Dangers in the Jamaican stock market

Andrew Holness, Prime Minister of Jamaica, seems to want to go down in history as the PM who has divested the most government assets through the Jamaican Stock Exchange. While there are clear benefits for the country and investors, major dangers lurk around the corner for many investors.

Wigton closed at anew high of $1

Rate cut for Wigton’s number 2 turbine to cut profit by nearly $400m.

The local capital market has many challenges for investors and in some cases, it is downright ugly and terrifying. One such is Wigton Windfarm that went to the market with information in the prospectus indicating that all the energy output would be sold to JPS at predetermined prices for twenty five years for each turbine. This publication has reviewed the prospectus and cannot find any information to indicate that the rate on turbine no 2 was to be reduced effective April 2021. That information is critical and could have meant the issue price for the stock might have been inflated. Worse, investors who bought a pile of the stock post IPO around $1 region could be facing serious losses for years to come. Investors are now likely to see their investment stagnate for a long time due to the downward adjustment to the rate for the number two turbine. This is not the way to build a capital market.
The company’s 2021 audited accounts state “Wigton Phase II which was commissioned in December 2010 and supplies 18MW power to the grid. The plant was awarded the avoided rate for the energy it supplies and as per the terms and conditions of the Power Purchase Agreement (PPA), the final rate adjustment for this plant was applied at the end of March 2021. The rate adjustment will translate to approximately fifty percent reduction in the revenue from Wigton Phase II in United States Dollars. This is projected to equate to an overall fourteen percent decrease in revenue in Jamaican Dollars.”
ICInsider.com’s calculation shows the effect of the rate adjustments will reduce revenues by approximately $380 million per annum before tax and will result in net profit coming in around $470 million of 4.3 cents per share for the 2021/22 fiscal year that would put the value of the stock around at the latest price of 63 cents at a PE of 15. That would be fine if there were likely to be growth in sales.
The prospectus list a series of risks and it goes on to state that If one or more of them described in the Prospectus or other risk not mentioned were to arise, Investors could suffer a material loss of their investment.
Electricity is sold by the Company to JPS under three (3) separate Power Purchase Agreements for twenty years each. Wigton one expires in April 2024 but can be extended up to 6 years. Wigton two expires in December 2030, with an extension of up to 5 years and Wigton three expires in May 2036 with any additional period to be agreed.
According to the prospectus, “the payment for energy supplied to JPS by each wind farm is determined by a formula fixed by the relevant PPA. Each formula, while different from the others, essentially determines the price payable by reference to the energy price for the relevant month and the Net Energy Output delivered to JPS. The Company regards the pricing formula in each PPA as highly confidential and disclosure might breach the confidentiality clause in each PPA but would be highly detrimental to the competitive interest of the Company in bidding for future generating capacity”.

Fosrich APO coming

FosRich, a distributor of lighting, electrical and solar energy products and a Junior Market listed company, seems set to go back to the capital market to raise funds for expansion and reduce loan funding.
“We are currently examining a possible additional Public Offer (APO) in 2021,”  managing director Cecil Foster stated in response to ICInsider.com enquiry as to why would they not take advantage of favourable market conditions currently to reduce the high debt load.
Fosrich borrowed debt totalling $1.6 billion is more than twice the Shareholders’ equity of $869 million at the end of December last year. The company has lent nearly $400 million to a related party that should be repaid this year, with the proceeds expected to reduce the debt load. Even after that, the company will still be overleveraged and will need approximately $500 million in new equity to bring its financing to accepted levels. Any new issue seems unlikely until the last quarter of 2021, with the company annual general meeting that will likely be held in August, as was the case in 2020 that would most likely approve such an issue. Additionally, with the stock now price over $5, a stock split would likely be considered to be approved at the 2021 AGM.
The company had a successful 2020 financial year with increased profits from rising sales and the stock price rising 31 percent so far in 2021.

