ItsMoneyMark Newsletter #51

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Lots of Earnings this season! Let’s get into it!

Bank of Jamaica, hikes Main Benchmark rate by 1.5%  

Just the other day, the benchmark rate was at 0.50%.  

Well, effective February 21, 2022 (Monday), we kick-off the week with 4.0%, a 3.5% or + 350 bps change for fixed income paper or bond junkies. What a difference a little bit of time makes, and the ensuing, patty, gas, toll, groceries, etc. prices have made, also known as inflation.  

If this continues in the coming months, get weary of local equity markets, as this latest move, will get pension & institutional investor meetings “brewing” for 2nd thoughts in taking additional positions or new positions in equity markets. There are only a handful of JSE ordinary stocks, from a dividend yield perspective that rival a 4% benchmark yield, and given the continued uptrend of the benchmark rate, it is safe to assume, this will go higher for institutional investors, the largest component of the JSE market to evaluate. 

The potential impact: funding rates for the retail market, car loans, mortgages, credit cards, etc. Credit/ Risk committee meetings at Banks and Financial Institutions this upcoming week and heading into March 1, 2022.  

Rates previously advertised for SMEs, and many other factors that could be adjusted in the marketplace.  

Investment portfolio re-adjustments.  

Cash Piles, which keep on Adding Up at Public Companies  

Market analysts have mentioned this topic in one-off scenarios or here and there, and as we have spoken about, there is not much value placed on companies on the Jamaica Stock Exchange (“JSE”) that have this important criterion. With the further increase of the benchmark rate by the BoJ, to now a Woooosa moment, 4.0%, this line item in their balance sheet, becomes even more important, as leverage will become and be more expensive in 2022/ 2023.  

In the Jamaica markets, we focus tremendously on Price to Earnings ratio (P/E), but it really is not the only consideration. Take the recent market “chatter and banter” on FESCO Ltd… there has been quite a bit of commentary that it is now over-priced based on its current P/E. Please recall, consider the G-rate % (growth rate) when discussing P/E with your peers, financial advisor, broker, etc. FESCO’s growth rate may exceed its current P/E, plus its additional market announcements may permit them to continue their current growth rate or even increase it…  

Back to the point here before the interlude on the hot topic of FESCO, consider taking into account the “cash presently on company balance sheets on the JSE.” We strongly feel, that as mentioned previously in a few of our Newsletters, companies that can (a) make deals/ acquisitions, (b) conduct M&A, (c) make pro-active corporate actions/ market announcements, (d) announce CAPEX market moves within their company, etc. will be winners or continue to be winners in 2022/ 2023… To re-iterate this is where the cash comes into play… It all boils down to market consolidation, market share consolidation in one form or another, and focusing even more on the winners in 2022/ 2023.  

We name a few (cash & cash equivalents, including investments & short-term investments): 

  • Wisynco:                                           J$ 9.5 billion  
  • Lasco Manufacturing:               J$ 2.56 billion  
  • Honey Bun (1982):                       J$ 508 million  
  • Kingston Wharves:                       J$ 8.35 billion 

Focus, as this market, in the aftermath of the Pandemic, will need “cash” to fuel the recovery, take-overs and this is where the continued consolidation and growth will take place. 

Scary Balance Sheets that get no Business Coverage “Love” 

In Jamaica & the Caribbean we tend to speak to or carry the winners persistently. Perhaps, this has prevented the start-up or the MSME/ SME culture, winners from emerging actually or in hindsight. Interesting topic for a further Note. It is noticeable, that there are some scary balance sheets emerging on the Jamaica Stock Exchange (“JSE”) that seem to not garner the headlines, or as much coverage. They include 138 Student Living (JSE: 138SL), Palace Amusement Company (1921) (JSE: PAL) and GWest Corporation (JSE: GWEST). There are a few others, with smaller balance sheet holdings and significantly smaller Profit & Losses, that we will highlight in March 2022. 

By the Numbers: 

  • 138 Student Living: Long-term loans J$ 4.21 billion; Payables J$ 1.19 billion; Current ratio just above 1x 
  • Palace Amusement Company: Net Loss J$ 111.6 million for Q2; Net loss J$ 191 million for 6 months; Net  current liabilities, negative J$ 276 million; Debt to equity, 1.58x 
  • GWest Corporation: Net loss J$ 11 million for Q3; Net loss J$ 29 million for 9 months; Current ratio .94x, current liabilities exceed current assets by approximately J$ 13  million  

It is important for minority shareholders to be aware and for their respective Annual General Meetings (“AGMs”) if you are in them…  

Market Moves:  

  • Seprod Limited (JSE: SEP) has appointed a new director, Mr. Mark Suomi, who comes with interesting and vast business model and business market experience whereby Seprod is concerned. The appointment is effective January 31, 2022 and follows on the retirement of Mr. Peter J. Thwaites from the Board of Directors in December 2021. Mr. Suomi could be viewed as just another director but given his experience as outlined in the advisory,  “He has held various senior management positions in marketing and strategic planning during his over 10-year tenure at Mondelez International, his most recent position being Sales Director – America Export; and previously during his tenure at Kraft Foods Limited, where he was Marketing Manager – Latin America Export.” 

