ItsMoneyMark Newsletter #25

Lockdowns, SMEs, MSMEs, & Impact on Even Big Business – Are we caught in No Man’s Land?  

Halfway house maybe a more popular saying than no man’s land in terms of this topic in Jamaica, but really when you “google” halfway house and its definition it really shows you our creativity that we can turn any words or phrase into a totally different meaning to describe something serious or fun.  

The recent seven (7) days lockdown have again wreaked not only a little havoc but a lot of havoc on the business environment. If we look at it from a strictly business standpoint, although there are significant concerns regarding civil issues presently (building) and during the week we saw, issues not limited to, (i) nurses, (ii) fire brigade, etc, how does a business entity “plan” its operations in the current environment. That is the major question faces a lot of businesses not only next week and heading into September, but this were the same questions many months ago now recurring? As each time you gear your business back up, you are being told to get it back down. Technically, each time a business gears up, it may have done so with significant capex, or other costs. In addition, each time it is told to gear down, its fixed costs continue to run. Unlike in the U.S. where there have been directives to write-off student loans, specific types of leverage, given specific credit moratoriums, and many other policies from the level of the President Orders, Jamaica has taken a softening of policy, regarding bad loans we assume (90-day bucket in 2020) during the peak period, but each institution would have had different policies. Yes, from analysis there would have been clearly some “softening or easing” but unlike the U.S. it was not a policy, that stated all credit or specific credits in the domain will now receive ABC or XYZ. Based on recent events, this could be a major concern facing not just the financial entities but also just as important SMEs, MSMEs and many Jamaican families. In the U.S. the positioning was across the board, defined as it impacts the entities and the consumers simultaneously, positively, and negatively from a credit standpoint.  

For a long time, Economy and Socioeconomic have been used together or as one in a single message. When in fact they are two (2) very different topics/ subjects. Recent reports outlay our popular statistics, as we do not have a broad array of statistics yet on offer – our NIR, our inflation, our FX, our tax revenues, our Debt/ GDP, however with the focus on NIR, tax collections, Debt/ GDP – the economy is very strong, and everything is excellent.  

Let us come back to the point, that unlike the U.S. where we do not have statistics daily, or Bloomberg giving us data each morning, it is very hard to get a gauge of the real Economy or the Socioeconomic conditions – let us assume and name some variables versus NIR, tax revenues, Debt/ GDP, etc. and name some additional data points – (i) food prices/ staple foods (ii) fuel/oil/ gas – transportation, (iii) doctor/ prescription – healthcare, (iv) back to school – education, (v) access to capital – financial services.  

At large, these statistics are not very defined in Jamaica at this stage. The baskets are simply not there and/or measurements.  

When the U.S. commenced opening markets – you can gauge the economy, somewhat via the 2nd Quarter results of the public companies and the recent surge in U.S. retail, that was simply not there and most made losses in the said Quarter 1 year ago. Now these companies are making hundreds of millions of US$ again. Noticeably in Jamaica, when we were open, several JSE public companies, had record 2nd Quarter results – is there a correlation? Of course, the common theme is being open for business. We recently spoke about, companies like Honey Bun, Salada, Grace, JMMB, Barita and the list goes on that had record Q2 numbers…  

A lot of countries have fought the Pandemic in different ways, and depends on whose opinion, have battled it head on in 1 of 2 ways for their people. 

  1. Open fully for business, so persons/ citizens have jobs and income/ livelihoods,  
  2. Close for ABC period, fully and zero tolerance.  

Either of these choices seem to have worked globally in analysis.  

However, the fatigue, the mental exhaustion, the business issues that have arose of starting/ stopping consistently or every few weeks or months in any Country case (business case) has been brutal on the people – it is proven business wise and economically – that the cash flow havoc and in turn spill over cash flow havoc (direct/ indirect) to other stakeholders makes no sense. Eventually, while the popular statistics may seem excellent, “the real bubble” could burst. 

Market Moves:  

Lots of Action and Corporate Announcements of significance taking place this week, that have ramifications for the markets and their specific stocks… Let’s jump into some of them as you head into your Friday and the weekend before another three (3) days of lockdown ☹ (feel free to read more ItsMoney newsletters and listen to our ItsMoneyMark Earnings Reports!) 

  • EquityLine Mortgage Investment Corporation – Sagicor Investments had led the deal and listing process here recently; Sagicor & Sigma names make up the Top 4 of the Top 10 list. The Company has never lived up to expectations in hindsight. Another change has occurred at the Company, announced this week to the Jamaica Stock Exchange (“JSE”) however effective last week, August 18th, 2021. The change is a change to the CFO office. We are not sure if this will make much change to the financial fortune of the listed entity based on the current composition of the Balance Sheet, but the verdict is still out.  

