Republic Bank undervalued (TTSE)

Republic Bank out of Trinidad is reporting slightly lower profit for the six months to March this year compared with 2012. According to data released by the bank today profits before tax came in at TT$336.954 million or 6 percent less than the $358.97 in 2011 for the same quarter. According to the chairman, $49 million was an adjustment for the defaulted Grenada bond. On a quarter over quarter basis the December quarter was better than the March quarter by 16 percent while in 2012 the March was worse by 7 percent. For the six months to March, profits were flat with just a slight negative slant as the 4 percent improvement generated in December 2012 was wiped out by the reduced earnings in the March quarter.

After tax profits attributable to shareholders was slight better that the pretax performance as the March quarter slipped by 4 percent to TT$267.468 million, while the year to date earnings are just slightly up. Earnings per share for the six months is TT$7.27. Republic trades at just $108.90 or at a PE of just over 7 times this year’s earnings while Scotia Bank is selling at more than 20 times earnings. Republic has traded around 20 times earnings in the past and has much room to grow. What is apparently holding back the stock must be the fact that a large block of the shares is in the hands of the government and could be divested in the near term.

Loan and advances at March came in at TT$24.7 billion, investments was TT$7.7 billion and customer deposit and funding instruments amounted to TT$43.4 billion and total equity was TT$79.4 billion. The bank seems well capitalized, however, its operations reaches out into the wider southern Caribbean and some of those economies face difficult times.

RBTTGlance

KREMI oversubscribed

When the public offer of Caribbean Cream Ltd (CCL) KREMI closed on Wednesday, it brought the total number of companies to raise funds using the Jamaica Stock Exchange’s junior market to seventeen (17).

Caribbean Cream Ltd (CCL) KREMI, seeking to list on the JSE Junior Market, closed on Wednesday morning, May 1, 2013 with applications amounting to more than 375. Word reaching ICInsider.com was that the level of oversubscription was not high. This means that the stock will struggle in early trading to hold the $1 price but ICInsider.com data suggest that earnings to be reported will beat a number of investors’ expectations when the annual results to February are released in a few weeks.

The Invitation for Subscription for 75,713,623 Ordinary Shares at J$1.00 opened on Thursday April 25, 2013 and was originally scheduled to close on closed May 10, 2013.

Stocks & Securities, the brokers to the deal, indicated that applicants (inclusive of Applicants for Reserved Shares) will be advised of the basis of allotment within three (3) business days in accordance with the Jamaica Stock Exchange Junior Market Rules.

The brokers also stated that the closing of the Invitation represents a landmark event for the company’s expansion as CCL recently signed a $13 million deal with Sandals Resorts International as the sole supplier of bulk ice cream to its Jamaican properties. CCL has also brokered a successful transaction with getting its products into Jewel Resorts.

CCL when it lists on the stock exchange later this month will bring the total listing on the junior market to 17 and will be the second since the start of 2013.

Talk Back | What were your reason for buying or not buying this IPO?

Kremi IPO to close today

ICInsider.com has been reliably advised that the initial public offer (IPO) of shares of Caribbean Cream which opened to the public for subscription on, 25th April 2013 will close today, Tuesday April 30, most likely on the morning, well ahead of the original propose close of 4:30 pm on the 10th May 2013. The early close was subject to the right of the Company to close the subscription list at any time after it opens on 9:00 a.m. on the Opening Date, once the issue is fully subscribed.  The shares which were priced at $1 each and meant to raise $75 million did not get the blessing of some brokerage houses as they saw the price as being too high, and in one case, they saw it as too risky based on inconsistent earnings amongst other issues.

JMMB‘s Forecast and Valuation | The company is expected to remain profitable despite the uncertainties in the local economy. The macro-economic instability may subside following an International Monetary Fund (IMF) agreement with Jamaica against the background of foreign exchange inflows and a slight improvement in the net international reserves. Further, listing on the Junior Stock Exchange will give the company a tax break for the next ten years, which should boost earnings attributable to shareholders. Revenues will continue to improve over the short term, while the enhancements and expansion in productive capacity of the company’s facility will likely improve its operational efficiency.