Proven buying Fidelity Bank Cayman

Proven Investments entered into an agreement with Fidelity Bank and Trust International to acquire all the shares of Fidelity Bank Cayman (FBCL), subject to receiving approval by the Cayman Islands Monetary Authority.
The purchase price for the Shares will be determined in accordance with the terms of the Share Purchase Agreement.
“FBCL is a financial services company incorporated in the Cayman Islands and is licensed with the Cayman Islands Monetary Authority under the Bank and Trust Companies Act as a Category A Bank to carry on banking business in the Cayman Islands.
“The proposed acquisition of the Shares is aligned with Proven’s strategy of regional growth through acquisitions in the regulated sector throughout the Caribbean and Latin American regions, with a view to increasing value to its shareholders,” advised Proven.
The acquisition, if completed will result in the second financial institution to be owned by the group in the Cayman Islands and the second bank within the Caribbean as the company continues to grow by acquisitions.
Proven acquired all the shares in International Financial Planning (Cayman) Limited, a licensed security dealer, in August 2018. In 2017, the majority shares in Bank of Saint Lucia International Limited were acquired. Proven could realise cost savings, with two entities owned within the same territory.
In January this year, Proven acquired 50.5 percent interest in Roberts Manufacturing Company, a Barbados based company.

Another Grace acquisition this week

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Fresh on the heels of announcing an agreement to acquire all the shares on Scotia Insurance Eastern Caribbean shares, Grace Kennedy announces another agreement to acquire, this time the brand of 876 spring water from Bliss Limited and UniBev Limited (UniBev).
Under the acquisition agreement, Grace Kennedy will assume ownership of the 876 brand, while UniBev will continue to manufacture the product.
“ 876 spring water has been distributed by World Brands, a Grace Kennedy subsidiary since it entered the market in 2017” a Grace release states. The release further states, “this is the second announcement of an acquisition by Grace Kennedy this week. The acquisition of 876, which remains subject to customary closing conditions, places GK in a stronger strategic position in the Jamaican spring water market”.
Commenting on the latest move from Grace Kennedy, Group CEO, Don Wehby stated, “Brand acquisition is a key component of the growth strategy for our Foods Division. Since GK began partnering with UniBev to distribute 876, the brand has shown strong growth and we see opportunities to expand this even further through possible line extensions and the export market. We’re excited to be taking steps to grow our portfolio of products to provide a wider selection to our consumers.”

More growth for Grace

Fresh from a record-breaking profit performance in 2020, Grace Kennedy announced the signing of an agreement to acquire all the shares of Scotia Insurance Eastern Caribbean Limited subject to regulatory approval.

Grace Kennedy HQ in Kingston

Scotia Insurance operates in seven countries in the Eastern Caribbean: Anguilla, Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines. Scotia Insurance offers credit protection regionally to customers of Scotiabank on personal loans, residential mortgages, personal lines of credit, personal and small business credit cards.
According to Don Wehby, CEO of Grace Kennedy, “the operation is profitable but not highly profitable”. Grace’s ownership is likely to result in lower operating cost and a vehicle to do business in other countries and for other financial institutions.
In an investors briefing on Monday, Wehby stated that the proposed acquisition is one of ten that the group is looking at currently, at various stages of assessment or negotiation, including some being stress tested and others at the legal stages.
Wehby in answer to a question on the growth rate of 2020 continuing into 2021 confirmed, that it will as the 2020 growth was achieved after years of work to lay the foundation for it to happen.
tTech limited is a Junior Market that seems set to benefit when the acquisition is concluded, the extent of its involvement will depend on the technology in use and whether the acquisition will continue to utilize the current infrastructure or not. tTech is a major Information Technology supplier to Grace.
Grace is listed on the Jamaica Stock Exchange and currently trades at $90.99, the shares are trading on the Trinidad and Tobago Stock Exchange at TT$4.50, in line with the JSE price.

Barita acquires 20% of Derrimon Trading

Barita Investments now owns 20% of the issued shares of Derrimon Trading Company following the closing of the Derrimon additional public offer of shares, Barita disclosed in a release to the Jamaica Stock Exchange.

Barita headquarters.