    It will be a benefit for Seprod without question in our opinion, but it does lead to some interest, as he comes across as a super different director appointment that the rest, in the sense that is Mr. Suomi a component to a potential strategy in business succession planning at the Leadership level in moving forward at SEP. 
  • Carreras Limited (JSE: CAR) reported continued earnings growth, even though the JSE market is not rewarding the market value of the Company. Not a dreadful thing if you are a believer in the Company. Hey, you can just keep buying more if you want to, while Mr. Market is not paying any attention to Carreras…  

    We call it the re-branding, the management changes: the “Glynn effect,” and the other efficiencies that Carreras has been making, plus their improvements in investor relations to the market. 

    CAR as always is back, they took longer this time to bounce back on the JSE, but face it, they are one of the market bellwether stock prices… For the year-to-date or 9 months ended December 31, 2021, earnings were + 18%, hitting J$ 62.9 cents per share, or J$ 3.05 billion, up from J$ 2.59 billion in the comparative period.  
  • Wigton Windfarm Limited (JSE: WIG), finally makes a well overdue move. We endorse this, and think whether it happens overnight or over the next few quarters, will result in a different and improved market value for WIG…  

    “Midas Touch” has entered the fold, and they have previously done it with Access Financial Services, Caribbean Producers (Jamaica) Limited of more recent times and many other companies. So, there is confidence here, to get the market value of WIG to where many feel it should be. They are motivated as they were with these other investments, as their subsidiary (Mayberry Jamaican Equities (JSE: MJE) is a top 10 shareholder in WIG) is a material shareholder in WIG, per WIG’s disclosure to the market on February 18th, 2022. We speak of Mayberry Investments Limited (JSE: MIL) here, who WIG has entered with a financial advisory services mandate to provide certain business development opportunities in Jamaica and the Caribbean.  

    We think this is a positive development, and expect the brokerage, analyst community at the right time, to react positively in the short-term to a few more investor relations communications on the matter or quarterly reports by WIG.  
  • Jamaica Public Service Company (JSE: JPS) releases huge and favourable earnings for the full year 2021 and even more robust numbers for their 4th quarter. JPSCo really improving their business model each quarter. US$ 973 million in top line for 2021, with earnings of approximately US$ 36 million. Even more impressive, the 4th quarter saw operating revenue of US$ 275 million with earnings approach nearly US$ 10 million.  

    While Wigton Windfarm (JSE: WIG) and TransJamaican Highway (JSE: TJH) have had their share price issues post-IPO, JPSCo, seems strong and growing its earnings. That is, if the divestment and the Government of Jamaica (“GoJ”) lists its stake, it seems per above, it could be a good one…  
  • ARK Investment Management (Cathie Wood), what can we say, we feel it for the company, the CEO and Founder in Cathie Wood. She has built up a legendary status over the past years (she was named stock picker of the year in 2020), decade, with billions and billions of USD$ of investment inflows, large, outsized returns, and making herself known as an investment manager who is “disruptive.” With no pun intended, herself being disruptive, but making investments in technology and even more so disruptive companies as her and her investment outfit, ARK Invest’s strategy.  

    As they say, once you put yourself on the radar, or the limelight, be prepared to deal with the “good times” and the “bad times.” Cathie and ARK Invest’s flagship fund, ARK Innovation ETF (ARKK) is down 30% Year to Date, and the limelight of public relations and interviews continue to pile onto Cathie Wood and Ark Investment Management, especially during the changes in the tech sector, and pull-back in prices.  

    Her recent business interview and that created social media digs of her and ARK Invest, of course some not justified, but with the Zoom comments about running out of time during the interview although ARKK is a major shareholder of Zoom Video continue to add to the current slide and sentiment. 

    Over the past year ARKK is down 54.93%, or US$ 78.98, currently trading at US$ 64.80/ share (NYSEARCA: ARKK).  

Have an amazing 2022, stay safe and don’t forget to invest!

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Happy investing and Happy markets.
Enjoy the It’s Money Experience until next week, bright and early at 7am!
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