Within this context, the net earnings for the 2013 financial year end are expected to reach $29.81M (or EPS of $0.08). Meanwhile, net profits for the 2014 financial year end are projected to reach $40.99M (or EPS of $0.12). At the initial public offering price, the price-to-earnings ratio will be 12.70 times. The average trailing price-to-earnings ratio for the Junior market is approximately 6.41 times (Main market has a P/E of 6.58 times). Further, the average trailing price-to-earnings ratio for manufacturers and retailers listed on the Junior market is roughly 6.75 times (Manufacturing sector on the main market has a P/E of 6.06 times). Therefore, assuming a forward P/E ratio of 8.0 times for the 2014 financial year against the background of improved investor sentiments and stability in the local economy; the intrinsic value for Caribbean Cream Limited’s share based on estimated earnings is approximately $0.94.

The capital base of the company is expected to improve to $195.16M or a book value per share of $0.52 by 2014 financial year end. Assuming a forward P/BV of 1.8 times, the intrinsic value of stock is $0.93.

NCB Capital Markets‘ assessment of the prospectus | “For the nine months to November, the company increased net profit by 103% and boosted its equity base by increasing its share capital. Caribbean Cream Ltd ended the March 2012FY with earnings of $31.36Mn, the highest profit the company has recorded over the past five years and a sizable improvement to the $5Mn loss experienced in the previous year.

Risks:

  • Earnings have been extremely volatile over the last 5 years
  • Earnings for the nine months period of $23.67 was driven almost entirely by a $21.0Mn revaluation gain following an $11.62Mn profit in the prior year period. This further confirms the earnings volatility
  • Company is highly leveraged which could impede its growth prospects
  • Current ratio of 0.79X raises liquidity concerns
  • Free cash flow is negative which could restrict the company’s ability to follow through on its dividend policy which is to pay out at least 20% of earnings.

There is no clear growth strategy even amidst the company’s rapid expansion As a result of the aforementioned, we are not recommending this investment at this time”.

KremiBanner600X250IC Insider considers that both assessments are way off the mark. Assessment of the company’s performance must be based on pretax profit, not after tax which has varying taxation elements that has nothing to do with operating activities. Profit before tax has been very consistent since the commencement of the company, Earnings for 2013 is more likely to hit 17 per share if the trend in revenues continues after November last year. If the company makes $29.8 million as indicated above in profit for 2013, earnings per share would be 9.8 cents not 8 cents before tax based on the 302.85 million shares issued for the year to February this year.

The company’s rapid growth has helped to put pressure on working capital. New cash to come from the IPO, will help address some of the issue rightly pointed out above.

Talk Back | What do you think? Was the IPO overvalued?

Is the real estate market bullish?

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Jamaican Teas is reporting that its first real estate development, Carmen’s
 Court was sold out in 2 days when the units went on sale in mid-April, as
 buyers said a resounding, Yes!

This very first real estate project brought to market by H Mahfood & Sons Limited, a subsidiary of Jamaican Tea. Billed as charming, contemporary and ideal for property virgins and investors, the gated community on Kingsway in the prime Kingston 10 area, offered eighteen super studios of approximately 630 sq ft, with added features of private parking, a water tank and generator.

“Fifteen of the units were sold in one weekend and the remaining three are spoken for”, according to John Mahfood, Managing Director, Jamaican Teas, who believes that the development was a big winner because it had great timing, is quality real estate in a great location and affordably priced at
$10.5m to $11.9m.

Since its listing on the Junior Market of the Jamaica Stock Exchange in
2010, Jamaican Teas has demonstrated that it has its finger on the pulse, in terms of innovation and expansion. The group has plans for future real estate projects, as well as growth in its supermarkets and consumer brands of Tetley Teas, Caribbean Dreams and Jamaica Blue Spring Water products.

Talk Back | But investors are wondering if the quick sell off of units is an indication that investors are opening their wallets again to invest locally as opposed to putting money in foreign assets.  More importantly, is this move heralding a revival of the real estate market?

NDX slaps NCB profits

National Commercial Bank

For the six months ended March 31, 2013 | Operating income declined by $26 million, when compared with the six months ended March 31, 2012, mainly as a result of a $2.4 billion reduction in gains on foreign currency and investment activities due to losses arising from NCB’s participation in the debt exchanges, plunging income for foreign currency and investment activities, declining to a loss of $729 million in the march quarter compared to a profit of $1.4 billion in 2012.

