ItsMoneyMark Newsletter #64

BoJ Rate Increase and Market Valuations 

The next policy interest rate decision is set for June 29, 2022, and it seems only headed in one direction with two (2) things happening, (a) the latest decision, effective May 20, 2022, raising the rate by 0.50% to 5.00%, and (b) the inflation rate April 2022, coming out at 11.8%. As a consumer, although this is the formal inflation rate, based on food prices, the gas pump, and the practical day to day, inflation practically just feels a bit higher, and more like 20% +. 

We continue to remind you, when US$ equities/ share prices selectively become cheaper than J$ equities/ share prices, on a P/E ratio basis, be careful, become a bit more cautious, and re-look at your portfolio. We are believers in being focused and absolute return, and over the coming months, to the end of 2022, and into 2023, we believe the winners will be the focused investor if you are still seeking the JSE on a very selective basis, and focusing on the active ones, who are doing big things with significant above average growth rates, in light of what is happening with interest rates by the BoJ and the realities in the U.S. markets (economic situation). 

If you wake up and valuations, metrics, seem odd, do not go to bed, and think valuations, metrics got better, they are still odd…

Market Moves:

  • K.L.E. Group Limited (JSE: KLE) continues to go through the motions, with several continued changes. The latest change/ announcement is now the resignation of Director, Mr. Christopher Dehring from the Board, effective May 24, 2022. Mr. Dehring has been a long-standing Director of the company. 

KLE recently reported their audited year-end 2021 financial statement, and they did in fact report a profit, but this was due to a gain on sale of investment recorded on other operating income of some J$ 77 million, versus income or profit on the core operations. For the year ending 2021, KLE did not report any core revenue. In reading & analysing their management, discussion & analysis (MD&A), that is the previous release to the audited financial statements to the JSE, the outlook seems to be and focused on the the Bessa Project in partnership with Sagicor Group Jamaica, in Oracabessa, St. Mary and maintaining the 49% stake in Franjam (t/a). Overall, it stops the losses at KLE clearly, and still allows KLE to seek or take advantage of any opportunities that it may deem fit. 

The key with the restructuring is it stops the losses moving forward and the cash burn that had been hurting KLE for some time. 

  • GK 100, & Grace Kennedy (JSE: GK) are in full effect! At ItsMoneyMark, we mentioned a few years ago, that all GK needed to do with its brand, management and “war chest” of its balance sheet was to become a bit more active in the private equity markets, and/or capital markets. Well not only has GK awoken, but they have become continually active in the past 24 months, and we like that. They have clearly listened to market analysts, brokerage analysts, and GK minority shareholders… 

In April/ May 2022, GK invested via private equity investment in well-known venture capital play, Bluedot, taking an equity stake. GK quoted in their press release on April 13, 2022:

Our private equity investment in Bluedot will lay the foundation for it to become the Caribbean’s leading strategic insights consultancy. We have a view to possibly take Bluedot to market in the long term, provided certain criteria are in place.

In May 2022, GK Capital Management, GK Financial Group, GraceKennedy announced another big deal! As we mentioned they just keep coming. GK Capital, signed a joint venture agreement with the Trinidad and Tobago Unit Trust Corporation (TTUTC)! The new venture, which remains subject to the requisite regulatory approvals, will allow GK and TTUTC to partner in the distribution of mutual funds in Jamaica.

Lastly, but most importantly, GK released another release in May 2022 to the market on its 2030 Vision, something that on a forward-looking basis, that pretty much, not many, if any publicly traded companies on the JSE do, so it is refreshing to observe. The GK 2030 Vision, read as follows or key takeaways:

To become the number one Caribbean brand in the world with,

  • 70% of our revenues and profits are earned outside of Jamaica
  • US$2.1 billion in Revenues
  • US$250 million in PBT
  • GKFG and GK Foods are listed on Caribbean and major overseas stock exchanges, respectively.
  • The trend is your friend as we always mention at ItsMoneyMark and if the continued buying into Mayberry Investments Limited (JSE: MIL), reflects this principle, then it is one to continue to stick by, and watch. In corporate action reports to the JSE – Jamaica Stock Exchange over the past week or so, MIL has reported further “insider buying” into one of Jamaica’s leading investment banks, and money makers, MIL

Note briefly, its important not to mix up the Companies, as they are two (2) different entities with similar brands, it is understandable and easy to mix up the two (2), but they are separate. We are talking about “Mayberry Investments” here and not “MJE – Mayberry Jamaican Equities.”

On May 24, 2022, a connected party purchased approximately, 452k shares in MIL

On May 18, 2022, a connected party purchased approximately, 661k shares in MIL.

On May 18, 2022, a connected party purchased approximately, 100k shares in MIL.

On May 17, 2022, connected parties purchased a total of approximately, 205k shares in MIL.

There are a few more “buys” but materially, this tallies approximately, 1.418 million shares over the past week or so… The positive earnings results of J$ 1.0 billion + for the quarter, plus these material trades, have recently pushed MIL’s share price to J$ 10 + in recent trading days. The demand/ supply dynamics continue to favour MIL as well, as the supply side continues to be gobbled up by company insiders. 

  • It is a tough time to be a Central Banker, not just in Jamaica, but globally… market uncertainties, inflation challenges, and much more. The tool traditionally, historically, used to tame “inflation” by Central Banks has been “interest rates.” 

Our Central Bank, Bank of Jamaica (“BoJ”) recently further increased the policy rate by 0.50% or 50 bps from 4.50% to 5.00% effective May 20, 2022. At some point, the rapid increase in rates, over the past year, from 0.50% to now 5.00% will be felt in the economy. As a reminder, rate increases are never felt immediately, there is a definite lag, and the ending impact takes time to set into the economy and the end users, consumers. One of the reasons being, commercial banks, merchant banks, and building societies do take time to pass on rate increases to customers, sometimes the lag could be 60-90 days. While in the U.S. the rate increase impact can be effective immediately or within a few days to a week. 

As we mentioned in a recent ItsMoneyMark Newsletter, get your leverage or debt burden lower or to zero where you can while there is a lag, and exit asset classes that are not showing above average growth rates with more interest rate increases expected and the ensuing economic slowdown to come. 

  • Mailpac Group Limited (JSE: MAILPAC) reported a quarter to the “downside,” one that surprised us at ItsMoneyMark, and we think most analysts, although there have not been much commentary or reports on it to date. 

We have got this one wrong over the past few fiscal years, as we had MAILPAC in our mind, heading to the J$ 5 – J$ 6/share price range or higher, based on its previous growth rate, which has become discombobulated. In its latest quarterly report, the downside risk, and lower earnings came out further. MAILPAC reported lower revenue and net profit for its 1st quarter as follows:

Revenues: Fell to J$ 398 million versus 470 million for March 31, 2022

Net Profit: Fell to J$ 56.3 million versus J$ 103.3 million for March 31, 2022

The Company did focus on its report to the JSE – Jamaica Stock Exchange on its improvement during the quarter, regarding its “cash position” and its balance sheet strength. That is, MAILPAC ended the 1st quarter, with cash & bank balances of J$ 445 million, total equity of J$ 750.8 million and increase in equity of + 43% year over. 

MAILPAC has been trading lower, close to J$ 2.50/ share, and within 10% of its 52-week low. At ItsMoneyMark we have not given up on our previous belief in the growth potential of the company, but it has been a bit too long now, and MAILPAC needs to wake up, and in our mind, make some deals, and acquire some competitors or focus on why its top line isn’t growing again, to get back to its former winning ways. 

%d bloggers like this: