Owners and directors along with their advisors ought to know the value of their company. But this publication must ask the question if Fontana has really done so well and will continue to expand, why is it priced so low?
At a premium over net book value of 88 percent, the stock is one of the cheapest of Junior Market listings, with the vast majority selling at a premium of 3 to 4 net book and an average PE of around 13 excluding the extreme highs and lows. One would expect the stock to be priced closer to 10 times earnings before tax, that would put the price closer to $3 than $1.88 and that would place price to net asset value at a premium of 200 percent, still below the market average. The fact that the company is setting up a new branch and looking for more expansion, makes the case for a higher price more compelling as investors are most likely going to rake in much profit from this stock. The only problem the general public will not get many shares to buy up front as it is set tobe heavily oversubscribed. Investors can expect this one to at least double shortly after listing.From where we sit we think the brokers did the owners out of several million dollars on this issue but then the owners may want Jamaicans to party with them on the 50th anniversary.
Why is Fontana IPO priced so low?
Scotia Group stuck in neutral

Investors could find themselves in shark infested waters if they are not careful with the prices of several stocks now at very high levels. Investors need to be careful of being sucked into attractive profit results that are not based on sustainable earnings.
A case in point is Scotia Group. In the July quarter the interim results showed a big jump in profits, but that was based on an unsustainable rise in foreign exchange earnings due to the slippage of the Jamaican dollar, resulting in nearly $2 billion raked in for the quarter. For the October quarter only $396 million is reported for that line item, but the year shows a big jump from $2.5 billion to $4 billion. Net interest income is on the slide, falling from $26.64 billion in 2017 to $25.2 billion in 2018 and in the quarter the decline continues with October falling to $6.1 billion from $6.3 billion in July and $6.7 billion in the October quarter in 2017. While loan provisioning is down, year over year to October, to $1.9 billion from $2.2 billion it rose in the final quarter to $744 million from $695 in 2017 and $620 million in July this year. Net fee income has been steady for the various quarters at just over $2 billion but fell in the fiscal 2018 year to $8.1 billion from $8.6 billion.
Operating expenses rose to $5.74 billion in the October quarter from $5.1 in July and $5.18 billion for the 2017 final quarter. For the full year operating expenses rose to $22 billion from $21.3 billion. The group had a gain on disposal of a subsidiary of $753 million which saved profit from falling for the latest year with a rise to $12.78 billion from $12.17 billion in 2017. For the quarter, profit dropped to just $1.6 billion from $3.36 billion in 2017.
Importantly, the loan portfolio that rose strongly in the July quarter to $177 billion is up at a slower pace of 3.2 percent to $183 billion, an annual pace of 13 percent, but it needs to increase further to really deliver a reasonable increase in profit going forward.
The stock closed at $54.05 on the Jamaica Stock Exchange on Thursday, but its recent profit performance does not send very encouraging signals to buy.
Fontana IPO set for heavy oversubscription
Fontana’s prospectus initial public offer, first mentioned by IC Insider.com is now out but with confusion as to the pricing. The price seems to be $1.88 except for reserved shares at $1.69 each.
Whether the price is 1.88 or $2 the stock is priced very attractively priced for investors at a PE that is well below that of the Junior Market that it will be listed on and is expected to be heavily oversubscribed. The general public has been allocated 113,434,802 shares at a PE ratio of just 6.4 times 2018 earnings, well below the market average of more than 15, but things get even better as the interim results to September this year show a huge jump in profit from $11.5 million to $51 million before tax, with sale revenues up just 5.5 percent to $936 million while cost of sales declined from $650 million to $640 million, thus improving gross profit margin. While revenues grew just 5.5 percent in the quarter administrative cost climbed faster by nearly 10 percent to $223 million. At the same time inventories rose 19 percent to $680 million over the levels at September 2017 and are up 15 percent from June 2018 figure, a development that requires clarification. The PE ratio based on the interim figures suggest that the PE will fall to around 6 or less for the 2019 fiscal year, with good prospects for continued growth in the business.
The Company, in March 2013 acquired the former Azmart location in Barbican Square, Kingston and opened its Ocho Rios location in November 2013. There has been significant growth in sales from these locations. Kingston and Ocho Rios branches now represent 27 percent and 16 percent of the total sales, respectively, the Company stated. Revenues from the Ocho Rios branch increased from $113 million in 2014 to $536 million in 2018, while revenues at the Kingston branch grew from $508 million in the 2014 fiscal year to $871 million in 2017 with growth slowing to 5 percent in the financial year 2018.
The new Waterloo Square location which will open in financial year 2019, is expected to add 28,000 square feet of retail space, an increase of over 40 percent and bolster sales. It is expected that the Waterloo Square store will provide greater buying power to negotiate more favourable terms and rebates with key pharmaceutical partners on the local market. The company is seeking further opportunities to expand its branch network in growing communities such as Montego Bay and Portmore. The anticipated increase in sales will provide greater critical mass to support the sourcing of higher volumes of inventory directly from China with greater margins.
The Company invites Applications for 124,937,565 Subscription Shares, which are to be newly issued. The Company is also inviting Applications on behalf of the Selling Shareholder for 124,937,400 shares. A total of 136,440,163 shares that are initially reserved for priority applications. The minimum amount to be raised by the Company from the sale of the Subscription Shares is $234,040,086.
The Company was established in 1968 at the Manchester Shopping Centre in Mandeville by Shinque “Bobby” Chang and Angela Chang. Today, the Company is run by Kevin O’Brien Chang (Chairman), Anne Chang (Chief Executive Officer) and Raymond Therrien (Chief Operating Officer) with the support of Independent Directors. The Company operates pharmacies and retail stores in Jamaica with 5 locations across the island and 330 employees. Its core business is the sale of pharmaceutical products through licensed pharmacies, and a range of beauty and cosmetic items, housewares, home décor, toys, baby items, electronic, school and souvenir products.
The Company recorded revenues of $3.4 billion in financial year 2018, representing an increase of $272 million or 8.66% over the prior year and an increase of approximately 91% from $1.76 billion in 2014. Pretax profit for 2018 declined 6 percent from $322 million in 2017 to $303 million after rising from $237 million in 2016 that was up more than 100 percent over the 2015 profit of $115 million. The slowdown in 2018 is attributed to the state of emergency in Montego Bay and road construction in the Barbican area.
The stock has been accorded IC Insider.com critical BUY RATED accolade.
Barita directors to consider rights issue
Barita Investments advised the Jamaica Stock Exchange that a meeting of the Board of Directors will be held on December 13, 2018, at which the consideration of rights issue of the ordinary shares of the company is being considered.
IC Insider.com, has been reliably informed that a large portion of the recent $5 billion bond issue that was raised by Conerstone Investments Holdings the new majority Barita Investment shareholder is earmarked for the rights issue.
The company will need to call an extraordinary meeting of shareholders to get shareholders approval for the rights, it is therefore unlikely that if approved by the directors it will take effect until late January 2019 at best.
Sharp drop in JSE Indices
The Jamaica Stock Exchange had one of its largest fall with the JSE All Jamaican Composite Index dropping 10,996.27 points to 422,043.60 and the JSE Index nosediving 10,018.84 points to close at 384,529.46 at the close.
Earlier in trading the market had slipped appreciably but dived in the last few minutes of trading with NCB Financial trading at $150 before moving back to last trade at $159 and Sagicor Group down to $140 but last traded at $144. The Junior Market inched higher by 2.46 points.
Scotia Group reported poor final quarter profit and that could weight on the market on Friday.
5 stocks rise 5 fall on TTSE – Thursday