For the three months ending March 2013 | Compared with the three months ended December 2012 net profit of $1.7 billion, decreased by 37.4%, or $1.0 billion while earnings per stock declined by 37.4%, to $0.71 from $1.13. During the quarter NCBJ group accepted government’s debt swap offer and exchanged $118 billion of eligible securities. The primary impact of the exchanges is a reduction in coupon rates, an immediate hit from loss from the difference in market value from the amounts received from new instruments and the extension of the tenure of the securities. However, the eligible securities involved are marketable securities and the securities received was lower than the value of the securities tendered, resulting in losses on some of the instruments exchanged. The group stated that they have identified a number of mitigating measures to address the on-going reduction in yields, most of which have already been implemented.

For the six months ended March 31, 2013 | Net interest income increased by 9.8%, or $1.0 billion, primarily due to growth in loans and investments. Net fee and commission income, grew by 11.6%, or $407 million, due primarily to increased card transaction volumes in the Payment Services segment, as well as increased fees earned from new loans. Premium income increased by 73.7%, or $747 million due mainly to the acquisition of Advantage General Insurance.

Provision for credit losses | Declined by 30.8%, or $470 million, due mainly to losses recorded on a large loan last year, while operating expenses increased by $646 million in the six months ended March, over the six months ending March 2012, mainly as a result of:

  1. Other operating expenses, increasing 27.7%, or $967 million, primarily due to insurance benefits and reserving expenses related to the acquisition of Advantage General Insurance and asset taxes.
  2. Depreciation and amortisation charges increased $48.5%, or $179 million, due largely to increased capital expenditures.

Loans and advances | Increased to $128.8 billion at the end of March 2013, growing 24.9%, or $25.7 billion, compared to the loan portfolio as at March 2012. Non-performing loans totalled $7.5 billion ($7.5 billion as at March 31, 2012) and represented 5.7% of the gross loans compared to 7.1% as at March 31, 2012.

Dividend Declaration | NCB declared a dividend of $0.16 per share payable on May 24. The stock closed at $18.56 at the end of trading on Friday with 253,195 shares trading the day after the results were released.

Talk Back | Any response to these posted results? Please leave a comment below.

Berger holds dividend, NCB cuts

Berger Paints Jamaica Limited | Advised that at a meeting of the Board of Directors held on April 24, 2013, the Directors passed a resolution that a Final Dividend payment of $0.13 per ordinary stock unit payable on July 9, 2013 be recommended to the stockholders on record as at June 21, 2013 in respect of the year ended March 31, 2013. The ex-dividend date is June 19, 2013.

Last year, the company paid dividends of a similar amount of $0.13 per share in July. This suggests that the profit to be reported for March 2013 is most likely flat.

National Commercial Bank | Declared a dividend of $0.16 per share payable on May 24. The ex-dividend date is May 8, 2013. The 2013 payment represents a decrease from $0.21 paid in May last year and is in keeping with an unpredictable dividend policy the company has been executing even after repeating a previously announced policy. The dividend payout ratio for the 2012 financial year to September amounted to 27% and for the 2011 financial year 25.7% compared to 42.2% for September 2010.

PreferenceStock150x150Dividend policy | As per the  2011 annual report: “The Board of Directors of National Commercial Bank recognizes the importance of capital in meeting the needs of shareholders, investors and the business. To this extent, a dividend pay-out rate has been determined.

The Board of Directors will declare, at its discretion, dividends to shareholders. These dividends will be paid from the realised earnings of NCB. The dividends will be subject to a maximum of 50% of the ordinary realised profit earned each year and will be applied after taking account of all transfers. In the event that the pay-out is less than 50% in any one year, the Board of Directors reserves the right to increase future distributions proportionately. Further, the Board, at its discretion, may distribute to its shareholders the full amount of any and all realised gains arising from non-recurring or extraordinary transactions.

“The Dividend Policy is consistent with the Capital Management Plan and is reviewed annually or more or less frequently as determined by the Board of Directors.”

Access Financial defying IPO critics

Access Financial Services, after reporting a successful 2012 when it clocked up earnings of $238 million from revenues of $661 million, reported a 47 percent increase in earnings for the first quarter of this year, which took it to $61.5 million from revenues of $173 million, up $19 million over 2012 first quarter.

The company’s growth is emanating from very strong growth in loans which increased from $643 Million in March 2012 to $758 million at the end of March this year. The company also reports maintaining costs at a low increment, which was another factor in the increase in earnings. Access is primarily involved in payroll lending at high interest rates amounting to about 60 percent per annum. Investor’s Choice projects $1.37 per share earnings for 2013 and recommends the stock as a good BUY.

