Shane Ingram, Contributor
Left: Shane Ingram - Right: Richard Byles, president and CEO of Life of Jamaica.
HOPES OF a recovery in the local equities market weakened this week as most listed companies reported disappointing results for the period to December 2005. Manufacturing and trading companies were hardest hit, as the tight trading environment, together with adverse weather conditions in 2005, ripped through income statements. There were, however, positive results from most financial entities including, Life of Jamaica (LoJ), Pan Caribbean Financial Services (PCFS), Jamaica Money Market Brokers (JMMB), and Capital and Credit Merchant Bank (CCMB).
COMPANY SPOTLIGHT: ACQUISITIONS BREATHE LIFE INTO LOJ DURING 2005?
Although profits at LoJ climbed 55 per cent to $2.23 billion for the year ended December 2005, earnings per share (EPS) grew only 14 per cent as shares outstanding swelled 1.17 billion during the year, due primarily to the 1.16 billion shares issued to satisfy LoJ's deal with FJI (First Jamaica Investments).
For the year, aggregate revenues increased 65 per cent to $11.6 billion on the back of the 44 per cent uplift in insurance revenues and 112 per cent jump in investment income, following the acquisition of FJI's insurance business and the additional 37 per cent equity stake in PCFS. Fee-based income also climbed 144 per cent to $1.36 billion in response to the improved business volumes. Simultaneously, total benefits and expenses shifted up 53 per cent to $8.21 billion, as insurance benefits and general administrative expenses saw respective increases of 73 per cent and 42 per cent owing to the larger insurance portfolio and the inclusion of PCFS. Still, operating margins strengthened from 23.98 per cent to 29.26 per cent thereby allowing operating profits to double to $3.39 billion.
However, LoJ booked $34.7 million in finance costs chiefly associated with the acquisition of PCFS shares, and taxes more than doubled to reach $565.3 million following the doubling of the tax rate applicable to premium and investment income. There was a further outflow of $568 million to minority interests in PCFS. Therefore, net profits surfaced at $2.23 billion, or $0.65 per share, matched against $1.43 billion, or $0.57 per share one year earlier. Despite the strong earning performance, net margins contracted from 20.34 per cent to 19.19 per cent, Further, it was interesting to note that EPS fell 15 per cent in Q4 2005 when compared to Q4 2004.
The consolidation activities also brought about significant changes in the balance sheet. Total assets climbed 244 per cent to $69.2 billion while ROA (return on assets) slid 2.87 percentage points to 4.99 per cent - the lowest in four years. Shareholders' equity was booked at $11.7 billion, $5.5 billion more than that recorded at the same interval in 2004. Similar to the ROA, ROE (return on equity) fell to its four-year low of 24.67 per cent; albeit ahead of the return available on one-year Government of Jamaica (GoJ) instruments.
While LoJ boasts an enviable level of policy retention, product development and new business generation, the tight interest rate environment and the ailing local stock market are likely to mute the income it is able to generate from the insurance segment. Moreover, the firm will be challenged to meet its targeted 25 per cent to 40 per cent growth in new business for 2006, given the general weak economic context. PCFS will continue to make healthy contributions but much will depend on PCFS's ability to halt the decline in interest margins while maintaining the uptick in securities trading. PCFS must also execute its planned credit expansion, broaden its product offering and rev-up its stockbrokerage business.
Meanwhile, LoJ's property development activities at Winchester Estate (Hope Road) is expected to create a 'one-off gain' from the sale of residential these properties, possibly in the final half of 2006. LoJ also acquired 51 per cent stake in Cayman General Insurance Co (CGI) as of November 3, 2005. Although CGI will extend LoJ's reach in the Caribbean, it is not expected to make a material contribution to LoJ's profits since it makes an estimated CI $2.5-3.0 million in net profits annually, or less than 10 per cent of LoJ's current profits. As these factors converge, net profit (from continuous operations) should grow in the band 10 per cent-15 per cent to allow for EPS of $0.75 for 2006. If the stock is able to sustain the current P/E, it should region $9.00 by December 2006.
RECOMMENDATIONS
We hold favourable outlook for Cable and Wireless Jamaica, National Commercial Bank Jamaica, PJAM, Dehring Bunting and Golding (DB&G), and Bank of Nova Scotia Jamaica. Seprod, Courts, and Goodyear could also perform well over the short term. Please contact DB&G's Stockbrokerage department at 1-888-CALL DBG for further information on these and other stocks or visit for detailed analyses.
Disclaimer: All information contained in this article has been obtained from sources that DB&G believes to be accurate and reliable. All opinions and estimates constitute the author's judgment as of the date of the article. No warranty as to the accuracy, timeliness or completeness of this article and as to the opinions based thereon is given or made by DB&G. DB&G and/or its employees or directors and/or any associated person may have an interest in, or interest in the acquisition or disposal of, the securities or class of securities mentioned herein. Call
1-888-CALL DBG if in doubt about the content of this article. Decisions based on information contained in this article are your sole responsibility.