Trinidad & Tobago Stock Exchange Head Quarters
In market activity on the Trinidad & Tobago Stock Exchange on Thursday ended with trading in 17 securities against 16 on Wednesday, with 5 advancing, 5 declining and 7 remaining unchanged on a day when both the volume a value of trading fell below Wednesday’s levels.
At close of the market the Composite Index gained 4.49 points on Thursday to 1,310.21. The All T&T Index inched 1.07 points higher to 1,696.96, while the Cross Listed Index rose 1.09 points to close at 124.87.
Trading ended with 224,227 shares at a value of $4,223,600 compared to 920,887 shares at a value of $4,495,578 on Wednesday.
IC bid-offer Indicator| The Investor’s Choice bid-offer ended with 1 stock with the bid lower than the last selling price and 4 with lower offers.
Stocks closing with gains| First Caribbean International Bank rose 25 cents and completed trading 47,493 units at $8.30, First Citizens added 4 cents and settled at $32.80, after exchanging 1,000 shares, JMMB Group increased 3 cents and concluded market activity at $1.80, after exchanging 12,000 shares, Republic Financial Holdings rose 26 cents and ended at $107.26, after exchanging 1,000 shares and Trinidad Cement closed with a gain of 3 cents at $2.65, after trading 6,236 shares.
Stocks closing with losses| Clico Investments shares fell 5 cents and ended at $20.15, with 10,821 stock units changing hands, National Flour closed with a loss of 2 cents and completed trading 32,351 units, at $1.63, NCB Financial Group shed 1 cent and settled at $8.92, after exchanging 7,000 shares, Trinidad & Tobago NGL lost 10 cents and closed at $29.15, after exchanging 65,990 shares and West Indian Tobacco ended trading of 5,167 units 43 cents lower to $95.07.
Stocks closing firm| Angostura Holdings ended at $15.80, with 2,000 stock units changing hands, Gaurdian Media concluded trading at $15, after exchanging 50 shares, Grace Kennedy ended at $3, with 7,042 stock units changing hands, Guardian Holdings completed trading of 201 units at $18, Massy Holdings ended at $45, after exchanging 5,350 shares, One Caribbean Media concluded market activity at $10.50, after exchanging 13,514 shares and Scotiabank completed trading at $64.74, with 7,012 units.
Prices of securities trading for the day are those at which the last trade took place.
New Elite branch now in black