Commenting on the investment, Jason Chambers, Director of Barita and Chief Investment Officer of Barita’s parent company, Cornerstone, said: “The Board of Directors of Barita and the leadership team of Cornerstone are very satisfied with this investment as Derrimon embodies several of the characteristics we typically look for in assessing investment opportunities. DTL has built up an enviable track record of growth and value creation, and the management has demonstrated their ability to achieve scale both organically and through the successful integration of several accretive acquisitions. Barita has, over the course of the last two-plus years, established significant capacity to expand its portfolio of investments into sectors that are viable alternatives to traditional ones that are now fully priced in our view and therefore not likely to generate alpha for our shareholders in the medium to long term. This minority acquisition should be seen as a by-product of our increased investing capacity as we prudently seek to unearth both value and growth-oriented investment opportunities within the context of the current global investment landscape.”
Chambers continued, “We also note the diversification factor that this investment adds to our portfolio as it provides exposure to the real sector via a company which has recently begun an international expansion.

Mayberry tried trading 420m Derrimon Trading shares but the transaction was disqualified.

At Cornerstone and Barita, our goal is to positively impact the lives of our stakeholders through the tireless pursuit of opportunities that provide solid risk-adjusted returns throughout their investment horizons. We believe this investment is aligned with that ethos and we look forward to collaborating with the team at DTL to the mutual benefit of our collective stakeholder groups.”
Paula Barclay, General Manager of Barita, in commenting on the Company’s investment in Derrimon, stated: “At Barita, we continuously seek out unique strategic opportunities to build shareholder value while balancing the interests of our clients, team members, and other key stakeholders. We are confident that our association with a company like Derrimon will only contribute positively to our overall future performance. Consummating this investment took significant effort from the team at Barita and I would like to take this opportunity to extend my gratitude to them for their hard work.”
Barita Investments is a publicly-traded Securities Dealer listed on the Jamaica Stock Exchange and majority-owned by Cornerstone Financial Holdings.
Derrimon Trading is listed on the Junior Market of the Jamaica Stock Exchange and distributes dry and frozen bulk commodities. It also operates retail outlets and Supermarkets.
The shares of Barita are trading at $81.14 and Derimon at $2.56 on early Friday morning after the release.

Tropical Battery IPO oversubscribed

oThe Tropical Battery issue of 325 million ordinary shares at $1 each opened on Tuesday, September 22, was oversubscribed. The company exercised the option to close the offer early at the end of the opening day.
The offer comprised shares sold by existing shareholders and by the company. The net proceeds that the company will get will be for expansion and upgrading of the operating facilities and working capital needs.
Earnings per share are around 7.7 cents, putting the stock is price value at a PE ratio of 13 times 2020 earnings, leaving little or no room for short term gains, with it, priced 19 percent above the market average.
NCB Capital Markets, brokers for the issue advised that applicants of reserved shares will be allocated in full while applications in the General Public Pool will receive the first 50,000 units plus approximately 30.6499 percent of the excess shares they applied.
All monies to be refunds will commence next week Wednesday, September 30, will be processed as per their instructions on the GoIPO platform. Refunds to all other applicants will be made to the respective broker.
The company is t listing on the Junior Market of the Jamaica Stock Exchange with the profit for the next five years not subject to corporate taxes and the following five year period resulting in taxes paid at 50 percent of the regular rate.
The listing will take the number of Junior Market companies to 41 and the 44th company to be listed on that market since 2010.

More US$ for NCB Financial Group

NCB Financial Group went to the international market to raise US$175 million in funds from the issuance of diversified payment rights for payments due from correspondent banks, up the amount taken to US$250 million.

NCB Financial Montego Bay branch

According to the banking group in a release on September 22, “the Board of Directors of National Commercial Bank Jamaica has approved an upsizing of the Securitization of its Diversified Payment Rights to up to, Two Hundred and Fifty Million United States Dollars following an oversubscription of the transaction.” The transaction will be rated by FITCH Ratings and placed in the International private placement market by Westwood Capital LLC, as Arranger.
The transaction will swell the pool of foreign currency the bank will have at its disposal for lending or investing. At the end of the 2019 fiscal year ending September, NCB Group owed just US$50 million but owed US$309 million on Merchant voucher receivables.
NCB Group is listed on the Jamaica Stock Exchange and owns the majority of shares in Guardian Holdings, a Trinidadian based listed company and Clarien Bank in Bermuda.