Access, the first junior market company to hit the Jamaica Stock exchange in 2010, was slapped by the most scathing criticisms of any public issue to come to the market. There were few persons who publicly recommended the offer. So scathing were some of the critics that a number of institutional investors who were committed to buying in the issue opted out.

Three years after the issue, what is the outcome? The company has increased profits in each year and the stock has grown from $18.30 to the equivalent of $70 each (the stock was split into 10 units for each 1 owned and now trades at $7 each). Investors would have received a dividend in each year since listing, amounting to 65 cents based on last year’s earnings, 45 cents for 2011 earnings and 31 cents per share based on 2010 earnings. Not bad for those investors who backed the issue.

20/20 Hindsight: Click here to read my BUY recommendation of the Access Financial Services IPO published in the Jamaica Observer in October, 2009 and reader responses finding fault with my stock analysis.

Talk back | Did you buy this IPO? What were your reasons?

Performance chart

20/20 Hindsight: Access Financial IPO

Your decision to invest in a company should be based on a full assessment of  all the facts. Case in point, the Access Financial Services IPO offer. Below is the full text of my response to an article published in the Jamaica Observer in October, 2009 that I felt was flawed in its valuation of the IPO offer. Rather than the stock being overvalued, the facts indicated that the stock had an above average growth potential that could “far exceed any other stock on the market.” Needless to say, my BUY recommendation was not greeted favuorably by readers.

Many Jamaicans remain poor because they never take the time to find out the facts. The same seems true of an unfortunate assessment of the value of the shares of Access Financial Services in its current IPO carried in the Friday business section of your paper.

Share valuation is not about looking back at pass earnings but at likely future earnings. The article, deals well with many of the attributes of the company, but fails to indicate clearly, a full assessment of the true worth of the shares. In so doing, there seems to no focus on the impact of the removal of the tax on profits and the growth in earnings this year so far that will sharply boost earnings, as well as making the earnings for last year on a performa basis, better than reported.  To attempt to cast aspersions at Mayberry’s integrity in the offer price, is far too unfortunate as there is no evidence to suggest that the broker is trying to milk funds from the proceeds. In fact Mayberry is not selling any of their holdings in the offer and indicates that they have no plans to do so in the future. The gains from their initial investment, is purely on paper at this time.

Critical facts: What are some critical facts? First off the shares are not overvalued. An honest comparison with other listed companies will show that there are none that have the potential to grow as fast. The writer makes some unfortunate comparisons with JMMB and Scotia Group. The former has no chance of growing anywhere close to Access while Scotia Group’s possible growth is around 15-20% per annum. Those who fully understand share valuation know that the higher the growth rate, the higher the valuation.

The market targeted provides very high profit margin not even credit cards offer these margins. The history shows that the company has had very little bad debt even while lending to the riskier clientele. The market here is huge.

Big profit jump: Most importantly, Access earnings for last year, which came in at $69 million, was earned after writing off amounts incurred as loss of funds due to theft of $17m. When the earnings are adjusted for such losses and the tax free profits are factored in, then the earnings last year is around $3 per share. At $18 per share, the PE is 6, a little higher than the market average. But look what is happening in 2009. For the 6 month period from January to June 2009 the Company recorded total revenue of $151 million, an increase of 47% over 2008. Pre-tax net income for the period was $37 million, a 205% increase over the previous year. These 2009 figures clearly indicate that earnings for the full year should jump sharply, all things being equal. By my recognizing earnings for the full year could exceed $100 million or $4 to $5 per share. At just over $18 per share that a PE of 3 or 4, the shares are far from overvalued.

