Review of 2018 stock market forecast
“ Assessment of the market, suggests that 2018 could be a grand year, with overall price gains likely to be in excess of 40 percent”, a quote from IC Insider.com in February, this year.
“Based on projected earnings for 2018, the average PE ratio suggests that main market stocks should grow by 26 percent. Falling interest rates could add another 20 percent to gains during the year, bringing overall gains in excess of 40 percent.”
“Technical readings of the market have the main market heading initially to around 390,000 points or 23 percent ahead of the December close, for the all Jamaica Index, before resistance sets in and then moving much higher, later on’ the IC Insider.com forecast for 2018 stated.
With almost three more months to go, before the year ends, the main market is broken through the 390,000 points mark to be up 31.7 percent for the year to date, there seems no stopping it for now.
The report in February stated that the main market was caught in a wedge formation, trading just below the upper end of channel that can be traced to late 2015. The wedge could hold the market in consolidation mode for a short time, a month or two, before breaking out, most likely to the upside.
IC Insider.com projects that many of the main market heavy weights will find it tough to repeat the strong gains they enjoyed in 2017, if that is the case, their impact on the market index is likely to be less than for 2017. Another factor that could make a repeat of 2017 tough, is the movement of interest rates. Last year, Treasury bill rates fell 29 percent from 6.56 percent to 4.83 percent, that level of decline, is unlikely to happen in 2018, even as some of the decline in the latter part of 2017 is yet to be fully reflected in the prices of stocks to date and should positively affect prices in 2018. IC Insider.com is forecasting rates on 182 days Treasury bill hitting 3 percent by the end of the 2018 first quarter. Treasury bill rates in 2018 at 1.7 percent, have fallen more sharply than in 2017.
The original piece stated that “there are a number of other factors at play that are set to impact the market. Increasing employment is taking place with the highest number of persons employed in the country’s history. Attendant with that is the sharp fall in unemployment from more than 16.3 percent in 2013, to just over 10 percent in 2017. The annual net employment is growing around 30,000 persons per year and that could rise as the economy gains steam. This will mean more spending and increased tax collection for government. Alpart resumption of Alumina production is a big positive for the overall economy, for increased government revenues and more demand for local goods and services, some of which are provided by listed companies. The tourism sector is enjoying strong growth, apart from increasing foreign exchange intake for the country, will have direct impact on Jamaica Producers and Sagicor X Fund. Jamaica seems to be going through a construction boom with several new buildings under construction, Caribbean Cement and Berger Paints should benefit considerably from such developments.”
“More listings on the stock market will result in increased fee income for JSE and brokerage houses, from increased trading volumes.”
The TOP 10 stocks include a few surprises while there are others that sit just outside the top stocks that investors may still want to keep a keen eye on. Investors should be looking beyond 2018 as medium term gains beyond 2018 could be strong for stocks that will benefit from current developments, long term.
The TOP 10 selection is selling well below the average PE of the Main market of the Jamaica Stock Exchange at just over 6.3 versus nearly 12 at the end of 2017.
Barita Investments moved more into fee based income and that is working well for them, with sharp growth, while net interest income stagnates. The prospects for continued strong growth in fee income continues with more investors seeking better returns than in the fixed interest market. The company should see a change in ownership soon and that could see a more aggressive approach to management that could optimize returns from exiting business and newer lines. Unrealized gains on investment ought to be factored into its earnings in valuing the stocks and that would boost its value considerably, the market is not paying attention.
Berger Paints is set to be a big winner with increasing sales coming from a buoyant construction sector resulting in increased profit and what IC Insider.com expects to be a healthy dose of dividend payments. It could become the next Carreras from a dividend yield standpoint but with growing profits. The company will benefit from lowering of overhead cost which was evident in 2017.
Jamaica Broilers continues to grow organically and from new business being acquired. Growth will continue as the Haitian market deliver greater returns form a growing market while the poultry demand in Jamaica continues to grow.
Caribbean Cement will benefit from lower operating cost, increased sales and a planned cut in financing of the lease which is said will cut hundreds of millions of dollars out of it cost that could come close to $2 per share per annum.
