ItsMoneyMark Newsletter #30

Waking up to the BOJ Rate Hike 

It was not unexpected but like 2 negatives in a sentence which is a “no”, 1.0% one-time seems a bit much by the Central Bank. Most analysts or market sentiment was for a ½% or .5% rate hike but not a 1.0% hit. We must see how this pans out. The positive is that the communication by the BoJ and the Central Bank is fantastic now and the minutes, etc. Big up for that!  

The justification or the reasoning online have been amusing. Economics 101 to say the least. Most persons have mentioned, it is due to “inflation”, and it is so for banks to place liquidity at higher interest rates, or that the real estate or infrastructure sector had been booming or had seen runaway growth… Again, we find this commentary amusing. The commentary is “textbook” but how applicable is it?  

In a recent publication, we noted that inflation has many shapes and forms, however we had taken a more practical look at it regarding the day-to-day life of a Jamaican, critical items, as well as the import driven side, that most JSE public companies have spoken about in their Management Discussion & Analysis. The resulting action we are now seeing, has been clearly building up over the past few months.  

The concern though – some think inflation is import driven from external issues presently (supply chain, pandemic, etc.) and not necessarily consumption driven locally. Therefore, if interest rates are increased too high absolutely and/or too fast, while the objective may be too slow consumption to a degree, will it slow our economic recovery?  

Market Moves: 

  • Elite Diagnostics Limited (JSE: ELITE) just released their year end audited financial statements for the June 30, 2021. The net profit line continued to falter, but on a positive note, revenue grew by approximately 15% year over year. The reason we mentioned positive is that investors will still question if ELITE can add to its business model, or can its business model scale overall, being in the healthcare sector but more so radiology specific sector, so the top line growth for 2021 versus 2020, is a positive outcome. We credit them for the MD&A – management, discussion & analysis write-up: a lot of public companies wouldn’t get to the transparent points about what really hurt the financial results for the quarter or the year, but only highlight the headline numbers, that is the revenue, the net profit, total assets & the shareholder’s equity. This is defined as the bare minimum under the “Financial Highlights”. ELITE makes it clear, and objectively that during the year they faced several challenges with their latest location in St. Ann, in particular the equipment there, regarding breakdowns, etc. and this hampered profitability. ELITE further shed some light on some inefficiencies that they had at their Liguanea branch and mentioned that the Board & Management has spent CAPEX on an MRI Machine (these are not cheap) and that this new MRI machine should be installed and ready to go for Q1 2022 (we assume when ELITE mentions this, they mean September 2021 as this is their fiscal Q1 2022). They opine that this machine should reduce the inefficiencies and assist in aligning administrative costs with business revenues. With all of this said, the Company is tightly held like most JSE companies, and even more so most JSE Junior companies. Where you can get in, you get in, if the outlook is favourable. It seems what ELITE has been doing, and their MD&A is making it more clear now, is that the expansion with location 2 & 3 as well as the equipment maintenance and growth there, was way more excruciating than expected or highlighted. Or, put another way, they went for significant market share very quickly, and, they just did not have these two (2) factors in place or the depth of management. They seem to be playing catch up and should get there by the end of Q1 2022 (calendar) to Q2 2022 (calendar). By the numbers, ELITE’s revenue jumped to J$ 506.9 million from J$ 439.8 million year-over-year. The net profit fell to J$ 1.9 million from J$ 8.5 million. 