Stock to perform: Investors need also to be aware of the small number of shares that will be in the public’s hands that will exert upward pressure on the price once the company delivers. If management continues to keep bad loans at bay the way they have done so far, the sky is the limit. Investors in the stock will be extremely happy as the return on their investment will far exceed any other stock on the market. Investors who refrain from buying the stock are making a grave error if they really think it is vastly overvalued as the article suggests.

  || End  ||

READER RESPONSES to above:

warren
10/18/2009 8:47 AM

I profoundly disagree with John’s assessment of Access.
John has sought to suggest that the stock is fairly valued, but his assessment is based on future value of existing stock.
I cannot see how one could be willing to be $18.43 per share today, which is what the stock should probably be valued 4-5 years from now.
One never knows what the future hold especially in the financial market hence should never pay so much upfront especially for an IPO.
John has failed to look at the fact the growth rate of this company is most likely to fall once it has gone public, due to a different type of corporate structure and reporting requirement required for a public vs a private company.
The “new” company is likely to be more conservative in risk taking position thus likely to slow down its growth rate.
Based on the above I see the growth rate slowing down, making those who purchased this stock at this inflated rate, likely to lose at least 60% of its valuation weeks are listing.
If Access intends to sustain a pretty good growth rate, it means plowing back the profits into the company, which virtually assures that the investor has no dividend to receive at least in the first 2-3 yrs depending on management plans.
If access intends to pay dividends, this alone means less retained profits to be used in the expansionary mode, this slowing its growth.
Regardless of what John thinks, asking investors to pay so much upfront for a future value which may be justified in the next 4yrs, means investors are in for a raw deal.
I will look to buy when the stock reaches a value lower than its net current assets, which lowers my downside losses.
Persons who bought this stock at 4.35 its net current assets, have zero protection on the downside losses, and are likely to suffer very serious losses once trading begins.

Overvalued IPO
10/18/2009 9:10 AM

This stock is priced at 4.35 its book value per share, meaning it is 4.35 times its net current assets or put another way 4.35 its valuation.
Scotia Group on the other hand @ $17.96 is valued at 1.21 price to book. Scotia group earns close to a billion dollars in profit each month and pays close to a $1.00 per share in dividend each year.
Now access is being offered at a price of $18 per share, a price which is not only greater than a well run and profitable company as Scotia current price of $17.96, but at a value is almost 4 times higher than Scotia, amazing.
Price is what you pay, value is what you get and I fail to see one getting value out of paying $18.43 per share for such a small company as Access.
Personally I would not buy this stock for more than a price to book of 0.75 , which works out to just about $4.60 per share.

Orane
10/18/2009 9:12 AM

I looked over their prospectus the very day it was released and came to the very same conclusion that this price is pie in the sky!! I have a degree in Finance and I invest in companies on the JSE including Mayberry and I think this is a sad day in IPO valuation. They had the opportunity to set the standard for the Jr. JSE and they are muggin it up.
The conclusion I draw from their pricing is that they take the Jamaican investor for idiots, like so many companies in Jamaica. And they are playing on peoples greed. I would love to invest in this company and if it hits the market I will wait for the price to realign to it’s proper valuation before buying.
Mayberry’s behaviour is nothing new as mentioned in the article beyond CCFG look what they did to Salada over the from 2007-08 even though they had no hope whatsover of taking over the company because the majority share holder refused to sell they kept on putting news out into the market about them taking it over. This drove up the price on Salada shares to on speakable heights for a company barely eeking out a profit and not paying any dividend. Salada had to enact a split to create liquidity and something of a normal valuation. Mayberry is a hype machine and this is coming from an investor.

Mark
10/18/2009 12:01 PM

John, I hope you are not doing a favor to yout friends at Access and Mayberry. What you have written about Access share price is pure nonsense. The price is grossly overpriced.
IF THERE WAS AN AWARD FOR FINANCIAL NONSENSE, BASED ON WHAT YOU WROTE, I WOULD NOMINATE JOHN JACKSON!!!

.Mitchell
10/18/2009 5:46 PM

John shame on you, this is the worse crap I have heard since CASH MINUS and OFLINT. How can you look at yourself in the mirror? Bro you and your organization are worst than the THREE CARD man.
Now where the hell is the FSC dont they see the fraud that is been perpetuated on the nation. This is corporate malpractice. SHAME ON YOU ALL

nigel
10/18/2009 7:26 PM

Access financial may have great growth potential, but not great valuation just yet. This is a IPO for the balance sheet valuation somewhere else as an Associated Company. The Lead Broker could have done a better job with this IPO in more ways than one. There is no long term benefit from this IPO and all the initial investors in this IPO will lose money. The stocks will be bought back from the market when the price of the shares hit rock bottom. That is a strategy.

spectator
10/18/2009 7:49 PM

No value. I will repeat, NO VALUE

warren
10/18/2009 9:17 PM

Mayberry is reporting that this IPO has been oversubscribed!!

