Interest rates and the direction in which they are heading have important messages for investors as they indicate the changes that may take place in various investments.
In short, rising rates mean that fixed assets will decrease in value while falling rates will result in fixed assets value increasing, assuming all other elements remain fairly static. Jamaica has seen a long period of excessive interest rates and bouts when the rates fell below the rate of inflation by a wide margin. When real interest rates were excessively low as in the 1983 to 1984 period and 1991 to 1993, the local dollar came under major pressure and lost much of its value. When the rates went excessively high between 1993 to 2004 it resulted in major dislocation and mayhem in the economy. The latter was the period when the financial system collapsed. After 2005, real interest rates were mostly positive against the United States rates. This period was one of the more stable for the value of the local dollar even when there were some periods when the currency lost value due to real negative interest rates. Treasury bill rates are now below 2 percent, it is likely to provide negative returns for some investors and with rates in the United States rising, this position is unlikely to remain at these low levels for too long.
Many investors are focusing currently on extracting attractive gains from the local stock market and real estate investments, this may stave off increased interest in US dollar investments for a while. The chart shows that there need not be a huge premium for local Treasury bill rates over those in the US, see the period on the chart from 2005 on wards.
With interest rates at current low levels, investors have been revaluing stocks by increasing the Price Earnings ratio they are prepared to pay for them. The trend in interest rates locally is worth watching to see where they could be in 2019 and what if any impact they may have on asset values going forward.
Jamaica US interest rate tango
October 14, 2018 by
CAC 2000 not priced to bounce
December 10, 2015 by
CAC 2000 Limited is offering 29,032,258 ordinary shares to the public next starting Wednesday December 16, at $4.89 each. The price values the company at a PE of 10 based on full year results to July this year. There is no room for a bounce with junior market stocks priced at an average PE of 8.4 with 7 stocks selling above CAC’s valuation.
A total of 14,516,129 shares are reserved for priority share applicants. The issue is expected to raise $120,545,327 to inject additional working capital into its operations, to allow it to increase its ability to take on new business.
Earnings before tax of $49 million, was achieved for the year to July 2015, from revenues of $824 million, with earnings per share of 48.8 cents, putting the PE ratio at 10. In 2014 revenues were $708 million and pretax profit at $51 million. The of listing of the shares on the junior market, will result in tax free status for 5 years making the use of the pretax earnings, the appropriate figure to use in computing the value of the shares.
Steven Marston,
Chief Executive Officer
The company was incorporated in Jamaica in July 2000, and is a provider of commercial Air Conditioning systems and refrigeration and energy solutions in Jamaica, with a share of the residential market. The Company sells, services and supports the air conditioning systems in Jamaica.
The minimum amount to be raised is $50 million as a result, if this threshold is not attained, the company will not make an application for the shares to be admitted to the Junior Market and all funds will be returned.
Currently, there are 100 million issued ordinary shares and 148,037,000 variable rate cumulative redeemable preference shares maturing July 2018. The redeemable preference shares attracts dividends of 10 percent per annum for the first year and thereafter a variable rate of 2.5 percentage points above the weighted average yield rate applicable to the six months Jamaica Treasury Bill Tender, held immediately prior to the commencement of each quarterly interest period until maturity.
There have been no six months treasuries but with the 90 days bill rate being just over 6 percent interest cost going forward should be around 8.5 percent.Some positives of the company include the fact that the current owners and CEO have strong engineering backgrounds, and should know their business. Their expertise should help growth in new related areas of business. There is the potential to expand to other engineering services including alternative energy and into Mechanical, Electrical and Plumbing (MEP) contractor. On the negative front is an unsettled negligence claim against them and large blocks of revenues from large projects that could result in revenues being sporadic. The level of receivables is too high at 4 months on average, with large amounts due for over 4 months, a big negative, as it exposes the company to bad debts as well as the possibility of cutting off potential revenues. The level of inventories being carried is also high but may well be a product of a sliding Jamaican dollar.
The prospectus does not include the September quarter’s results that could shed light on what is currently happening. That is a negative as its absence suggest that it cannot help in selling the issue.