IPOs are back the Tropical issue

Just when investors thought COVID 19 had killed off IPOs for this year, suddenly pops up, Tropical Battery‘s long-promised initial public offer. The prospectus for the issue is now available to the public.
The issue for 325 million ordinary shares at $1 each of with up to 187.5 million units reserved for priority applications, opens September 22 and is scheduled for closing on September 30, subject to the right of the Company to close it earlier.
The Company intends to apply for the shares to be listed on the Junior Market of the Jamaica Stock Exchange, subject for at least $260 million being raised, by way of this invitation.
The total issued shares following the offer will be 1.3 billion units, with the parent company owning 75 percent. That will allow enough shares to be in the public hands to facilitate adequate liquidity in the stocks for some time.
The Company generated profit before tax of $87 million from revenues of $1.74 billion in 2019, a decent increase of 18.6 percent higher than in 2019 and a pretax profit of $45 million from revenues of $1.47 billion in the prior year, to September or 8.6 percent above the 2018 sales.
Gross operating revenue for the nine months to June this year increased nine percent to $1.36 billion from $1.25 billion in 2019, with profit before taxation falling from $67.6 million to $62 million.
Future growth, the Company says, “will come primarily from the addition of new product lines, i.e., Renewable Energy Batteries, Oils and Lubricants, Tyres, etc., organic growth of existing products, expansion and the renovation of our retail stores.”
The proceeds of IPO will be split equally between the selling shareholder and the Company, resulting in $162.5 million going to each, net of cost.
The Company plans to use the amount collected for expansion and working capital purposes, including but not limited to new product lines, expansion and renovation of retail stores, including an expansion of the parking area at the retail store at Grove Road in St Andrew. Completion of the buildout of and relocating to the new warehouse, head office and retail store at Ferry, Acquiring and install information technology systems for greater efficiency and improve customer experience and expansion of Mobile delivery fleet of vehicles.
Total shareholders’ equity at the end of June stands at $593 million, while our long term liabilities fell by to $315 million with the total interest-bearing debt of $415 million. The Company is owed $190 million by a related party and is interest-free, but payable on demand.
With earnings per share around 7.7 cents, the stock is priced around a PE ratio of 13 times 2020 earnings, leaving little or no room for short term gains.
NCB Capital Markets are the brokers for the offer. Unfortunately, for investors, there are no forecasted earnings included in the prospectus to help to guide them. This practice leaves a lot to be desired and it is fulltime, the authorities step up to the plate and ensure that all prospectuses include forecasted data for a least three years. That is not asking too much in the drive to build a developed capital market.

10 to 1 stock split for Caribbean Flavours

Caribbean Flavours and Fragrances (CFF) is set to split their stock, subject to the approval of shareholders at a meeting to be held to consider the matter.
The company will hold a special board meeting on August 27, to consider the approval of resolutions to increase the authorized share capital and approve Stock Split.

Caribbean Flavours a Derrimon’s subsidiary

Based on the release from the company, the approval by shareholders will result in the authorised share capital moving from just 91.452 million shares to 2,6 billion, by the creation of an additional 2.509 billion shares. Each existing issued share will be subdivided into 10 ordinary shares with effect from the close of business on September 23. The split will result in the total issued shares increasing from 89,920,033 shares to 899,200,330 shares.
The company should consider increasing the authorized share capital to an unlimited amount that will not cost them any more funds in doing so and would give them greater flexibility. CFF recently released quarterly results with revenues rising 42 percent in the June quarter to $161 million, with profit before tax rising 18 percent to $30 and revenues rose 37 percent for the six months to $311 million, with pre-tax profit rising by 23 percent to $49 million.
The stock closed trading on Friday at $14.95 with just two lots of stocks on offer at the close.

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