquidity support, they should not be too optimistic either.”

Source: CNA/sk

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