Palace Amusement Company, currently enjoying sell out cinemas with block buster hit, is one of those unusual choices. It enjoys minimal trading but it could surprise on the upside if all goes well. Growth in the economy and increased employment will help to boost patronage going forward and will aid in profit growth as well.
JMMB Group put out outstanding Q3 results with a 39 percent increase in profit and strong gains in revenues, auguring well for 2019 outcome.
The growth potential remains strong and investors in the stock will reap rich rewards down the road. Just one stock that requires patience. By the way fees and commission income jumped an impressive 71 percent to $512 million in the quarter and 53 percent in the nine months, over the similar period in 2016 and should continue to do so going forward.
Radio Jamaica continues to disappoint with below expected revenues and profit. It could return to favour but needs to generate more income from advertising. This is one to accumulate for a payoff down the road.
The other three stocks, Sterling Investments, Grace Kennedy and Sagicor Group are undervalued and could deliver some decent returns to patient investors.
Below the TOP 10 are strong candidates to deliver decent returns this year and beyond, the list includes NCB Financial that is on a strong growth trajectory and recently listed Wisynco Group that should generate earnings around $1.10 for the 2019 fiscal year that starts in July.
Gwest’s share issue response inadequate
The response by GWest the issue of preference shares is inadequate and they still have a number of questions to answer about the issue and the lack of disclosure in the prospectus and the audited financial statements.
The openness of directors with their investors is critical in cementing trust between them. A prospectus is a contractual invitation to the public to purchase shares in the offering company. It requires that full disclosure of all material information is made, so that prospective investors can make rational decisions pertaining to the shares being offered for sale. Any rational person reading GWest prospectus would come to the conclusion that the only matter agreed on at the extra-ordinary meeting of November 27 was that which was disclosed in section Page 45 of the prospectus which list details of the “Recent Capital Restructuring of the company to be as follows”:
“At an extraordinary general meeting the shareholders of the Company approved the following actions in respect of the capital structure of the Company: The re-registration of the Company as a public company in accordance with the Companies Act, adopting new Articles of Incorporation for that purpose:”
a)”The increase of the authorized share capital. (b)The subdivision of each Share”
“The disapplication of any pre-emption rights, howsoever arising, for the purposes of the issue of new Shares for subscription. The conversion of all fully paid Shares to stock on issue.”
There is no mention of the issue of any other type of share. Any decision to issue other shares should have been disclosed in this section if a meeting took place before the date of the prospectus.
The fact that it was not, is the clearest sign that there was inadequate disclosure of important and material information and that the issue of preference shares after, should not stand before approved by a meeting of the new owners.
The vast majority of Junior Market companies have limited administrative staff, as such all the skill set to properly run them are not in their employ. The end results is that mistakes are made and will continue to be made. Recognizing, that most of them don’t have the knowhow of running a public company, the JSE created the creature called a Mentor, but not even that seems to be adequate to fill the breach.
According to the company in a release to the JSE, “Sections 18 and 19 in the November 2017 GWEST Prospectus specifically disclosed that shareholders loans were to be converted to preference shares, thereby reducing the servicing cost to the Company: Shares in the capital of the Company are under the control of the Directors, as expressly provided for in the Articles of Incorporation.”
That is nonsense. The prospectus only has 16 sections, with the last (section 16) being signed by the directors.
Section 11 contains projections along with supporting notes that were reviewed by Ernst and Young who signed their report on November 28.
The extraordinary meeting at which the change in share capital was approved was said to be held on the November 27. According to the resolution, the directors were given authority to issue, to allot such Cumulative Non-redeemable Preference Shares at such subscription price per Preference Share as the Directors of the Company or such Committee may deem fit, the same to be allotted to shareholders of the Company who have invested in the capital of Company (in cash or in kind) with the understanding/pursuant to agreement(s) that such investment(s) will be recognized as shareholder loans or by the issue of preference shares, in each case on terms and conditions determined by the Directors of the Company, subject always to the Articles of Incorporation of the Company”.
