3 Singapore stocks with aggressive share buybacks. Are they worth buying?

TL;DR

• Hongkong Land, Keppel Corp and Yangzijiang Financial Holdings have been aggressive with share buybacks recently. 
• Some investors may view these share buybacks as a signal of management confidence towards the company’s prospects. 
• These 3 companies have some exposure to the Chinese property market, which is facing rising risks from defaults currently. 
• Apart from share buybacks, we would also be looking out for signs of improvement in the Chinese property sector. 

What happened?

One of the metrics that investors often screen for when looking for interesting stock ideas, is the share buybacks made by companies and their senior management.

Some investors may view these share buybacks as a signal of management confidence towards the company’s prospects. 

It could be a sign that management believes the shares are undervalued, and buybacks are the best use of its capital compared to investing into the business for growth or paying out as dividends.

Using this as a guide, let’s take a look at a few Singapore-listed companies that have been aggressive in share buybacks in recent months. 

3 Singapore stocks doing buybacks

#1 – Hongkong Land (SGX: H78 Bloomberg Ticker: HKL SP)

Hongkong Land, or HKL, is a landlord and developer with a diversified portfolio of properties across Asia. 

More than 80% of its portfolio consists of investment properties, which are properties it owns and leases out.

In Singapore, this would include office assets such as Marina Bay Financial Centre and One Raffles Quay. 

But the bulk of its property assets are in Hong Kong, where it owns office assets and retail assets such as One & Two Exchange Square and Landmark Atrium.  

In 1H22, it swung back to a profit of US$292 million, after reporting a loss of US$865 million in 1H21.

The profit was supported by the robust performance of its office assets in Singapore, following the trend of a recovery in prime office rents. 

In Singapore, the average gross rent of its office assets rose to $10.5 per square foot per month (psf/month) in 1H22 from $10.30 psf/month in 2H21. 

The performance of its Hong Kong property assets was less stellar as the strict Covid restrictions continue to dampen business activity.

Average net rent continued on its downward trend and fell further to HK$112 psf/month in 1H22 from HK$115 psf/month in 2H21.

The encouraging sign is that vacancy rates appear to have stabilized at about 5.1% (on a committed basis) at end-June, compared to 5.2% in end-Dec 2021. 

The other interesting development, is that HKL has announced an extension of its share buyback programme.

In September 2021, the company had first announced its intention to invest up to US$500 million in a share buyback programme extending until 31 December 2022. 

This led to a big bounce of 15% in its share price from $4.20 to above $4.80 after announcement. These gains were subsequently erased due to concerns about China Evergrande’s impact on the Chinese property market. 

With the extension announced, HKL has the ability to invest an additional US$500 million in its the share buyback programme until 31 December 2023. 

Hongkong Land's share price has gained 14% in the past year (as of 4 August 2022). Based on Yahoo Finance, it currently trades at a price-to-book valuation of 0.35x, and offers a dividend yield of 4.2%. (As of 4 Aug).

#2 – Keppel Corp (SGX: BN4 Bloomberg Ticker KEP SP)

Keppel Corp is a conglomerate with businesses in the energy, urban development, infrastructure and asset management segments. 

What we were impressed by was that Keppel’s net profit grew strongly by 66% to S$498 million in 1H22.

As a conglomerate, there are always concerns that some businesses might be a drag to its performance. 

But encouragingly, all businesses did well in 1H22, which helped to contribute to the recovery in profit. 

Its offshore and marine business stayed profitable even with the challenges faced in the industry, which we discussed here after its announced combination with Sembcorp Marine. 

Keppel’s infrastructure business achieved significantly higher profit, as it likely benefited from the higher electricity prices in Singapore.  

As part of its plans to unlock value for its shareholders, Keppel has announced a target to drive more than S$5 billion of asset divestments by end-2023. 

It has been able to make strong progress on its asset monetization, with S$3.6 billion of divestments announced since October 2020. This would include the sale of the Keppel Marine East Desalination Plant to Keppel Infrastructure Trust for S$355 million.

Keppel launched its S$500 million share buyback programme in January 2022. In 1H22, it purchased 57 million shares worth about S$364 million.

Together with the turnaround in profit and announced restructuring of its offshore and marine business, it has helped to drive a 26% gain in its share price in the past year (as of 4 August). 

Based on Yahoo Finance, it currently trades at a price-to-book valuation of 1.0x, and offers a dividend yield of 5.2% (As of 4 Aug)

#3 – Yangzijiang Financial Holdings

Yangzijiang Financial Holdings is a spin-off of well known S-chip Yangzijiang Shipbuilding, and was listed in April this year. 

The bulk of its RMB 20 billion (S$4.25 billion) of assets now comprises of debt that it provides to others in mainland China, and it generates its income largely from the interest income from these loans. 

The interest income it has been able to earn from these debt assets has grown from RMB 1 billion in 2011, to RMB 2 billion by 2019. 

The company has plans to deploy about RMB 5 billion (S$1 billion) of its capital into investments outside of China by the end of 2022. 

This would involve directly investing in funds that will allow YZJFH to earn an investment return, and launching its own funds to generate management fees. 

Yangzijiang Financial Holdings’ share price has fallen significantly since its spin-off from Yangzijiang Shipbuilding.  From an opening price of S$0.69, it has fallen to S$0.40 as of 4 August 2022. 

This is due to concerns about increasing financial difficulties faced by companies in China, which could lead to high non-performing loans for YZJFH. 

After all, there are more reports about Chinese property companies defaulting on their debt payments. 

This has led the company to announce a S$200 million share buyback programme on 8 June 2022. 

Apart from the share buyback, YZJFH also announced that it will be increasing its dividend payout to 40% of its underlying net profit from 30% previously. 

YZJFH has a book value of around S$4.2 billion as of April 2022. Based on its market cap of S$1.56 billion as of 4 August, it is trading at a price-to-book valuation of below 0.4x. 

What would Beansprout do?

Interestingly, the 3 companies we mentioned here face some form of challenges in their businesses. All of them have some exposure to the Chinese property market. 

Hongkong Land and Keppel develop properties and own property assets in China. Yangzijiang Financial Holdings have loans to other Chinese companies including property developers. 

This might have caused their market value to be lower than what management might think is the intrinsic value. 

What this means is that while the share buyback may provide some support to their share prices, what we would really need to see is an improvement in the fundamentals of the business. 

Apart from the amount of shares these companies are purchasing, we would also be looking at the extent of defaults in the Chinese property market, and also whether the Chinese government would come in to provide some support for the sector. 

If you are looking for other companies that have also recently announced share buybacks, do check out our writeups on iFast and Digital Core REIT.