ItsMoneyMark Newsletter #61

Blistering Earnings Reports Continue for Q1 on the JSE, while the Dow Jones, and U.S. Markets continue to Head Lower…

The Dow Jones Industrial Average (US: DJIA) continues to test lower and lower resistance levels. It seems destined to break through the 32,000 points mark, but let’s see what happens. Depends on which U.S. index we examine, but from the peak, we are talking about, U.S. indices being anywhere from 13% – 25% off their highs, whether we speak about the DOW JONES or the NASDAQ

Interestingly, although, with all the global market uncertainty, headline inflation, FED increases (and more expected), legendary investment guru, who just had his company shareholder meeting, has purchased a tremendous amount of U.S. equities in the first quarter (Q1). You got to listen and follow the Buffet at some stage, so this tells you something. The reality is, as U.S. indices are off as we mentioned 13% – 25%, some select blue chip U.S. equities are off way more than this, from their peak, 50% or even more. 

Although Buffet & Berkshire Hathaway have made some large announcements year to date – YTD, you just get the “feeling something big or even bigger is coming from Buffet soon…” Let’s see. 

Onto the Jamaica Stock Exchange – JSE, of course, there is concern brewing around our own rapidly increasing interest rates, and the historical happenings to Jamaica financial markets once the U.S. hits a recession, if it does. With all that said, a few things do feel different about Jamaica economically, and while the listed companies’ earnings reports are not the “end all be all benchmark”, let us tell you, the earnings growth rate for Q1/ first quarter, is way higher than expected, and way higher than the respective P/E ratios in most cases. If the earnings growth rate is there and stays there or improves, the high P/E argument wouldn’t get much traction in 2022… 

In a previous ItsMoneyMark Newsletter, we spoke to SVL and PTL getting us to blast off the right way for the quarter! Well, while we await many other hotly anticipated companies to report on the market, here comes Spur Tree Spices, Dolphin Cove, Sagicor Group Jamaica, Wisynco Group and even NCB Financial Group, surprised us with a better-than-expected quarter. Most of these have not been a 10% – 15% earnings growth rate year over year for the quarter, but we have been seeing 25% and up, with some exceptional growth rates for Q1.

These types of earnings growth rates can cause P/E ratios that seem on face value to be high, to tumble on a 12-TTM (trailing 12 months basis). 

Market Moves:

  • Caribbean Assurance Brokers Limited (JSE: CAB) demonstrates what happens when companies, and their respective board of directors take the leadership discussion seriously, and source the right leadership. Historically, CAB has seemingly always had an issue with “cyclical earnings” meaning, since the numbers have been public, CAB has reported break-even or losses for their 1st 3 quarters or 9 months, and then they have a massive booking of profits in their final quarter, Q4 that then carries a year end net profit with it. Not ideal for a publicly traded company, that must deal with not only minority shareholders, but the public scrutiny of the media, journalists, analysts, etc. 

CAB reported a first quarter profit, a significant turnaround from Q1 in its previous year. CAB reported net profit of J$ 1.8 million for the 3 months ended March 31, 2022 (Q1 2022) versus a net loss of J$ 7.88 million for the 3 months ended March 31, 2021 (Q1 2021). Impressively, and you want to see this in an insurance brokerage is the growth in top line. CAB grew operating revenue to J$ 104.9 million, versus J$ 87.3 million for the period under review, representing an increase of 20%. We like this double-digit increase, as even if, some of it is represented by pricing increases, to get such a material jump, there is market share growth in there. 

In our mind, what does this quarter boil down to? As we started the thread, leadership. Mrs. Tania Waldron-Gooden is the CEO at in recent times, and since she joined the company to the build up of this, the steady improvement running quarter to quarter has been there. A lot of things make up a company’s success, but in our opinion, the “driver” here and management, is making a significant difference to the earnings. 

  • Palace Amusement 1921 Company Limited (JSE: PAL) is back outside, slowly but surely. What a storm PAL has had to weather, with high fixed costs, that one assumes over the past two (2) years have been unavoidable. Upon review of their financials, and in our previous ItsMoneyMark Newsletter, they did lower expenses and cash burn where they could, but they burnt significant cash in hindsight… The arrangement of financing that they put in place, a large corporate bond raise via VM seemed to be their saving grace as it gave them ample room to get through to the end of DRMA, or the end of restrictions, and the lifting of these restrictions by GoJ.

Just like that, earlier this month, Palace Amusement 1921 Company announced to the JSE – Jamaica Stock Exchange after a long wait & haul, they were all set to re-open Palace Cineplex in Sovereign Centre on May 4, 2022. 

A feeling of relief for PAL minority shareholders. We now await the next quarter. 