Elite Diagnostics accounted for 31.7M of Wednesday’s Junior Market trading.
Elite Diagnostic lost money at the Liguanea branch in the first quarter of the 2019 fiscal year but the CEO Warren Chung told shareholders at the company’s annual general meeting held at the Knutsford Court Hotel on Wednesday, that October and November were two very good months at the branch.
The audited financial report on the fiscal year to June 2018 show revenues of $297 million compared to $263 million in 2017 resulting in profit of $45 million after tax credit of $9 million and $44 million in 2017 after tax expense of $15 million.
Liguanea has moved from a loss into profit and will not be a drag on profit from the original operation from now, the CEO confirmed. Data for the first quarter shows profit before tax dipped sharply from $14 million to $1.8 million the direct result of a loss at the Liguanea branch as well some cost involved in the early purchase of MRI machine to be used in the St. Ann Bay branch to be set up in mid-2019.
While revenues rose, a number of categories climbed sharply partially due to the expansion into a new location on Hope Road. Big increases were experienced in legal and professional fees that moved from just $38,000 to $3 million due primarily to the IPO in 2017, rental expense more than doubled to hit $15.8 million from $7.9 million and Utilities moved from $7.3 million to $17.5 million partially as a result of the new branch as well as some cost for storing the MRI machine to be installed in St Ann Bay location.

Elite CEO Warren Chung with a shareholder at the company’s 2018 AGM.
Cost to set up St Ann Bay is put at $20-22 million plus U$375,000 for the MRI machine. The company bought the MRI equipment early because it became available locally, but it comes at a cost as it is being stored and incurring cost as it has to be stored in certain conditions resulting in the consumption of electricity along with rent. The MRI Machine for St Ann is being stored with rental cost being incurred as well as electricity cost to maintain it at a cool temperature.
While the company has 3 other MRI competitors in Kingston, there will be no immediate competitor within 50 miles in St Ann. Operating cost at this location will less than at Liguanea with the former being staffed by 7 employees versus a planned staffing of 4 or 5 for St Ann.
For the Liguanea location to move into profit would require revenues around $36 million per quarter or 50 percent above that of the first quarter and that would likely move the profit in the second quarter well above the $1.8 million earned in the first quarter.
Elite last traded on the Junior Market of the Jamaica Stock Exchange at $2.85.


stock units changing hands. Mayberry Equities fell 50 cents trading 85,414 shares in closing at $10, NCB Financial Group added $1.99 to end trading of 66,148 shares at $159, PanJam Investment added 90 cents to $66, with an exchange of 7,665 stock units, Sagicor Group fell $3.50 to finish trading of 77,462 shares at $44, Salada Foods ended trading with a rise of $1 to close at $30 trading 2,000 stock units, Scotia Group traded 4,641 shares and dropped $4.95 to close at $54.05 Supreme Ventures lost $1 and ended at $16, with 125,696 shares exchanged.
Trading on the Junior Market of the Jamaica Stock Exchange ended on Thursday with a miniscule increase in the Index of 2.46 points to 3,168.22 after 11 securities advanced, 5 declined, while 7 remained unchanged as 23 securities changed hands versus 23 on Wednesday.
General Accident finished trading 25 cents higher at $3.75, with 64,860 shares, GWest Corporation closed 10 cents higher at $1.55, with 10,000 stock units trading, Indies Pharma traded 411,391 shares and gained 3 cents to close at $3.15, Jamaican Teas settled at $3.70, while exchanging 42,931 shares, Jetcon Corporation ended trading 4,700 stock units for 40 cents higher at $3.40. Key Insurance traded 14,900 units, with a loss of 2 cents at $4.98,
Fontana another IPO another set of errors
This is an unfortunate development for yet another issue, that seems very attractively priced. The directors have all signed off on the document that has gone through the Financial Services Commission, the Jamaica Stock Exchange and the Company Office of Jamaica, so why the errors and important ommission.
The introduction in the prospectus speaks to a price of $1.88 except for reserved shares at $1.69 but later on in the body of the document it speaks to a price of $2 for each share, making it unclear exactly what the price really should be? In the interim results to September, there are two issues, one is an error and the other, information that really needs clarification. The interim cash flow has no profit, nor depreciation and it therefore is not balanced and needs correcting.
The gross profit in the interim results jumped sharply,even as revenues grew just 5.5 percent with inventories are up 19 percent at the end of the quarter over 2017 and 15.5 percent over June this year. Why the big jump in inventories with sales are just rising moderately? Importantly, this raises questions about the accuracy of the inventory levels and the gross profit margin for 2018. Management should explain the sharp changes in this area so that investors can better understand why there is such a sharp jump in the quarterly profit.
This publication finds it difficult to once more raising issues relating to a prospectus. We are concerned that enough care is not going into them. The breach of GWest Corporation relating to the non-disclosure of information relating to an extraordinary meeting that was said to approve the issue of preference shares that was never brought to investors’ attention is fresh and has not been properly dealt by the regulators or the company. The regulators seem to have turned a blind eye to it. We need to raise the standards if the capital market integrity is the be enhanced.