Barita’ financials speak eloquently

Financial statements don’t lie; they provide a window into the stewardship of companies for good or bad. There are good management and not so good ones and the financial reports tend to separate the good from the bad. In this regard, investors need to be assured that both interim and audited results are informative and can be trusted.

Barita eyeing expansion

Unfortunately, the stock exchange relies on the ICAJ to set standards for companies to report, but these fall short of what investors need to make a proper assessment in investing. The matter of reporting on the performance of companies to show gross profits separately from pretax profit is an area that is inconsistently applied. Some companies show direct cost and gross profit so investors can see the level of contribution made before selling marketing and administrative cost.
This publication finds Barita’s financials quite up to acceptable levels with disclosures, so why are investors questioning management’s stewardship?
Directors of Barita Investments met on July 14 and are recommending raising additional capital by the Company to be voted on at an extraordinary meeting set for August 3.
The announcement coming after the third such capital raise, with the last being September last year that raised $13.54 billion. The announcement has set off a mini storm within the financial community, with questions raised about the company and what is happening there.

Jason Chambers

Some investors marvel at the approach the directors are taking to fund capital needs. Worse they are asking the question, where has the money raised in public offers gone?
Cornerstone acquired 75 percent of the company in 2019 and set an aggressive dividend policy of 80 percent of net distributable profits. Since they acquired control of the company, profit retained exceeded the total profit reported for the last few years under the former management. But those funds are inadequate to fund the company’s expansion needs, fueled by growth in some critical areas of the Jamaican economy and soon regionally.
In commenting on Barita’s investment activity over the period from its September 2020 Additional Public Offering (“APO”) to March 2021, Jason Chambers, Chief Investment Officer of Cornerstone, said that the Company has “focused on allocating capital across high conviction, value-oriented opportunities.” He cited the marked expansion in credit and investment assets, acquisition of a twenty percent stake in Derrimon Trading Company costing north of J$2 billion as examples of the results of Barita’s year to date investment activity. We have materially expanded capital to our Investment Banking business line. In line with previous guidance, we have also originated and/or acquired significant investment assets, which will eventually form the basis of the launch of new and innovative investment products and structures. We have commenced investing in our footprint expansion and technological overhaul, which we expect will require staged investments over the next several quarters”, Chambers stated.
He cited the doubling of Barita’s 6-month profits to March 2020 as being a by-product of the Company’s ability to deploy the capital it raised in the APO efficiently and profitably. We, therefore, see certain aspects of our business as appropriately funded by long term capital to reduce the risks presented by asset-liability mismatches. This has served us very well, particularly most recently during the height of the market fall-out related to the COVID-19 pandemic last year when Barita maintained healthy liquidity, said Chambers.
Barita Investments was a sleepy little conservatively run investment bank whose directors focused on maintaining the status quo rather than taking advantage of the vast opportunities in the market.

Shareholders at Barita Investments AGM.

The company has gone about raising equity capital, not debt capital, so they don’t have to worry about repayment. They can also vary the aggressive dividend policy, even though that could affect the share valuation.
The argument by investors is reminiscent of two cases. One is the pile of negative comments Access IPO received when going public, back in 2010, by persons who were not adequately informed to be commenting on the issue.  In late 2016, a leading brokerage house concluded their assessment of Barita Investments as follows, “we expect just a marginal increase in year on year net profit. Given this expectation, we estimate BIL shares to be valued at approximately $2.35 by applying the market average P/E to the estimated EPS. Therefore at a current market price of $3.10, we are recommending a SELL on BIL.” At that time, placed a BUY RATING on the stock and it occupied the number 2 spot on the main market BUY RATED list.
The rationale by, while reported profit was down to $207 million from $242 million in 2015, total comprehensive income, the better measure of profitability was $691 million or $1.55 per share, compared to $201 million, a huge increase. In 2017, traditional profit slipped to $172 million after an impairment on investments charge of $81 million, total comprehensive income ended at $492 or $1.10 per share. For 2018, reported profit jumped to $374 million and total comprehensive income moved to $736 million or $1.65 per share. The lesson, if investors look only at traditional profits, they could miss big gains.
Profit after tax rose from $509 million to $1.04 billion in the March quarter and from $1 billion in the half year ended March 2020 to $2.06 billion in 2021, helped by the improved equity base.
Revenues nearly doubled for the quarter to $2.05 billion from $1.13 billion in 2020 and from $2.26 billion last year to $4.05 billion in 2021.
Total assets are now $79 billion, up from $49 billion at the end of the year ago and $71 billion at the end of September last year. Shareholders’ equity climbed from $14.4 billion in March 2020 to $28.7 billion in 2021. When the majority shares were acquired, total assets were just $17 billion and shareholders’ equity a mere $3 billion. Pledged assets jumped from $21.5 billion in March 2020 to $47 billion in the latest quarter, while loan receivables increased from $1.1 billion to $7.3 billion.

First Citizens Bank closed at 52 weeks’ high on Wednesday.

The 2020 raise of $13.5 billion was invested in increased loans to third parties amounting to $6 billion, net investment instruments of 13 billion and a 20 percent stake in Derrimon Trading amounting to $2 billion and a reduction in amounts due for payables of $5 billion. When the company meets with its shareholders, what is planned for the new raise will undoubtedly be put on the table. In the early months of 2019, this publication pointed to sources suggesting that the first rights issue should bring in fresh capital that is primarily targeted to fund an acquisition that has Caribbean wide locations and will make a big impact on profitability when fully integrated into the existing structure if the deal goes through. gathers that the deal which is yet to materialize may not be off the table but may be taking longer than originally thought possible. Any fresh raise could well bring such prospects to the fore in addition to funding normal operations.
When all is said and done, First Citizens Bank in Trinidad, a bank group with total assets of J$1,090 billion, bought shares in last year’s APO and added to it subsequently, a strong seal of approval for the strategy Barita is pursuing. With the financial muscle of First Citizens and the small size of Barita there are areas for cooperation, including partnering to acquire assets or businesses. First Citizens is in talks to acquire Scotia Bank assets in Guyana as the bank pushes its regional expansion plans. Will Barita play a major role in this?

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