denise
10/18/2009 10:50 PM

Mr. Jackson everyone has a right to his or her opinion, you Sir should have done your homework. I am not a stock broker, but I was interested in the offer and did my research, after reading the Prospectus I decided not to take up the offer.
Look at likely future earnings, the future of Access Financial looks BAD. WHAT IS THEIR BUSINESS?????? SUB-PRIME LOANS. In the USA a company such as this would be called a predatory Lender.
The business model looked okay 3 to 4 years ago, but now it just looks dismal. Most of the clients the foward looking statement alludes to are people who live paycheck to paycheck. With all the talk of layoffs and cutback in the Jamaican economy, how does the principal of Access expect their business to grow?
One point made in the prospectus is that Government does not regulate this particular company, and therefore they can keep their interest rate on their products higher. Look at the percentage of bad loans recorded for 2008, and then compare that to the 9.09% projected non-performing loans in the prospectus. Come now Mr Jackson, does this sound right to you?
How is the market huge when this company’s business model caters to small and micro business sector? Take an informal survey on how many micro business have pulled down their shutter since the year started.
If i did not have access to information I might have called you for guidance as a stockbroker.,what a disappointment that would have been.

Navek
10/19/2009 8:17 AM

Does anyone still have the Mayberry IPO. Well it is the same way before they go public two years before they have a MASSIVE growth. I read the ACCESS IPO and and decided that i would wait or investigate the financial details. I am in a WAITING mood

Chris Berry
10/19/2009 9:46 AM

Orane,
Your recollection of what happened with Salada is not correct. The current owners made an offer to purchase the outstanding shares of the company, we made an offer which was substantially higher than the current owners offer. At the time many said our offer was too high yet the price passed our offer and remains substantially higher to this day. We sought to purchase an undervalued asset and we were unsuccessful in acquiring it.

Cairy
10/19/2009 11:15 AM

John – A couple of quick questions for you and possibly the Observer. Who is responsible for regulating financial analyst commentary on securities in Jamaica? Are there any rules around disclosure either for the publisher or the analyst? Don’t you think regulation in this area would be welcome? Comments from the BOJ, FSC, FDIC or the JSE would be welcome.

KLE Group — to buy or not?

KLE Group’s entertainment hot spots may be great places to let one’s hair down after a long day but are the shares, placed on the market late last year, good for one’s pocket and peace of mind? That was the challenge many investors faced when the company placed 27 million shares on the market, which was snapped up with great speed. But judging from the small 13 percent level of oversubscription and 198 applicants, seasoned investors had a different picture from that of the promoters and the principal owners.

In 2008, seven young Jamaican entrepreneurs are said to have had a world-class vision to create a unique blend in the local entertainment market-place, thus was born the hybrid lounge/club — Fiction — a new addition to Kingston’s night-life with its über chic design, lavish, intimate VIP booths, premium audio visual equipment and first-rate bar experience.

To rave reviews and patronage from locals and some of the world’s top celebrities, the club imprinted the Fiction Lounge brand on the entertainment industry. The early success attracted one of the world’s most marketable and fastest athlete, Usain Bolt and the Usain Bolt’s Tracks and Records restaurant with its perfect blend of what is termed a “4 dimensional experience of touch, taste, sight and sound” brought together in the same location as the Fiction Lounge.

Expansion | Having raised the desired capital, the KLE Group is to expand into other related ventures including a theme park and villa community on the north coast. The ventures include the following collaborative projects highlighted in the IPO.

“The Secret Room”, said by the promoters to be the first of its kind gaming lounge will be operated in conjunction with Supreme Ventures Ltd., and strategically positioned between Fiction Lounge and Usain Bolt’s Tracks and Records restaurant.

Night life in the second city, Portmore, will be catapulted into a new experience with a coliseum style nightclub to be named FAMOUS. KLE said that the more than 6,000 sq. ft. setting will be decked out with LED screens, projection walls and “unparalleled décor, sound and lighting” that will create an unforgettable nightclub vibe.

KLE Group plans to add BESSA, a lifestyle themed villa community to be built in Oracabessa in partnership with Sagicor Life Jamaica. The 8 acre ocean and river front property will be the site of 45 lavish living spaces with 1 bedroom swim-up suites, condos and 4 bedroom villas.

The expansion plans sound impressive but these are yet to come on stream even as the risk associated with them seems higher than for many other ventures in the country and certainly, the businesses operated by the majority of listed companies.

