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Local stock market review 2017

Thursday, January 11, 2018

During 2017, we could discern at least two themes on the local stock market—a hunt for dividends in US dollars and a search for quality and safety. These factors resulted in the cross listed index advancing
by 38.65 per cent to end at 108.38 from 78.17.

Were it not for the advances exhibited by GHL, T&T NGL, AGL, LJW “B” and SBTT, the all T&T Index would have shown a more severe decline. In these circumstances, the contraction was restricted to 5.75 per cent or 105.48 points.

We will comment briefly on the five largest winners before concluding with the five biggest losers.

The winners

Not surprisingly, NCB Financial Group exhibited the largest price appreciation of 109 per cent. In its 2017 fiscal period, EPS grew by 32.2 per cent to J$7.76 from J$5.87. Its associates, which mainly include GHL and JMMB, contributed almost 12 per cent (J$2.85 billion) to the pre-tax profit of J$24 billion.

In Jamaica, the share price closed at a shade under J$100.00, which is equivalent to about TT$5.00. The disparity in the TT$ price partly is explained by the attraction of receiving dividends in US dollars. The 25 per cent price premium could suggest that local investors are willing to price the US dollar at about TT$8.44 to US$1.00.

NCBFG started its new financial year by acquiring a Bermudan bank and mounting a bid for additional shares in GHL to bring its shareholding up to 62 per cent.

At just under TT$16.00 per share (US$2.35), this block of 74.23 million shares will reduce NCBFG’s average cost down to about TT$18.30 per share; nice start to the New Year for them!

In May 2016, NCBFG paid the equivalent of about TT$21.00 for a shade less than 30 per cent of GHL.

Naturally, local investors are now wondering why NCBFG is offering, using official exchange rates, less than TT$16.00 per share for GHL. Could it be that the main targeted investors (Lok Jack and Ahamad) are willing to ascribe a “real value” of about TT$9.00 to US$1.00 for this transaction?

In other words, they will receive the “real equivalent” of TT$21.15 (9 x US$2.35) for their shares.

Several years ago, the International Financial Corporation (IFC) paid TT$16.00 for its shares in GHL. In May 2016 (the same transaction as above), it seems that IFC, under a “unique arrangement”, was able to exit its position at the equivalent of TT$21.00, thus recording a capital gain of TT$5.00. How interesting?

JMMB Group Ltd appreciated by 83.33 per cent to end at TT$1.65 from TT$0.90. Part of this strong growth could reflect the receipt of a commercial banking licence for its Jamaican operations. (Those operations were previously limited to a merchant banking licence.)

For it half-year period to September 2017, JMMBGL recorded lower EPS of J$1.03 versus J$1.24 for the comparative 2016 period. Dragging down profits were operating expenses, which climbed by almost 15 per cent to J$5.8 billion from J$5.1 billion.

JMMBGL closed in Jamaica at J$22.39, which approximately equates to TT$1.12. Here again, we observe that local investors are paying a huge (43.5 per cent) premium in order to access a US dollar dividend.

Investors might ask themselves: “At what point will this strategy prove to be self-defeating?”

Guardian Holding Ltd’s share price expanded by 34.62 per cent to $17.03 from a depressed price of $12.65.

Part of this strong price appreciation reflected the anticipation of a bid for additional shares from NCBFG, which eventually materialised in mid-December 2017.

For the nine-month period to September 2017, GHL’s EPS closed at $1.10 from last year $1.12. Even with significant challenges to its insurance segment, its investment operations continued to benefit from its association with NCBFG.

The current prospectus to GHL shareholders states that NCBFG will conduct a comprehensive review of GHL’s operations. As the year progresses, we should expect to see incremental improvements in the bottom line at GHL and its new parent.

Based on a calendar-year dividend of $0.67, the year-end price of $17.03 reflects a yield of 3.93 per cent. Using the theoretical price of $21.00, the yield falls to 3.19 per cent. Some food for thought. T&T National Gas Liquids exhibited price appreciation of $5.50 or 26.19 per cent to close at $26.50.