    The current ratio is a bit tighter than we would like to see, but with NCB Capital Markets Limited owning 18.6% of the Company, there really isn’t much to worry about if you are a minority shareholder. This is another interesting thing about ELITE, is that you do not tend to see NCB Capital Markets as an investment company or regulated securities dealer own such a significant stake or almost an associate stake in a public company on the JSE that is non-financial. In hindsight, we recall that this deal or investment was done, in the early stages of NCB Capital Markets re-inventing its deal desk, IPO pipelines, the marketing of no underwriting fees for IPOs etc. so this investment may have been in the infancy stages of that re-organization of their investment review and investment banking comeback, and the start of what is now the domination of the mid-size to large IPO markets. Overall, besides ELITE’s quality earnings, and that their management needs to get the earnings to fall to the bottom line now, it is a good feeling to go to bed knowing that such a large company, NCB Capital Markets has an almost 20.0% stake in this Company if you are a shareholder in ELITE.  
  • The insider party, and continued buying up of shares continues in FESCO, SVL and a few other consistent companies on the Jamaica Stock Exchange over the past week with reported corporate actions to the JSE. The most consistent continues to be Future Source Energy Company Limited with, 80,000 shares Director purchase on September 24th, 2021. A further 80,000 shares, purchased by a Director on September 23rd, 2021, as well in Future Source Energy Company Limited. In addition, 175,924 shares and 300,000 shares respectively on, September 22nd, 2021, and September 21st, 2021, each by a Director in Future Source Energy Company Limited. The takeaway here is, although over the years, we have seen once a Company is not in the JSE rules of blackout period trading, typical buying by company insiders tend to trend and continue quarterly & annually: SVL, Mayberry, Jamaican Teas, Jamaica Producers and a few others, and the reality is it does eventually factor into the shareholder value long-term, FESCO can be added to that list. As pretty much every quarter now, their insiders are buyers of there product. In essence, that is a “positive and a good sign.”  
  • Jamaica Public Service (JPS) has been in the news a lot recently, not necessarily for good stuff, but for another rate hike and sending our already high electricity bills even higher? We believe the commentary is the cost of raw materials has increased and they need to keep pace with “inflation”, but what an oxymoron? As higher electricity bills will also spin-off into our Nation’s inflation. What a circle of events for us to debate. Well, with all this happening, one of Jamaica’s largest Companies welcomes a new Chairperson. Effective today, October 1, 2021, Mr. Yong Hyun Kim is the Chairman of the Board of Directors of our JPS, well our 20% or so of JPS 😊. The release states the tenure of the previous chairperson, that in hindsight was quite short, it states April 2020 – September 2021. It will be a very interesting time as aforementioned for a new Chairperson given family wallets, the Pandemic, brent oil cruising above US$ 80, and many other factors. His closing paragraph in the release is reflecting for the people of Jamaica, it states: 

    “Mr. Kim believes that electricity has the potential to be the best and easiest way to improve the loves of people and benefit the earth.”  
  • The wise and the learned say, “Life is about Timing” and also, “Nothing happens by Surprise or by Chance.” Barita Investments Limited (JSE: Barita) immediately after their APO success and silencing of the “noise” about related party transactions, etc. announces, “Establishment of Employee Stock Ownership Plan”. Barita announced this on September 28th, 2021. It’s a wise move by Barita as, the first thing typically, large, or big bank competitors will do as Barita takes market share is “attack” or go after Barita’s top tier talent in 2022. Typically, big competitors wouldn’t wait until 2023, as their “frustrations” set in with either losing deals, market share, or their respective lower or decreased earnings given the Pandemic, etc. As frustration sets in at the large financials or largest board rooms, typically, the pouncing or “people” happens, so this in tandem move with the latest APO or capital raise, should ensure that Barita has a strong and further 2 year or even further cycle (3-5 year) in its business plan given its aggression and appetite for growth. As we have mentioned before, given Barita’s size of equity and relative comparison or benchmark that to some of the largest financial institutions (FIs) in Jamaica, 30/09/2021 in short order, this is a wise move by them. The first thing the larger FIs will do is seek to drive accountability already or in 2022, with the message.

    “Chairman! We need to improve our EPS, what’s wrong? We need more accountability like what we had in 2019 and before… Where are the best people in our sector…? Who is making the most money now… hmmmm…?”  
  • Well known Company Brand: Bed Bath & Beyond (NASDAQ: BBBY) is feeling the supply chain “pinch” and significantly higher costs… impacting their share price massively. As a result, stock price lower by more than 25% in recent trading. The Company’s 2nd Quarter earnings were impacted but, the outlook for 3rd Quarter, the Company stated are underwhelming, and this concerned analysts and investors further sending the share price lower… Like industry wide logistics complications like skyrocketing shipping prices, and other logistics issues like what FedEx recently faced, BBBY is experiencing similar issues. For the 2nd Quarter, the Company registered a loss of US$ 73.2 million compared with net income of US$ 217.9 million a year earlier. Just as concerning, revenue fell 26%. Continued Pandemic, and delta-variant issues has impacted their business model and in-store shopping sales and the issues with managing supply chain costs. 

Make the best of October and see you next week!

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These opinions and thoughts are solely of ItsMoneyMark and does not constitute investment advice.
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