IPO: Epply closes, JSE to trade

EPPLEY offer closes early | The Eppley Initial Public Offer (IPO) which opened today, Monday July 22, 2013 at 9:00, has been closed with the issue said to be oversubscribed. Eppley Limited opened the invitation for subscription for 218,999 shares at a price of $377 per share. PROVEN Wealth, acting as arrangers and Lead Brokers of the offering, announced an early closure of the offer effective at 4:00 p.m., way ahead of the scheduled close on Monday July 29, 2013 at 4:00 p.m.

PROVEN Wealth President & CEO Chorvelle Johnson noted that she is “pleased with the level of subscription. The response to the offer has been very good with the issue being oversubscribed and hence the early closure.” The company is set to announce the basis of allotment within 3 business days.

JSE to start trading on Tuesday | The Jamaica Stock Exchange ordinary shares which were offered public in a recent IPO at $2.85 per share and was oversubscribed, will start trading on Tuesday. The listing brings to 52 the number of companies with ordinary shares on the exchange. Eppley which was fully taken up will bring that number to 53 companies when it starts trading in a few weeks’ time.

First Citizens | In the meantime word out of Trinidad is that First Citizens is attracting great interest but there is no indication that the $1 billion IPO is yet fully subscribed. The issue is scheduled to close on 9th August.

JSE: Reports of insider trades

Latest reports of trading by connected parties: Updated as of 22 July 2013

Kremi | Three directors bought a total of 121,141,794 shares and sold a total of 121,832,193 Caribbean Cream Limited shares during the period July 16 – 18, 2013. Scoops Unlimited which had owned 121,144,794 shares was the seller on the 16th of July with the amount being split in two equal amounts of just over 60.57 million each.

Blue Power | A party connected to Blue Power sold 5,979 of the company’s shares. So did two senior managers who sold a total of 69,393 shares and a director who sold 303,916 during the period June 25, 2013 – July 14, 2013:

Mayberry Investments | A party connected to Mayberry Investments Limited purchased 48,559 of the company’s shares during the period July 15 – 17, 2013 and a related party purchased 100 shares of the company on July 18, 2013.

Sagicor Life Jamaica | Advises that two of its executives purchased a total 790,874 of the company’s shares during the period July 11 – 12, 2013. This could be a significant indicator of good profits ahead and is therefore worth watching.

To view our last report of insider trading dated 4th July 2013, click here.

Watching and rating

Monday, 22nd July 2013 | We’ll be watching to see what evolves during this week’s trading as we head into a period when companies start to release second quarter results. Our IC Insider “peep” behind the scenes, speaks a possible bull run since we see many instances where there’s a limited supply of stocks. Want to know more about the current demand and supply in the JSE? Read our market report Demand and supply tug of war.

Buy Rated Stock | Proven Wealth is new to our Buy Rated list. Before you buy, read our post, FX gains & securities boost Proven dated 4th June 2013, for an in-depth report of the company’s last reported results.

To search for published reports for a Buy Rated stock on IC Insider, please use ‘Search IC Insider’ and enter the company name, in full or in part.

Better than a broker’s ‘buy’ recommendation, IC Insider has no vested interest in any stock transaction or conflict of interest. Our research is backed by published reports of the company’s performance and insights of future earnings that can be found at ICInsider.com. The final decision to buy, or not, is your personal choice.

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Demand and supply tug of war

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Historically, July has been the month when the local stock market starts to look up. It is also the time of year when investors tend to be on holidays, thus reducing market activity. Additionally, we need to bear in mind that companies will start to release second quarter results which could move prices. Hence, what may be reflected by the movement in stock prices and market indices may be deceptive when gleaning market sentiments.