Having given the directors the authority to determine the terms and conditions of the preference shares, GWest in releasing information of the above resolution has not presented the minutes of the meeting of the directors that agreed on the terms. The fact that the extraordinary meeting did not set out the terms of the issue of the shares is even more reason why it should have been fully disclosed in the prospectus.
The company refers to 18 and 19 but it appears they mean notes 18 and 19 of section 11 that deals with the projections. What does the section say about the preference shares?
Note 18. “Borrowings| This relates to the NCB Term Loan and shareholders’ loans converted to preference shares.”
“NCB Term Loan| The terms of this loan for $350 million, include a repayment period of eight years payable in equal quarterly installments and an interest rate of 11.5% per annum.”
“Preference Shares| 50% of shareholders’ loan will be converted to non-redeemable preference shares with interest at 10% per annum. The remaining 50% will remain as shareholder’s loan with no fixed repayment with interest at 10% per annum for the J$ amounts and 4% per annum for the US$ amounts.”
Note 19. “Shareholders’ Loan| This amount relates to funds advanced by the shareholders. It is assumed that outstanding balances will continue to attract interest at the prevailing rates of 15% and 4%, respectively for J$ and US$ funds. However, once the IPO is completed and the Company becomes publicly-listed, it is assumed that the interest rates will be reduced to 6% and 2% for J$ and US$ denominated loans, respectively on the remaining balance not converted to preference shares. With respect to the J$ denominated balance, the interest rate is assumed to increase annually by 1%, with a cap at 10% by 2022. The Directors are of the view that these rates are more in line with arm’s length rates prevailing within the market.”
Nowhere in the prospectus is there any reference to a meeting called to approve the issue of any shares other than ordinary shares and the terms of those shares. Under no stretch of the imagination could assumptions included in a financial projections be regarded as disclosure of an agreement to issue shares or that a resolution was already passed to do so. Earlier in the prospectus it is made clear that futuristic statements are just that, as they may not be achieved. That the company withheld pertinent and material information from the new investors even when they had a number of occasions to do so, is glaring and concerning. That the Jamaica Stock Exchange sees nothing wrong with what has transpired is plain shocking, even more shocking is that they did not ensure that proper and full disclosure of the information was included in the relevant part of the prospectus.
The directors cannot over ride, the company’s act that requires that all changes in share capital of a company be approved by shareholders at a general meeting. From all indications this was not agreed to before the prospectus was published, in which case it appears that the new shareholders would have to approve it at a general meeting.
To compound the problem, the preference shares were issued to connected parties to the company. That alone should have alerted all concerned that all decisions should be properly executed.
Of note, the Audited accounts to March 2018, made no mention of the issue of additional shares that were issued or to be issued. It is the norm in auditing, that minutes of meetings are made available to the auditors and the directors have a responsibility to ensure that the financial statements are accurate. The directors need to state if the audited accounts correctly disclose all relevant information pertaining to the share capital. They need to state why they all signed the Prospectus with no mention being made of the resolution to modify the share capital indicating full details of the resolution.
What date did the directors meet to determine the terms of the preference shares and why were those terms not disclosed in the prospectus for all to see?
The Jamaica Stock Exchange requires that they should be advised in advance of any meeting of directors called to alter the share capital of a company and after the meeting the outcome of the meeting is to be communicated to them as well. There are no indications that the directors complied with this section of the Stock Exchange rules.
The handling of this matter is not the way to properly operate in the capital market.
TTSE traded steady on Friday
The Trinidad & Tobago Stock Exchange, closed after the Composite Index rose 0.74 points to 1,220.69, the All T&T Index shed 0.73 points to 1,694.24, while the Cross Listed Index added 0.31 points to 110.43.
At close, 15 securities changed hands, with the price of 4 rising, 4 declining and 7 remaining unchanged, against 14 trading on Thursday.
The market ended trading of 519,519 shares valued $3,980,716, compared to 602,213 shares valued $7,388,303, changing hands on Thursday.
IC bid-offer Indicator| At the end of trading, the Investor’s Choice bid-offer indicator reading closed with 5 stocks ending with higher bids than the last selling prices and 4 with lower offers. Republic Financial Holdings closed with the bid at $105 to buy just 15 shares, well above the last traded price of $103.70.