Luckily for the stock/ equity – the market, brokerages, and most analysts seem not to cover it…  

  • NCB Financial Group (JSE: NCBFG) latest close price is J$ 129.97 and hit a 52-week low of J$ 121 & change. The 52-week range is a tight window – approximately J$ 121 – J$ 150. Although they may be having a tough time, earnings down, numbers just not where they used to, their marketing/ PR machinery just doesn’t seem to be where it used to – never underestimate NCBFG as they tend to always go through these cycles. We like to view them similar in nature to Carreras (JSE: CAR). When things get rough for either Company, or a cycle of lower earnings for “ABC” periods/ quarters in a row, it is just a matter of time before the earnings rebound and ladder up. Whether it’s via further cost-cutting (aka digital branches, branch closures, digital overall, etc.), a management shake-up or leadership shake-up – NCB FG will figure it out. It may be too early still, given the volumes moving in the stock and the downward pressure on the share price but at some point, this will reverse… With that said, they wouldn’t rebound as fast or uplift at the rate JMMB Group and Barita Investments have been, but let’s face it, most aren’t.  

Let’s look at just one (1) of the strengths of the Giant, NCBFG with the recent release this week. It is more difficult for Giants to grow, and therefore they have done all their deals over the last couple of years. They went on a massive M&A spree and bought up several businesses. They keep repeating and stressing the importance of synergizing their group, businesses and digital – we assume that NCBFG must have a plan then to “squeeze” out all these synergies, added-on revenues and get all these companies to gain customer wallet share across the financial spectrum.  

  • We also assume NCBFG has this in the bag as they always do – this is not a lot of money compared to their size of balance sheet – their approximate US$ 140 million corporate bond unsecured that was issued in 2017 matures the end of August 2021. It is listed on the JSE.  
  • NCBFG is so “big” that their access to direct instruments like this, whether new and/or re-financing continues to put them at a different level, despite the earnings fall-off.  
  • Speaking of Financing, and Deals, although only a few years under their belt – the Barita Investments Shareholder’s Equity (S/E) box, keeps growing and growing… and it soon grow some more! The bigger boys must be getting some “jitters” at some point as Barita actually becomes not only a securities dealer/ investment bank force but must be sending jolting forces into Commercial Banking “Director” meetings. Some may say they are not at that stage, but with the rapid rate of their S/E growth and Net Profit Growth, don’t underestimate this once underdog and neglected brand in the marketplace. Onto their headline numbers for their next S/E box BIG ONE: 
  1. APO Price of J$ 80.00 per New Ordinary Share,  
  2. Issuance of up to 125 million New Ordinary Shares,  
  3. Upsize for an additional 62.5 million additional New Ordinary Shares.  
  • As of June 30th, 2021, Barita was at J$ 30.2 billion of S/E,  
  • Worst case, Barita after this hits, J$ 40 billion or more of S/E given the profits assumed for September Quarter,  
  • Best case, Barita after this hits, J$ 45 billion or more of S/E given the profits assumed for September Quarter,  
  • Let’s put this into perspective, in relatively no time from a Financial Market perspective or in 3 years or less, Barita S/E box after this could be approximately 70% of JMMB Group’s S/E Box… Incredibly Amazing and a Wild statistic line at the same time.  
  • Portland JSX Limited (JSE: PJX) is really carving out a nice niche and brand for themselves in the Caribbean, Central America, South America, etc. but based on where the listing is, JAMAICA! PJX is really making some good deals and reinforcing their positions in Jamaica. Its good to see them doing this.  
  • They recently completed a cumulative redeemable preference share transaction, and the overall disclosure is “refreshing”. A lot of listed entities and/or investment vehicles don’t give this level of “further” disclosure, and it is good to see. Realistically this is what shareholders, proposed shareholders and market stakeholders want to see. While funds may want to be private about their investments and utilize this reasoning as a basis to maintain a competitive advantage – practically it is hard for shareholders to get excited about what they really own in terms of the underlying securities or the Fund’s/ Company’s investments. 
  • In PJX’s advisory they make it 100% clear, not only about this “raise” – US$ 5 million, issued on August 20th, 2021, and maturing in 5 years (nice timeline!) What were the proceeds used for? The proceeds were utilized to co-invest in, “Outsourcing Management Limited” which does business at ITEL, PJX stated.  
  • What ItsMoney does know is that if one draws a line via PanJam Investments financials, as PanJam is also a shareholder in this company, Outsourcing Management Limited – this overall portfolio company of PJX seems to be doing very well, and even outperforming we assume despite the Pandemic.  
  • From these following assumptions, we may assume PJX is “going bigger” into one of its portfolio companies that is doing well during these crazy times as several other companies if one reads its Annual Report were rated as mid to high exposure to Covid-19. 

In summary, PJX for the “win” here and making a bold but calculated move as they should.  

  • The Rebound in the U.S. retail business is intriguing and one to follow, as quite the trend has emerged.  
  • Besides Dollar General disappointing with Earnings, several mid to higher end retail brands really surprised the Market and not by 10% – 20% but in some cases by 30% – 50% increases in year over year earnings,  
  • Macy’s & Foot Locker especially crushed their earnings estimates and a few others signalling strong U.S. retail demand, and a return to stores & malls, by consumers,  
  • In most cases as well, the businesses management were quoted as being able to pivot over the past year and gaining a lot of business online, 
  • Of interest, this is quite sometime after the “Stimmy” money craze and demonstrates the re-opening of the Economy in most parts of the U.S. more than likely led to these big numbers in the 2nd Quarter for well-known retail brands. It tells a story of the importance of re-opening markets.  

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These opinions and thoughts are solely of ItsMoneyMark and does not constitute investment advice.
Ensure to always speak to a Licensed Financial Advisor.

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