In dominoes they say that “a peep is better than a read” and this applies to the stock market as well, especially in the short run. Taking a “peep” behind the scenes, we see many cases where the supply of stocks has declined sharply. In several cases there is really no serious supply near to current prices to meet any increase in demand without prices rising sharply. We read that as a bullish signal coming from the market at this time.

jse_logo150x150Demand & supply | There are 7 serious buyers for Blue Power between $9.18 and 10.02 with a total demand of 84,000 shares and there are two sellers with 100,000 on offer at $10.50 and 10,000 at $13. AMG Packaging is in demand at $4.25 but there is virtually no current supply. Caribbean Cream has no demand currently but supply starts at $1.15 with 100,000 units. Dolphin Cove has virtually no supply currently with less than 20,000 units on offer. Jamaican Teas supply is very low with two sellers offering 55,000 units at $5.50 and demand is rising. Lasco Distributors, which should be releasing its first quarter results on the 29th of July along with the other two companies, has demand at $1.40 but the supply is at $1.60 up to $1.80. Lasco Financial has no active supply while the demand seems to have pulled back somewhat. Lasco Manufacturing with demand at $1.65 has no supply at the end of trading. Paramount Trading has had no supply for several days.

Cable & Wireless still has good supply at 15 cents with nearly 29 million units without any serious demand coming in to meet it. The sellers seem content to allow small buying to nimble away at the supply at 14 or 15 cents. Grace remains under pressure as demand is at $50, but in limited quantity as most of whatever demand is there is around $40. Carreras has slipped sharply from its recent highs and while there is quite some demand around $50-52 buyers, have been pulling back as supply continues to push prices lower. Troubled Caribbean Cement came in for demand this week and supply has receded and is now above $2. Desnoes and Geddes has buying at $4.65- 4.70 and supply at $5.18 but there are not a lot of sellers. Selling in Jamaica Broilers is moderate but buying is not aggressive. JMMB has demand at $8 but supply is way up at $8.80 but there is not much until $10.50. Jamaica Producers has very limited supply currently. Mayberry’s selling is not heavy but demand is just from Mayberry, with no other bid in place, which has been the case for several days.

National Commercial Bank has good buying for the stock between $18.50-19 and selling is very light. Selling for Pan Jam is very light.  Radio Jamaica has buying for 4.7 million shares with the closing bid at $1.23. Sagicor Life has buying around $9 but sellers are at a much higher prices. Scotia Group has good demand around $21 but sellers are much higher for the time being. Scotia Investments has some demand at $26 but mostly from one buyer with a seller supply at $30. Seprod has neither, much demand or supply, in the market and Supreme Ventures has virtually no supply.

We’ll be watching how JSE trading unfolds over the upcoming weeks starting with the Stocks to Watch as of Monday, 22nd July 2013.

IPO: What or who is Eppley?

The English dictionary has no such word, much less the meaning for ‘Eppley’ and a Google search has it as a little-known surname. However, it’s a name that will be on investor’s minds over the next couple of weeks as the company seeks to raise $82.6 million as a prelude to listing on the junior market of the stock exchange. The shares are clearly not meant for the average investor due to the small number of shares on offer and the price of $377 per share, which is the same as the net asset value of the shares, represented primarily by liquid assets. The shares are also priced around 10 times earnings before tax.

Who are they? | Although the public knows nothing about Eppley, it was established in 1973 and has been operating for some time under the name, Orrett and Musson Investment Company Limited. The Company is also an affiliate of General Accident which provides the Company with the necessary infrastructure to monitor and manage its investments plus ancillary administrative services. In consideration for these services, General Accident receives an incentive based fee, which is calculated as 20% of the Company’s average return on equity that is greater than 12% per annum.

The Directors, who are associated with the Musson group as directors or executives, are Nigel A. L. Clarke, Melanie Subratie, Nicholas Scott, Sharon Donaldson, Jennifer Scott, Maxim Rochester, Keith Collister, Alexander Melville and Byron Thompson.

The offer opens on Monday, 22 July 2013 and is scheduled to close on Monday, 29 July 2013 with 218,999 shares offered to the public of which 145,999 are Reserved Shares. Applications from the general public is at a minimum of 20 shares and multiples of 10 thereafter.  If any of the Reserved Shares in any category are not subscribed by the persons entitled to them, they will be available for subscription by the other Reserved Share Applicants, and thereafter, by the general public.

The proceeds are expected to be used to expand the capacity of the Company to provide credit facilities and to pay the expenses of the Invitation, which the Directors believe will not exceed $7.5 million. There will be no liquidity for these shares as the float is far too small.