  • Guardian Holdings Limited (JSE: GHL) has announced another material management change in a relatively short time span here, with the appointment of an Acting Group Chief Financial Officer (“CFO”). Effective May 15, 2022, Mrs. Samanta Saugh has been appointed to this acting capacity at GHL

For us, its simple, seeing the CEO change (for end of year), then now the Group CFO change, NCB Financial Group (JSE: NCB FG) had enough of the flat earnings growth, and they are executing their strategic plan, and there is more to come this year and in 2023. 

What you try to do with M&A is integrate and to extract as much shareholder value as possible. We are now starting to clearly see that between two (2) behemoths, powerhouses such as NCB FG and GHL, and eventually, things must get moving, and NCB Global/ NCB FG are doing that now. 

  • Seprod Limited (JSE: SEP) is one of those stocks, you got to look at “going forward” versus the 2021 audited financial statements. Due to their recent release to the JSE – Jamaica Stock Exchange that they are acquiring a mega deal & company in A.S. Bryden & Sons in Trinidad, we encourage readers & investors to look at SEP on a forward basis, and not on a historical audited financial statement basis or a TTM (12-month trailing earnings basis). 

To note, everything is in cycles, and sometime ago, it was the Trinidad investors/ buyers who were “gobbling” up Jamaican enterprises… Things have changed now over the past few years, with the bullishness on the JSE, and this deal by SEP is just another example of how the tides have turned… 

For 2021, Seprod gained more market share, and their revenue closed the Year-End December 31, 2021, at J$ 43.8 billion. Operating revenue was 16% higher year over year. Admittedly, SEP’s net profit was lower at J$ 1.99 billion for 2021, approximately J$ 880 million lower than Year-End 2020. Footnote # 27 in Seprod’s audited numbers caught our eye, that is the revaluation of investment property, approximately J$ 5.3 billion, and the positive impact of this on SEP’s capital reserves and SEP’s balance sheet. When you see something of this magnitude, one-off in a Year-End, it could signal, other deals, M&A, and/or arrangement of financing for other deals in the making. Let’s see…

With the disclosure of the deal for A.S. Bryden & Sons, and Seprod stating that the combined revenue will be more than US$ 500 million, using a FX rate of J$ 150: US$ 1, this would equate to, a top line, moving forward, of approximately 75% higher than the just registered J$ 43 billion. Of course, it will boil down to what SEP trickles down to the bottom line, the net profit, and large deals do take time to synchronize and get efficient, but the opportunity will be there for SEP in 2023. 

This may well be the reason, and smart of SEP, why in the release they make it clear they will operate as separate entities. Get the acquisition right before trying to synergize and synchronize. 

  • IronRock Insurance Company (JSE: ROC) continues to grow its top line, or gross premiums written considerably, however when one reviews its competitors across the general insurance sector, the publicly traded ones, they are all doing similar top line growth. 

ROC grew first quarter (March 31, 2022) gross premiums by 31% year over year to J$ 260 million. Nonetheless ROC reported an underwriting loss and an overall net loss for the quarter of J$ 8.5 million. Despite this, ROC’s shareholders equity remains strong at J$ 614 million. 

Because of the small quarterly profits or losses for this quarter, or each period, ROC is neither breaking out to the upside or to the downside essentially. From an investor perspective, it is “kind of in no man’s land” and may be a good acquisition for one of the larger general insurers if there is appetite from the major shareholder in ROC to exit in the near to medium-term. 

  • NCB Financial Group (JSE: NCB FG), are they back, and back in a “Big Way”? Hey, we can definitively say in another 3-6 months of financial results, but this 2nd quarter was refreshing to see. It was also unexpected after quite a few lower-than-expected quarters. 

We always say in our newsletters at ItsMoneyMark, NCB FG is a powerhouse, and they will go through the cycles, motions. Be patient and eventually, they will awake. This could be the quarter, but with all the market uncertainty, and global uncertainty, to be safe we got to see at minimum one (1) more quarter first. 

By the tail of the tape, NCB FG bounced back, by closing their 2nd quarter, March 31, 2022, with Total Assets of J$ 2.05 trillion. Wow! Plus, NCB FG earnings for the quarter were up 195%, registering J$ 3.39/ share versus J$ 1.15/ share year over year, some J$ 9.9 billion net profit for the 2nd quarter. 

  • Sagicor Group Jamaica (JSE: SJ), will they continue to lead the pack as they did last year, 2021 based on profitability for banks? 2021 was a big signal of things to come for Sagicor Group Jamaica, but when you analyse & look at their valuation on the Market, they are not getting a fair or even a premium valuation for those historical results. Interesting…

SJ’s first quarter numbers were up 31%, more than commendable, with Earnings per share of J$ 98 cents versus J$ 75 cents year over year. To note, SJ’s total assets closed the quarter at J$ 525 billion. We anticipate another break-out and record year for SJ in 2022, and it is important to note, that Sagicor Group Jamaica, total assets presently are about one-fourth (1/4) of NCB FG’s

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