Is trading IPO issues a good idea?

The question of the week comes from one of IC Insider.com’s readers. “ I’m trying to understand more about investing and would like to know about buying stocks at the IPO price, selling when they go up and then buying when the prices settles lower? Does it make sense to do so?
The answer to the question is yes and no. it can be done but understanding where the stock may top out initially, is going to be the key. You have to determine the price to sell at and then identify when to get back in, as well as where the price may go after reentry. Those targets are not always easy to assess. A good example is Main Event, it went to $5 early after listing and then pulled back a bit and went over $8 and pulled back to $4.85 last Week. Express Catering went over $5 initially and pulled back to $3.80, traded recently at $5.60 and pulling back again. Trading fees can cost up to 5% to get in and out that needs to be factored into the equation of potential trades as well.
Knowing the PE and how the stock compares to others in the market, will help a great deal to determine the likely top for a stock. The use of PE ratio and comparing them with other stocks gives a good indication which stock has a better valuation, but it may not tell when that difference will be eliminated. Currently, just below 20 times current earnings, seems to be a good exit point as the target for IPOs and say 20% or so below could be a good reentry point.
Picking tops and bottoms in markets is not always easy, unless historical records are used in the assessments. This technique is better known as technical analysis where markets or products, in this case stocks, establish set price patterns over time, often trading within what’s called a channel. Channels allow investors to better pick tops and bottoms, while the items is trading within the channel.

Main Event inadequate Q2 report

Three directors of Main Event, including the mentor who is respossible to ensure compliance with teh JSE rules.

The 2017 junior listed Main Event Entertainment, made a loss in the last six months of the 2016 fiscal year, ending the year with a profit of $56 million, down from $64 million for the six months to April.
The latest figures from the entertainment company for 2017, show a profit of $75 million for the half year and $51 million for the April quarter.
The figures reveal seasonal differences in the operation, with higher revenues and profit in the first half and lower revenues and losses or minimal profit in the second half. The Jamaica Stock Exchange rules require that seasonality in operations is to be reported on, in a listed company financial report. There is total silence on this issue in Main Event’s report, leaving investors to guess what the second half will be like, it should not take the stock exchange rules to put to this. Good investors’ relations suggest that this is absolutely needed in this situation of wide variation in the two periods. Astonishingly, a review of the company’s prospectus gives no indication of seasonality of revenues and earnings.
The directors’ report accompanying the half year results, speaks to a reduction in direct expenses due to continued investment in fleet and transportation solutions, and rental equipment and human resources. At the same time administrative cost had a big increase due mainly to increased transportation and fleet management costs. It appears that these added costs should be treated as a part of direct cost and not administrative.
Revenue in the April quarter at $319 million was flat with the 2016 out turn but the half year rose 8 percent to $652 million. The data to date show no indication that the second half year results will show much if any improvement over the outcome for 2016 except for the removal of taxes.
At the initial public offer in January the issued share capital was 240,004,000 shares and 60,001,000 shares were issued to the public, resulting in an average number of shares issued for the April quarter of 300,005,000 units but only 270 million units for the half year. The report shows the fully issued number of shares at the end of April is used in computing earnings per share (EPS) for all periods.
The effect is that the reported in the interim results are wrong and in effect understated as the number of shares used in the computation is overstated. Instead of earnings per share of 25 cents for the half year it is 27.7 cents and for the 2016 period 26.8 cents and not 21 cent. The earnings for the 2016 April quarter, is 17.2 cents and for the full 2016 fiscal year 23.5 cents.
There are clearly weaknesses in the report and its handling, but worse it is also showing weaknesses in the overall management inclusive of the directorate.
The company expended over $107 million on fixed assets, increased borrowed funds by a mere $10 million more than at the end of October with cash ending at $65 million from just $19 million at the end of October.
With the interim results ending at 28 cents per share, it is going be challenging for earnings for the full year to be much higher than 35 cents IC Insider.com is forecasting for the year to October, barring a sizable rise in revenues. It could go on to earn 50 cents for 2018, IC Insider.com’s forecast shows. At the current price of $6 on the Junior Market of the Jamaica Stock Exchange the PE ratio is 17, suggesting that the price may revolve around this level for a while.

Simply Impressive

Honey Bun shot up by more than 500% in 2016 shortly after stock split.

Honey Bun shot up by more than 500% in 2016 shortly after stock split.

Junior market listed bakers, Honey Bun, is enjoying a glorious period of surging revenues and profit that fueled a huge jump in the stock price of 355 percent for 2016, after rising over 500 percent, earlier in the year.
In continuation of a successful year, revenues climbed 36 percent in the third quarter of financial year to June, spawning a 124 percent increase in profit before taxes to $38 million over the June 2015 quarter. Revenues climbed 35 percent to $903 million for the nine months to June, up from $672 million in 2015 while profit jumped 109 percent to $138 million before tax and $132 million after tax of $6 million.
Gross profit for the nine months climbed at a faster pace than revenues, at 40 percent while for the quarter, gross profit rose 34 percent, just below the growth in revenues for the quarter. Expenses excluding cost of sales, rose even slower than revenues, at 20 percent, with administrative expenses rising sharply by 33 percent to $147 million and selling and distribution costs increasing by 10 percent to $104 million, while depreciation rose by 4 percent to $28 million. For the June quarter administrative, selling and distribution expenses rose at a slower pace than for the nine months, at 12 percent.
One Honey Bun's Products.

One Honey Bun’s Products.