EppleyNigelClarke150x150Business profile | The Company manages a portfolio of loans, leases and other forms of commercial credit. In so doing, it provides a variety of credit products to corporate and professional customers, including insurance premium financing — the company’s main line of business, lease financing arrangements for equipment (mostly motor vehicles for commercial and professional clients), commercial loans, and other forms of credit.

Insurance premium financing involves the financing of insurance premiums for personal and commercial insurance contracts, generally for periods of less than a year. Leasing involves the provision finance leases and commercial lending involves a variety of loans products that in most instances differ in structure or collateral from loans the Directors consider to widely available in the marketplace.

The Directors anticipate that commercial lending and leases will comprise an increasing share of the Company’s business following the Invitation.

Eppley aims to provide more attractively priced credit to its clients with better service than what is currently available in the marketplace. It aims to do this by maintaining a lean and efficient organizational structure, making fast investment decisions based on common-sense credit standards, and exercising strict confidentially and privacy in its dealings.

The Company’s business strategy is to deliver high and consistent risk-adjusted returns to its shareholders. It believes that commercial credit offers more attractive risk adjusted returns than other available fixed income investment alternatives, including Government of Jamaica debt. The Company stated that the vast majority of its aftertax earnings will be distributed to shareholders as cash dividends subject its Dividend Policy. The policy may be revised by the Board from time-to-time with the distribution being not less than 50% of its after-tax earnings.

Eppley’s numbers | The Company’s average return on operating assets, which provides an indicator of the rates at which it is able to lend, has fallen from 28% in 2008 to 15% in 2012. This reduction occurred at a slower pace that the reduction of interest rates in Jamaica. At the same time, the Directors note that the average cost of the Company’s operating liabilities, an indicator of the rates at which it is able to borrow, had not declined as rapidly. As a consequence, the average net income spread has tightened from 15% in 2008 to 8% in 2012.

eppleytype150x150The Company has restructured its balance sheet moving way from greater reliance on debt financing to a greater use of equity funding. The restructuring involved repaying related party assets and borrowings subsequent to the last audited report at the end of 2012, as well as actual or planned conversion of some loans from related parties into equity.

The Company’s cash and deposits were $115.5 million higher on 30 April 2013 compared to 30 April 2012. In keeping with its business strategy, Eppley began its lease operations late in the first quarter of 2013 and recorded lease receivables of $18.7 million as at 30 April 2013.

Eppley’s net investment income declined to $14.9 million in the 4 months ended 30 April 2013 compared to $16.1 million in the 4 months ended 30 April 2012. This was a result of increased holdings of lower yielding cash and marketable securities in the period. The Company’s other operating income increased significantly, mainly as a result of foreign exchange gains on its holdings of hard currency. As a result, its profit after tax increased from $7.0 million in the 4 months ended 30 April 2012 to $12.1 million in the 4 months ended 30 April 2013.

Listing of the shares on the stock exchange will provide visibility for the Company and opens it up to borrow cheaper funds than if they were a non-listed company. Listing will also improve the return on equity as there will be no taxes for 5 years on profits.

IPO outlook  | This one looks like a medium term investment but due to the listed number of shares, investors may want to acquire some in the IPO to ensure that they have them well ahead of when profits start to grow.

Kremi up, hardly out of the blocks

Caribbean Cream’s 49 percent jump in revenues in the first quarter to May this year, melted down to just 24 percent in pre-tax profits as costs rose above the growth in inflows. The situation for the February quarter was even worse as a 48 percent increase in sales delivered just $1.5 million in profit, a collapse from $18.6 million in 2012. Profit after tax rose to $11.7 million, up from $5.4 million, thanks to a roughly $6 million turn around in taxation.

Costs rise faster |  In the May quarter, direct labour cost climbed 69 percent to $11.4 million, electricity moved up by 86 percent, water jumped 106 percent to $1.2 million, machinery depreciation was up 117 percent. There were savings in packaging cost, down 53 percent to $725,000, factory rental was down by 44 percent to $1 million. IC Insider understands that the company underwent some major changes in how some aspects of the operations are done. The company used to purchase certain items from Scoops Unlimited, but this operation is now taken over, hence costs are structured differently than in the prior year period. The acquisition of their own warehouse means reduction in rental but a rise in finance cost. There was also a price adjustment in March for the products to help cover the increased production cost.

