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Happy April Fool’s Day (but all facts)!
Start of Q2, Rising Rates & Re-Financing
We start Q2 today, April 1, 2022, and as they say, a lot can happen in a Quarter. A few things to keep grounded, focused and stayed centered on as we kick-off Q2:
– With Covid seemingly passing and Jamaica opening up: the entertainment sector back and simply put, we are open for business, all seems great but don’t get fooled as there could be a tsunami coming from (a) interest rates rising & the (b) Ukraine-Russia wildness
– The theory of getting out of the fire jumping into the frying pan could be something that is happening with the joy of diminishing Covid-19 missing from the headlines but there are economic headwinds in the headlines all of a sudden
– This includes commodities across the board being at highs and Big Oil, even if settled for now, still up a lot at US$ 100 +
Back to rates rising faster than expected in global markets and locally. Last newsletter we spoke about the policy rate + .50% and the increase in WATBY. Some allotments are at 7% – 8%. Now if corporates start to get hit with risk premiums of let us say 3% – 4% and it puts financing at 10% – 12%; this is before a few more potential BOJ rate increases in the coming months, put on your “hard hat”.
A few private equity firms may be excited to “open their wallets” again assiduously and it’s deal time for 2022, but with rates increasing the outlook for 2023 gets even more interesting.
A few sectors that were well known and seemingly took on significant leverage during the Pandemic were tourism, construction, and a few others, but primarily tourism. We assume tourism has made a full recovery now or is almost there. It doesn’t seem like everyone across the board has rebounded as fast. If for example, debt matures in 2023 or within 12 – 18 months with the current inflation and interest trend outlook, those re-financing scenarios look “scary”.
Message: 2023 or earlier could bring some interesting “equity side of the balance sheet” opportunities for investors.
Market Moves:
- The following large share price movements happened in Q1 2022. Companies such as Wigton Windfarm (JSE: WIG), Lasco Manufacturing Company (JSE: LASM), Future Energy Source Company (JSE: FESCO) and the IPOs during the Quarter all performed significantly above average in the Quarter. Way above average.
In some cases the share prices were neglected, and/ or the company needed some positive direction and investor relations again. Case in point Wigton, languished at J$ 50 – J$ 53 cents per share but once they signed their financial services advisory agreement it changed the market perception of the stock plus did their first deal by acquiring 21% in an entity to diversify income, WIG’s price popped back to the J$ 70 cent region. LASM, another one was clearly mis-priced simply on a P/E, price-to-earnings basis recently when it was slightly above J$ 4/ share. We wrote about this in our newsletter recently. The Market awoke and it has popped to J$ 5/ share and change to J$ 5 mid-levels. It may not have a popular face or do a lot of investor relations but LASM is a strong fundamentally sound company with great earnings fundamentals. - Dairy Queen, not only in expansion mindset but the franchise filings and disclosures for 2021 demonstrate how “wildly profitable” this particular franchise is. Wow!
The filings shows Net Income for last year, 2021 around US$ 80 million and change on Revenue of US$ 220 million and change. This calculates to a whopping “net margin” of 36%. No wonder Warren Buffet & Charlie Munger love the company so much they have had for 25 years. From our experience of viewing global franchise P&Ls, income statements, net margins at best may be around 8% – 12% and that is actually a well-run business. Clearly, there is something special about Dairy Queen. Even though it is minuscule in the bigger scheme of things for Berkshire Hathaway’s investment portfolio when analyzing % of holdings, that is, equity holdings, contribution to net income, etc. on the basis of net margin analysis only, we are pretty sure not much beat Dairy Queen.
With that said, no wonder the board of directors, management team of Dairy Queen are excited to expand based on all of this and their numbers. The company plans to add-on to its only desserts and famous blizzards by adding the “Stackburger”, with 5 interesting varieties and seek to take advantage of this market. The varieties look great and sometimes there is nothing “nicer & sweeter” than a burger, fries & coke, and then an ice cream after… Dairy Queen expands to this. - U.S. recession on its way or just some noise in the markets? Markets dictate historically that when the U.S. yield curve inverts (the 2 year and the 10 year), it’s a 66.67% or two-thirds chance of a recession. It doesn’t happen overnight of course and it takes time historically, a lag of potentially 6-18 months in most cases but with it comes the unemployment numbers and the many other factors.
By the numbers, what happened yesterday regarding the U.S. Yield Curve? By close both tenures ended around the same level at 2.34%, but earlier in trading, the 2 year bond went mildly higher than the 10 year bond .006%, for the first time since 2019.
Principal protection & stability is key given this plus increased global market uncertainties. - EduFocal makes its 1st deal already post-IPO. Amazing. We keep getting a vibe although a new, different sector for the Junior Market as well as key investor Midas Mayberry, it just reminds us of the Access Financial play all over again. Re-living 2009/ 2010.
The deal here is EduFocal (JSE: LEARN) has acquired the assets of American K1 Edtech SaaS Company: cleverschoolteacher.com. The acquisition is the assets & the website. The company is Denver, USA based and provides monthly curated K-1 resources and live on-line professional sessions for K-1 Teachers in the USA.
http://cleverschoolteacher.com/
One of the most telling comments in the release to the JSE was by LEARN’s CEO, Gordon Swaby, whereby he said, “Acquisitions and new markets are high on our agenda as a primary driver of top and bottom line growth.”
Clear, telling and positive comments by a public company CEO. - Spur Tree Spices Jamaica Limited (JSE: SPURTREE) saw some major volumes move in the last week of March 2022 in the share cap table. Major! There were two (2) separate releases to the Jamaica Stock Exchange (“JSE”), and in totality they spoke to a few directors, approximately three (3) selling approximately 85 million shares in Spur Tree. That’s a Big Trade.
If we assume the trades were done on/ around J$ 3.50/ share, this would equate to gross proceeds of approximately J$ 300 million. On an issued share capital basis, approximately 5% of Spur Tree was sold by these Directors.
While we await the next Top 10 ordinary shareholder list to see who the buyer/s were the share movements should create further and potential depth, liquidity in the shareholder base of Spur Tree moving forward. Depending on who was the buy side, this may have increased the “float” of the stock moving forward. Let’s see.
Remember, don’t get fooled today, keep your guard up and enjoy the Markets.
Have an amazing 2022, stay safe and don’t forget to invest!
ITSMONEYMARK 