Stocks closing with gains| Clico Investments gained 1 cent and ended at $19.51, with 7,758 stock units changing hands, JMMB Group rose 5 cents and closed at $1.70, after exchanging 86,130 shares, Massy Holdings closed with an increase of 5 cents and concluded trading of 2,735 shares at $47.05 and Trinidad & Tobago NGLadded 1 cent and settled at $29.18 with 110 shares changing hands.
Stocks closing with losses|First Citizens fell 15 cents and settled at $32.65, after exchanging 435 shares, Guardian Holdings lost 1 cent and completed trading with 1,140 units at $16.89, Sagicor Financial shed 4 cents and ended at $7.70, with 10,857 stock units changing hands and West Indian Tobacco lost 44 cents and completed trading 7,363 units at $88.
Stocks trading with no price change| Angostura Holdings completed trading at $15.75, with 114,229 stock units changing hands, Ansa Mcal settled at $57, with an exchange of 1,450 units, Grace Kennedy completed completed trading at $2.70, with 246,995 stock units changing hands, National Flour settled at $1.60, with 29,518 units trading, One Caribbean Media ended at $12.11, after an exchange of 8,700 shares, Scotiabank settled at $64.94, with 750 units and Unilever Caribbean completed trading at $26.25, with 1,349 stock units changing hands.
Prices of securities trading for the day are those at which the last trade took place.
All Jamaica pass 415,000 Points
Gains in Grace Kennedy, Scotia Group, Seprod and NCB Financial were mostly responsible in pushing Jamaica Stock Exchange main market to a new record high in early trading on Friday.
The All Jamaica Composite Index jumped 7,892.89 points to a record 415,112.65 and the JSE Index surged by 7,191.32 points to a record of 378,214.61 points after 41 minutes of opening of the market.
The Junior Market has not participated in the bullishness and slipped 3.76 points to 3,397.17.
5 TTSE stocks rise 2 decline on Thursday
The Trinidad & Tobago Stock Exchange, closed with all three main indices rising on Thursday. At the close, the Composite Index rose 1.86 points to 1,219.95, the All T&T Index gained 2.44 points to 1,694.97, while the Cross Listed Index added 0.17 points to 110.12.
At close, 14 securities changed hands, with the price of 5 rising, 2 declining and 7 remaining unchanged, against 14 trading on Wednesday.
The market ended trading of 602,213 shares valued $7,388,303, compared to 194,813 shares valued $1,743,710, changing hands on Wednesday.
IC bid-offer Indicator| At the end of trading, the Investor’s Choice bid-offer indicator reading closed with 6 stocks ending with higher bids than the last selling prices and 4 with lower offers.
Stocks closing with gains| JMMB Group gained 5 cents and settled at $1.65, after exchanging 1,958 shares, NCB Financial Group rose by 2 cents and completed trading at $5.75, after exchanging 10,752 shares, Republic Financial Holdings finished trading after an increase by 1 cent to a 52 weeks’ high of $103.70, after exchanging 466 shares, Trinidad & Tobago NGL closed with a gain of 1 cent at $29.17, after exchanging 50,171 shares and West Indian Tobacco finished 44 cents higher and ended at $88.44, with 205 units changing hands.
Stocks closing with losses| Clico Investments concluded trading with a loss of 30 cents at $19.50, with 57,592 stock units changing hands and Sagicor Financial traded 9,301 stock units, with a loss of 1 cent at $7.74.
Stocks trading with no price change| Ansa Mcal ended at $57, trading 200 units, First Citizens completed trading at $32.80, after exchanging 1,893 shares, Grace Kennedy closed at $2.70, with 244,500 stock units changing hands, Massy Holdings settled at $47, after exchanging 48,084 shares, National Enterprises ended at $8.96, with 173,016 stock units changing hands, One Caribbean Media settled at $12.11, after exchanging 4,000 shares and Scotiabank ended at $64.94, with 75 units changing hands.
Prices of securities trading for the day are those at which the last trade took place.