KremiBanner600X250Admin cost | Administrative cost was fairly well contained having increased far less than sales. The increase most likely would have been partially impacted by added costs to facilitate the IPO which occurred in the quarter. As such legal and professional fees were up nearly $1 million and audit and accounting fees by $1 million. Utility cost were down as well as depreciation but these may be due to reallocation of charges to direct expense instead of administrative expenses as was shown in the prior period. Interest and finance cost also showed an increase of $1 million. There was also a loss of $937,000 on disposal of fixed asset. The growth in profits before tax would be 36 percent if the loss on fixed asset is excluded. With the increased level of revenue, far more would have been expected under normal circumstances. The next quarter will be the true test when one-off costs should not recur.

Caribbean Cream’s rapid sale growth is phenomenal and looks as it can continue for a while yet. This is the aspect that many investors should be looking at as the company expands its customer base and captures market share with good products at competitive prices. As sales continue to rise rapidly, cost is likely to grow at a much slower pace thus helping to boost profits at a rapid pace.

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At the end of May, current assets stood at $131 million up from $102 million at the end of February. Increased cash which stood at $65 million and a $24 million reduction in inventories were the factors giving rise to current asset change. Current liabilities on the other hand stood at $75.66 million a decline from February’s $126 million as the amount for payables was cut from $100 million to $64 million. Borrowed funds stood at $81 million, just a bit lower than the amount due at February.

Capital spend | The company spent $100 million on capital prior to the IPO but more is to be spent as new cold room machinery is to be installed later this year. Management states that this will cut cost and increase efficiency in freezing the product.

Valuation | The stock is selling at roughly 30 percent of sales. This compares with AMG Packaging at 100 percent of sales, Blue Power 50 percent and Jamaican Teas is around 100 percent of sales. The PE on forward earnings for 2014 is only 2 and there is much room for the stock price to move upward.

Management | The report containing the results show signs of some management weakness that they need to correct. In the investment world, communication is key. The changes in the operations and the resulting changes in the line items of costs should have been addressed in the directors’ report to shareholders. Costs that were of a one-off nature should have been highlighted so that investors could get a clearer picture about ongoing costs and profits. Instead, investors have to dig into the numbers making assumptions that really should not be necessary.

First Citizens’ $1B IPO opens today

The government of Trinidad & Tobago, through the holding company for First Citizens Bank Group, launches a billion dollar Initial Public Offering (IPO) of shares to reduce its ownership in the bank. The issue opens today, Monday 15th July, and when completed will be listed on the T&T Stock Exchange. The offer of 48,495,665 shares, approximately 19.3 percent of the total shareholding of the bank, is expected to rake in $1.1 billion before expenses for the Government of Trinidad. The issue has an offer price of TT$22 per share for sale to the public. The proceeds will go to the holding company for Citizens and is expected to be paid over to the government.

Citizens, a banking and finance company, has total capital of $6 billion and total assets of more than $37 billion. When compared to the two other banks listed on the Trinidad Stock Exchange, Republic has capital of $7.94 billion and total assets of $55 billion while Scotia Bank has capital of $3.2 billion and total assets of $18 billion as of March this year.

First Citizens Brokerage & Advisory Services (a subsidiary of First Citizens Investment Services) is the Lead Broker for the Offer for Sale.

First_Citizensbuilding150x150THE COMPANY | The First Citizens Group is a financial service organization headquartered in Trinidad & Tobago that offers a range of retail, corporate, capital markets, investment management, wealth management, asset management, trustee and brokerage services. The provision of corporate, commercial and retail loans, deposit and other retail services, including credit card accounts, internet, and telephone banking is conducted in Trinidad & Tobago via a network of 26 full service banking locations, one foreign exchange bureau, seven operations centres and 96 ATM machines. In Barbados, these services are provided via five branches, one lending centre and eight ATM locations. In Costa Rica, the provision of corporate loans is done via a centralised corporate banking team that covers both Costa Rica and the Central American region.

