Review of 2018 stock market forecast

Palace hits a new high of $1,500 to be top performer in 2018 so far.

“ 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 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 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 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 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 last traded on the JSE as high as $20 on Friday.

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 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.

Jamaican economy grew 2.2% in Q2

The Jamaican economy grew by 2.2 percent during the period April to June 2018, when compared to the similar quarter of 2017. This increase was attributed to improved performances in both the Goods Producing industries by 7.2 percent and the Services industries by 0.6 percent.
The growth in the second quarter brings to 1.8 percent growth for the calendar year to date with growth of 1.4 percent in the first quarter.
According to Statistical Institute of Jamaica, “the positive performance of the Goods Producing Industries was due to Agriculture, Forestry and Fishing that grew by 12.5 percent, Mining and Quarrying increasing by 31.6 percent, Construction by 2.9 percent and Manufacturing by 0.2 percent. The Agriculture, Forestry and Fishing industry’s performance was attributed to favourable weather conditions and assistance to farmers by the Ministry of Agriculture.

The mining sector boost GDP growth in 2018.

Growth in the Mining and Quarrying industry was due mainly to the resumption of production at the Alpart refinery and demand for crude bauxite from overseas refineries. Increased output of 2.5 percent from the Food, Beverages and Tobacco sub-industry was the main contributor to the growth in the manufacturing industry, due mainly to increases in meat and meat products, processing of fruits and vegetables, bakery products, beverages, sugar and molasses.
The Construction industry’s performance reflected increased activities in the building construction, civil engineering and building installation groups. All industries within the Services industries recorded higher levels of output with the exception of Producers of Government Services which remained relatively unchanged. Electricity and Water Supply grew 1 percent, Wholesale and Retail Trade; Repairs; Installation of Machinery and Equipment by 0.6 percent, Hotels and Restaurants by 0.4 percent, Transport, Storage and Communication by 1.6 percent, Finance and Insurance Services by 1.1 percent, Real Estate, Renting and Business Activities by 0.6 percent and Other Services by 0.3 percent. The economy grew by 1.6 per cent in the second quarter of 2018 when compared to the previous quarter. This was the result of a 2.7 per cent increase in the Goods Producing Industries and a 1.2 per cent increase in the Services Industries.
The results are preliminary and will be revised in the future when more information is obtained.

Paramount’s lubricant plant in operation

New Lubricant plant at Walton Park Road

Profit at Paramount Trading, jumped 137 percent to $34 in the first quarter to August last year, but declined by 35 percent in the November quarter, to $24 million from $37 million in 2016.
For the six months to November, profit rose only 13 percent to $58 million from $51 million in 2016. Sale revenues rose 28 percent for the November quarter, to $257 million from $200 million in 2016 and increased 31 percent for the year to date, to $487 million from $370 million in 2016.
The board of directors in their report to shareholders accompanying the quarterly, stated that “our lubricant business line produced strong sales during the quarter when compared to the last year growing $28 million or 261 percent and by $41.6 million with a 248 percent increase year to date. Technical grade product sales grew by $47 million or 137 on quarterly basis and $83 million or 133 percent year over the period year. We expect this trend to continue into the last two quarters.”

Processing and storage tanks inside factory.

Profit margin declined in the November quarter to 28 percent from 30 percent in the 2016, and slipped to 29 percent from 31 percent for the year to date period. The effect, gross profit rose 15 percent in the quarter to $99 million from $86 million and 19 percent for the year to date, to $200 million from $169 million in 2016.
While revenues rose solidly, so did administrative expenses that jumped 47 percent to $72 million in the quarter and increased 13 percent in the six months period to $121 million. Finance cost declined in the quarter, to a negative $2 million from $4 million in 2016 and from $7 million to $1.5 million for the half year.
Earnings per share came out at 1.5 cents for the quarter and 3.7 cents for the six months and should end the fiscal year ending to March around 25 cents with four months production and sales from the lubricant plant and the expanded chlorine and bleach operations.
Gross cash flow, brought in $72 million but growth in receivables, inventories, addition to fixed assets offset by loan inflows and reduced Payables wiped out the gains.

Another view inside of the factory.

Shareholders’ equity stands at $739 million with borrowings at just $77 million. Net current assets ended the period at $486 million, well over payables of $237 million. Inventories rose to $394 million from $320 million at the end of November 2016 and receivables climbed to $321 million from $238 million with cash and investments ending at $78 million.
The company commenced operation of the joint venture lubricant plant from around a month ago as well as production of bleach, an addition of a new product line. When the lubricant plant was announced in 2015, the estimate for revenues was in the US$5 million range but now that Alpart is reopened, the amount should rise.
The stock traded at $3.10 on the Junior Market of the Jamaica Stock Exchange with a PE ratio of 5.6 times IC, 2019 earnings of around 55 cents per share.

Jamaican economy throwing up goodies

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The Jamaican economy seems to be humming along pretty well, based on a number of critical measures that are available as well a physical evidence seen elsewhere.
There seems to be increased traffic around the corporate area at various times of the day, even when school is closed, thus reducing much of the normal peak hours traffic. Information from the Tourism sector is that visitor arrivals have climbed sharply since the winter months. There is strong evidence of increased construction activities with buildings be constructed across the length and breathe of Kingston and elsewhere in the country for commercial and residential purposes.
An examination of government’s statistical data is confirming some of these developments. Corporate taxes are up 33 percent over 2016 for the first 3 months of the fiscal year, an indication of higher sales and profit being generated. Education tax is running 7.7 percent ahead of projections and 13 percent above last year’s intake. Contractors levy is up over 2016 by 27.5 percent ahead of forecast, to reach $391 million and some 33 percent ahead of the intake for 2016 of $293 million, a good indicator of the health of the construction sector.
Traditional Exports are holding their own but with a slight fall in earnings for January to April 2017 of 1.5 per cent or US$3.4 million below the comparable 2016 period to US$216 million, but Non–Traditional Exports in the same period grew 36.2 percent or US$51 million above the US$140.9 million earned in the 2016 to reach US$192 million. Traditional exports should get a boost in the second half of the year with the resumption of alumina production at Alpart. Another critical indicator of increased health of the local economy is the second largest number of persons employed within a one year period of 35,500, for the twelve months to March 2017, only bettered by increased employment of 40,500 more persons between March 2015 and 2016,

The Hampshire Apartments complex being built by Guardian Life.

this number could have be swollen by persons employed due to the general elections that were held in February and staid on until sometime after. The 2017 numbers of newly employed, compares favourably with 2007 with 36,500 newly employed, 2006 with 41,900, 2005 with 35,500, but well below the 72,700 newly employed between April 2002 and 2003. Bank credit has expanded to one of the fastest pace for some time with an increase of 17 percent to $495.759 for banks excluding that was not so clarified in 2016. The growth is well over the approximately 4 percent inflation over the period.
Of course, business confidence is at record levels, as investors pump more investments into the local stock market, driving it to new record highs on the last day of July, with increases expected in the months ahead.
Recent data in the forex market shows it generating strong net inflows with the local currency enjoying some revaluation after a slight fall earlier in the year.