Even at that price, the dividend of $1.50 gives investors a yield of 5.66 per cent. The improved supply of natural gas to PPGP has helped the company increase its production and should allow it to benefit from higher product market prices.

For the nine-months to September 2017, EPS improved to $0.97 from $0.75. Perhaps, a more practical measure showed that cash on hand was almost $261 million; when related to the 154,800,000 shares outstanding, this reflected cash of $1.69 per share. This is more than adequate to pay its annual dividend commitment.

The price of Agostini’s Ltd (AGL) appreciated by 18.57 per cent to close at $20.75 from $17.50. This reflected improved core profits and a continuation of its expansion by acquisition strategy. For its fiscal period ended September 2017, EPS slipped to $1.45 from $1.52 in 2016. The major reason for this decline was the one-off profit of $11.2 million in 2016, which reflected a settlement from HDC.

On December 8, 2017, AGL announced that its CDP subsidiary had bought the global rights to four brands, including Peardrax and Cydrax. This acquisition has significant export potential.

The Losers

Topping the list of the losers was Unilever Caribbean Ltd (UCL), which price contracted by 51.54 per
cent to end at $29.00 from last year-end’s $59.84.

Multiple challenges at the local, regional and parent company level impacted UCL’s performance. For the nine-months ended September 2017, turnover declined to $350.3 million from $409.4 million. More particularly, EPS contracted to $0.27 from $1.15 in the comparative 2016 period.

The $54 million upgrade to its manufacturing facilities should eventually help the company rebound, probably in the later part of 2018.

Regional media giant, One Caribbean Media Ltd (OCM), saw its share price fall by $6.84 or 34.37 per cent to end at $13.06 from $19.90.

For the nine-months to September 2017, revenues fell by a modest 3.0 per cent, however, EPS declined to $0.50 from $0.70. This contraction was heavily influenced by higher administrative expenses, finance costs and Barbadian taxes.

In Q4, local taxes would further damage the bottom line. That prospect seems to have precipitated a sharp decline in mid-December.

National Flour Mills Ltd (NFM) experienced a 24.21 per cent drop in its share price, which fell to $1.91 from $2.52.

After reaching a high of $2.70 on January 23, 2017, the price began a mostly steady decline for the remainder of the year. In each of the three quarters of 2017, it recorded lower sales.

Cumulatively, as at September 2017, sales were 10.1 per cent lower that the previous year. Even so, gross profit margins improved to 30.25 per cent from 29.5 per cent; no doubt, this reflects better buying practices. For the period to September 2017, EPS fell to $0.19 from $0.24.

The prospect and reality of reduced profit and lower dividends helped West Indian Tobacco Company Ltd (WITCO) register a 21.22 per cent price fall to $100.00 from $126.94.

Revenues declined by 15.1 per cent while EPS fell to $3.27 from $4.42. Consistent with that trend, quarterly dividends for 2017 weakened to $2.95 from $3.70.

The company’s exports to Caricom accounts for 11.3 per cent of its revenues. In addition to the weaker local economic conditions, Witco faced higher excise and corporation taxes and continues to lose sales to illicit imports.

Trinidad Cement Ltd (TCL), now part of the CEMEX Group, delivered a 14.77 per cent fall in share price to end at $3.75 from $4.40.

For the nine months to September 2017, revenues fell by 11 per cent to $1.28 billion while EPS closed at $0.097 from $0.118. A dividend of $0.02, perhaps the smallest on the TTSE, was paid in July 2017.

TCL had a busy year. Starting with its debt consolidation, continuing with the acquisition of Readymix, then we saw its 10 per cent investment in a housing development, East Lake Development Company.

Even as it battles with a pesky competitor, all these developments will help stabilise and grow the company in the years to come.

Other market developments

Following acquisition activity, Readymix and Berger, which is now part of the Ansa Group, are eventually expected to be delisted.

In addition, the Praetorian Fund has applied to be delisted. In January 2018, shareholders will receive the first tranche of $2.00 per share, which represents a return of capital.

After the remaining properties in St Lucia and Barbados are sold, the final distribution will be made; it is anticipated that this exercise can be completed by November 2018.

In the next article, we will review my 2017 picks and select some possible winners for 2018.

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