COMPANY HISTORY | First Citizens Bank was formed in March 1993 and acquired, The Trinidad Co-operative Bank, Worker’s Bank and National Commercial Bank. At that time, 62 percent of its loan portfolio was in arrears. In the 10 years to 2003, First Citizens Bank grew its profits to TTD233 million, doubled its asset base to TTD6.1 billion and had attained international credit ratings of BBB- and A-3 by S&P and Moody’s, respectively.

In 2009, First Citizens acquired Caribbean Money Market Brokers Limited, now First Citizens Investment Services Limited, a full service securities company with offices in Trinidad & Tobago, Barbados, St. Vincent and St. Lucia. In January 2012, a representative banking office was opened  in Costa Rica as the Bank’s first entrance into Central America and in August 2012, the Group continued its expansion with the acquisition of Butterfield Bank in Barbados, now called First Citizens Bank (Barbados) Limited.

BALANCE SHEET & PROFITS | At the end of March this year, the bank loaned out $13. 8 billion, an increase over the March 2012 of $11.2 billion. Customer deposits climbed faster to $26.7 billion versus $22.9 billion. Profit before tax grew to $388.7 million, $40 million or 11.5 percent over the $348.7 million earned for the corresponding period last year. Profit after tax amounted to $306.4 million. For the 2012 fiscal year, the bank earned profits of $446 million giving a return on equity of 8 percent and return on assets of 1.58 percent. Return on equity is around 11 percent for 2013.

TTSEDailyTRading280x150Citizens is underperforming its two major competitors in a number of areas. Importantly, two critical measures tell the tale as to where the bank sits with its peers. Scotia Bank’s return on equity is 18 percent and return on assets 3 percent while Republic Bank is 14.6 percent return on equity and 2.25 percent return on assets. Republic sells at a PE of 15 and Scotia Bank at 22.5 times 2013 earnings and Ansa Merchant Bank has a PE of 19. The lower numbers of PE for Citizens suggest there is much room for the stock price to climb after the shares list with their PE at only 11.

The performance of the loan portfolio is a matter of concern. Data shows that there is not much impairment in the loan portfolio. However, it is noted that the level of loans that are past due increased markedly in 2012 over 2011 from $1.96 billion to $2.99 billion. “Corporate past due amounts” increased by $800 million, an indication that things may not be a sanguine as the profit figures are suggesting even as the provision for loans losses in the March six months period was much less than what was provided for in the comparable half-year results in 2012.

DIVIDEND POLICY | The dividend policy of the Issuer will be to distribute funds surplus to the operating capital and strategic requirements of the Group, as determined by the Directors, with an annual target dividend pay-out percentage range between 45 to 55 percent of net profit after tax.

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Watch and buy this week

Monday, 15th July 2013 | What’s happening in the markets this week? We’ll be tracking the Stocks To Watch in our headlights for trading activity and price changes.

Our analysts’ Buy Rated seal of approval has been extended to Access Financial Services, a stock that trades on Jamaica’s Junior Market. Read our post dated 27th June, 2013 about this money maker ‘Big payoff for Access owners‘.

Meanwhile AMG Packaging has lost some of its sparkle and is no longer Buy Rated. Our post ‘AMG is investing for tomorrow‘ gives an in-depth report on their recent published results.

Better than a broker’s ‘buy’ recommendation, IC Insider has no vested interest in any stock transaction or conflict of interest. Our research is backed by published reports of the company’s performance and insights of future earnings that can be found at ICInsider.com. The final decision to buy, or not, is your personal choice.

To search for published company results on IC Insider, please use ‘Search IC Insider’ and enter the company name, in full or in part.

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JSE share allotment

The Jamaica Stock Exchange announced the formula for the allotment of shares in the recent issue of 38,250,000 ordinary shares which was oversubscribed by 60 percent. The IPO received 196 applications for the shares costing approximately J$160.663 million at the price of J$2.85 per each. The issue which was opened on Friday, July 5 2012 closed on Monday, 8 July 2012 after it was oversubscribed on the first day of issue.

All Reserved Share applicants will receive 100% of the amount of the Shares they applied for. Applicants for the general pool, who applied to receive shares of 500,000 units or less, will receive 100% allocation. This applies to 93 applicants, 6 applicants who applied for more than 500,000 shares will have the excess allocated on a pro-rated basis.