Priced for future | The numbers in the prospectus did not read impressively and nowhere therein could one find information to justify the $3.70 offer price with a PE ratio around 17. The best that could be gleaned was a price below $2 each which would have been more reasonable.

It was fully priced to sales, which came in at approximately one time sales. That may not have appeared bad and was around the trading point for most of the junior market stocks. However, the price to net book value was 18 times, representing a huge premium over all other junior listed stocks. Cargo Handlers was the highest priced in terms of net assets at 6 times, based on the 2011 audited results.

Pan Caribbean Financial Services (PCFS), financial adviser and broker, indicated how they arrived at the price but unfortunately, investors were not privy to that information as it was not included in the prospectus. A spokesperson for the broker provided some clarification on KLE’s valuation as follows:

  1. DCF (discounted cash flow) methodology was used in computation.
  1. A discount rate of 23% – 26% was applied with terminal multiple of 4.5 – 5.0.
  1. This methodology was chosen based on KLE’s immediate prospects as outlined by the group.
  1. KLE is a true start-up and as such forward looking.
  1. Based on conservative estimates, we see KLE having earnings of between $50 million and $60 million next year.
  1. Any potential earning was excluded from Usain Bolt’s Tracks & Records’ expansion and franchising.
  1. Given the above, post IPO P/BV of 2.9x and forward PE of 6x-7x.

The main issue with this valuation is that the stock market has not priced in 2013 earnings for the vast majority of stocks. So why should that be done for what many see as a very a risky investment in KLE? But even if the company hits the profit target, at the upper end, based on present valuation of stocks, one would be looking at a price around $5 for a gain of a third, several months down the road. Interestingly, subsequent to this issue, there were two others. One, Paramount Trading came out in December at a PE of 3 times earnings before tax, with the price of the stock moving up in value, and before that, Consolidated Bakery (Purity) came out with what then appears to be a PE of 8, more or less in line with the Junior market valuation but has hardly moved up on price, having been barely oversubscribed.

One off cost | One possible hidden factor that could help is the administrative costs for 2011, which has some one off expenses that should not recur and therefore, stands to boost the bottom line, all things being equal. In addition to income and expenses attributable to the restaurant and Fiction Lounge, there were other corporate expenses not directly related to either. These included professional fees, categorized as enterprise management expenses paid to Neustone (provider of managerial and administrative services) in exchange for business development in relation to new and existing business opportunities for the company as well as other services.

If one thinks that Usain Bolt’s name was worth a fortune then his association with the brand may have compelled one to invest. After all, he had indicated his interest in stepping up his investment in the venture. Time will tell if his athletic prowess will be reflected in his financial skill.

Another issue  in the short run is that, so far, there is no evidence that the restaurant’s success to date has been significantly impacted by the worldwide name recognition of the world class athlete. Will it positively impact the fortunes of the company in the future? Only time will tell.

2012 Results | Subsequent to the above, KLE recently released full 2012 results with and reported a loss of J$13 million versus $7.7 million in 2011. In 2012 depreciation charge swelled to $20 million compared to $4.7 million in the previous year, while a $15 million reorganization cost was picked up in 2011. The stock which was issued to the market at $3.70 each last traded at $3.50 on April 4 but the offer is down to $3.20 with no bids as of April 24.

NCB to release post-NDX results today

Update | Click here to view NCB results posted on April 29, 2013

National Commercial Bank (NCB) is expected to release results today for the six months to March this year. This will be the first results for investors to assess the impact that the NDX debt swap of government’s bonds will have on profits. The expectation is for a big hit from the write down of the carrying value of the bonds that was in excess of the face value at which they were issued. At the end of 2012 NCB’s fair value reserves amounted to $1.8 billion. While all of this is unlikely to relate to government of Jamaica bonds, it gives an indication of the likely hit that could be taken against profits. The write down of the fair value reserves will be a one off event, more importantly, is whether the group will be able to adjust rates fast enough on various instruments it offers the public, to make up for lost income from government bonds that were swapped out for lower yielding bonds.

NCB is also expected to declare a dividend when the results are released. In March this year they paid 23 cents per share as dividend. It is unclear what amount will be declared today in light of the hit they took from the debt swap.

Other companies to release results shortly are Mayberry Investments, Barita Investments, Seprod, Grace, Sagicor Life and Sagicor Investments.