The company generated gross cash flows of $171 million for the nine months, before expending $75 million on the acquisition of property, equipment and fleet. Honey Bun is in a healthy state with cash balance and investments at $104 million after the company repaid $38 million in long term loans, leaving loans at $16 million. Current assets stood at $212 million and current liabilities ta $71 million. Shareholders equity climbed to $491 million.
The Company that listed on the Jamaica Stock Exchange Junior Market in June 2011, is now subject to taxation on profit for the next 5 years at 50 percent of the normal corporate income tax rate of 25 percent.
Earnings per share for the quarter came in at 8 cents and 28 cents for the nine months. IC Insider projects 34 cents or $160 million for the full year to September, with $147 million or 52 cents per share projected for 2017. The stock traded at $5.60 on the Jamaica Stock Exchange junior market for a PE of 16.5 times 2016 earnings, making it one of the highest valued stock on the market.
The stock was accorded a BUY RATED ranking in November 2015 but has since been placed on a watch list when it shot to over $7 per share.

Little profit in Q4 for Lasco Financial

Lasco FinLasco Financial Services reported profit of $191 million or EPS of 15.5 cents for the March 2015 year, an improvement of 8 percent over the $177 million made in 2014. The last quarter was poor with only $10 million in profit, down sharply from $41 million made in 2014, due to a combination of developments.
Revenue for the last quarter hardly grew, ending at $148 million versus $145 million in the 2014 quarter while expenses grew by $28 million due mainly to increased spend on marketing and selling expenses. Jacinth Hall-Tracey, Managing director indicated that the period suffered from squeezed margins on foreign exchange trading and foreign exchange losses in the quarter, resulting from the revaluation of the Jamaican dollar and greater stability of the exchange rate. Loan disbursements slowed as credit rating data used in assessing potential clients resulted in lower loan approvals.
The PE ratio of the stock is 13 based on the last reported earnings, normally the ratio would not be that high. Mayberry’s acquisition of 20 percent of the company’s shares has changed the dynamics and remove some supply from the market.
The company has cash of $500 million and is generating over $200 million per year. If the company can find the formula to ramp up good quality lending successfully, the profit outlook can be transformed considerably with high profit margins for lending. “We are working on a number of initiatives that will help in the transition from lower income in foreign exchange activity” Hall-Tracey said. The area of credit approval is one that they is being revisited as the use of credit rating information is stymying lending. But Hall-Tracey expects profit for this year that ends March 2016 to be higher than for the year just ended, subject to taxes on profit which the company will start bearing at fifty percent of the official tax rate of 25 percent.
The equity capital of Lasco is $812 million and is well below that of its two siblings who have equity in equity of more than $2.4 billion each. The company has done well from the money remittance and cambio operations but it is in the lending that the future growth prospects seems to rest. Hence the connection between Mayberry with the know-how having been exposed at Access Financial. The company has the free capital to increase lending with only $147 million in loans at March.

Guardian Media profit up 17%

Guardian Media has a respectable first quarter for 2015 in spite of a tight economy in Trinidad with the sharp fall in the price of oil. The improvement did not come from the main business of news dissemination, instead it came from the multi-media segment. Guardian reported profit before tax for the quarter increasing by 32 percent to reach $6.03 million, from $4.57 million in 2014. After accounting for corporate taxes, profits grew 17 percent to $4.48 million from $3.84 million in 2014.
GML 3-15 logoThe print segment made less profit before taxation than in 2014, with $1.24 million reported in 2015 versus $1.69 million in 2014 while the Multi–media segment generated $4.8 million compared with $2.9 million in March 2014.
Whilst revenue grew marginally from $44.4 million to $45.1million, management of operating costs and the realization of operational efficiencies and a reduction in finance cost from $495,000 to $243,000 resulted in the increase in profitability.
Cash flows increased by $2.4 million for the 2015 quarter resulting from cash inflows from operations rising by $11.6 million compared with $9.2 million in 2014, leaving cash on hand of $113 million. Equity capital ends at $382 million.
“We expect these improvements in performance to continue for the rest of the year,” management stated, in their release to the Trinidad Stock Exchange with the quarterly financial statements.
The stock last traded in January at $19.76 on the Trinidad Stock Exchange. If earnings should continue at the pace of the first quarter the company could earn $1 per share which would place the PE at 20, quite steep for a company in a matured market. At the close on Monday there were no stocks offered for sale and no bids to buy.

PE ratios computation & their usefulllness

PEratio+definition_280x150The use of standards is vital in the assessment of stock values as investors constantly compare one investment with another. The price earnings ratio is the most popular measure investors use to compare and determine stocks values.
It is computed by dividing the price of a stock by the earnings per share. It allows investors to compare the value of one company with others in order to decide which ones are to be bought sold or held on to. Pass developments also inform seasoned investors as markets tend to have familiar recurring patterns over time. When the market moves markedly away from the norm it is usually time for investors to move. Nowhere is this truer than PE ratios. Investors should therefore keep track of historical price earnings ratios and compare them with the current ones. Ratios that have been high in the past and are now low, may indicate a potential increase in value for the stock or vice versa.
Use of the PEs| There is a tendency to look at the earnings per share of companies and apply a price earnings ratio to them to arrive at the value of a stock. This is one approach, but we should go further, with companies having hidden values the purist approach will miss the underlying value that could surface at any time. Astute investors will take into account the difference in treatment of accounting policies could have on earnings in assessing company value. It usually takes a longer time for such concepts to gain investor acceptance, but once widely accepted, the patient investor is usually rewarded.
In looking at good buying opportunities the crude measure is to buy those stocks with low PEs compared to the market or to stocks in the same sector.