The shares are expected to start trading next week.

Read more about the Jamaica Stock Exchange IPO at JSE: 38m shares for IPO published 22 May 2013

AMG is investing for tomorrow

AMG Packaging invested $108 million since last August in fixed assets including land, building and equipment. The additions moved fixed assets to $230 million, a major increase for a relatively small company. The company took on debt to help fund the expansion as well as providing working capital financing, while both inventories and trade receivables rose and was partially offset by a rise in payables.

At the end of April, loans stood at $91 million up from $30 million in May 2012 as borrowing added $70 million to debt with repayment of principal over 7 years at 9.25 percent interest for 5 years and variable thereafter at 3.25 percent above Treasury bill rates. Capital spend is yet to end. Management in their report to investors indicated that a multi-functional machine on order will replace older manual ones and a rotary die cut machine that is being manufactured will be shipped shortly. They are expected to increase production and enhance the quality of products.

amg-packaging_logo150x1502013 profit | Profit for the quarter came in at $7.3 million down from $15.7 million in 2012. For the nine months period, the bottom line reflected an increase in profits to $37.7 million up from $32.56 million in 2012. Revenues climbed in the latest quarter over that of 2012 but only by 5.7 percent to reach $111.37 million, while revenues for the nine months was up by 18 percent hitting $315.77 million. Sales slowed down sharply in the latest quarter from 34 percent increase in the three months to February and 18 percent increase in the November quarter.

Interestingly, even as revenue growth slowed in the May quarter, the margin continues to show improvements as gross profit increased over that of the 2012 May quarter and production raw material cost marginally more to generate the increased sales. Direct expenses climbed 27 percent in the quarter. Rises in administrative cost, finance, interest and depreciation combined to squeeze profit for the quarter, although profit before these expenses grew by $2 million, net profit fell by $8.4 million. In the quarter, interest cost came in at $2.8 million. There was none reflected in results in the prior period. Financial cost rose by $1.3 million and administrative cost increased by $1 million over the February quarter. Some of the increased cost is not expected to recur in the subsequent quarter but indications from the rise in administrative cost in the previous quarter compared with 2012 figures suggest that the cost structure going forward is set at higher levels than before. The company has been focusing its energies on cost containment and the reduction of raw material waste. The improved margins indicates that they have succeeded in this latter area. But there others that they are working on that will bring results in the future. The results to date indicate that they need to get revenues up at a faster pace than the latest quarterly results indicates to more than cover the increased overhead cost.

2012 profit | Sales for the year ended August, 2011 increased by 15.71% to $357.46 million as a result of an increase of 27.19% in the number of units produced. This increase in sales resulted in a 27.23% increase in Gross Profit of $81.31 million (2011- $63.91 million).  For 2012, profit of $47.66 million was realised, up 52.45% over the 2011 prior year of $31.27 million.

amg-packagingboxes150x150Finances | Current assets of $199 million including cash of $49 million is more than adequate cover for current liabilities of $87 million. At the end of the February, cash was down to $7 million. Inventories climbed sharply and may well be attributable to the weakness of the exchange rate of the Jamaican dollar, in which case holding inventory at a lower exchange rate will act as insurance coverage for loss in value of the Jamaican dollar. The increase in inventories could well be that sales were taking place at a much slower pace than anticipated based on the hike in sales in the prior quarter.

Production improvement | AMG told its shareholders last year that the new 10,000 square feet warehouse facility was completed and will allow for additional space to stock raw material and finished products as well as expand the production capacity. The facility boasts two loading bays which will enable loading and unloading containers and minimise damage to the rolls. It will enable the company to store raw materials in a secure and proper environment. A paper clamp forklift was acquired and enables moving paper rolls in a more efficient manner.

A new two-colour printing and rotary die cut machine is installed and in production. This acquisition increased production as well as widens the product base. A partition machine was also acquired, expanding the product offering to service companies that package glass products.

Management decided to rearrange the shift system to accommodate a third shift in the near future. The new hours will be 6am to 2pm and 2pm to 10pm. This will eliminate the down time as well as minimize the overtime.