Vernon James
and Shane Ingram, Contributors
Scotiabank, Kingston - File
At the beginning of the year, Dehring Bunting and Golding (DBG) published its stock picks for 2006, along with an overall expectation of the market's performance. Today, we will be reviewing the performance of the market and our stock picks, and also advising on what to expect for the rest of the year.
Equity prices have generally retreated since the start of the year on the back of challenging economic conditions, stemming largely from a protracted cement crisis that gripped the island in recent months, and which brought the local construction and related industries to a halt, which significantly impaired corporate earnings for the first quarter.
Disposable income, on the whole was reduced which stifled general demand for goods and services.
This came on the heels of fragile investor sentiment, arising from a change in leadership of the PNP, sober business and consumer confidence results, and volatile international politics.
Consequently, all three market gauges are down by an average 25 per cent since the start of the year.
The Jamaican dollar lost marginally against its US counterpart, depre-ciating 0.82 per cent between April 2006 and June 2006. Sustained inflows from remittances, tourism, and foreign direct investment should sustain the dollars' stability over the coming quarters.
Money market rates also continued to decline as the BOJ sustained the interest rate reduction policy. Inflation for June 2006 amounted to 1.3 per cent, compared to 0.4 per cent in May, which brought rates to 3 and 8.4 per cent for the calendar and point-to-point, respectively. This represents a significant normalisation in prices, which bodes well for the achievement of GOJ's target of single digit inflation this year.
The fiscal performance has also been relatively positive. In particular, the fiscal deficit narrowed by $987.6 million in comparison to the budgeted figures for the period April to May 2006/7, which brought the fiscal year to date (YTD) deficit to $4.7 billion.
Revenue and Grants of $31.3 billion were $1.28 million above budget, this was mainly due to tax revenues surpassing budgetary expectations by $885.1 million, driven by increased inflows from the tax on interest and income and profit.
On the expenditure side, total spending was measured at $36 billion or $290.1 million above budget, as recurrent and interest expenditure came in at $2.2 billion above projections.
Challenges ahead
Still the challenges lie ahead. Of note is the prospect of increasing oil prices as geopolitical unrest continues to plague the Middle East. Local elections are also on the cards, while the cement debacle is still expected to negatively impact second quarter profits.
Notwithstanding, prices have been over-discounted over the last 18 months such that the market price earnings (P/E) is now 10.6 with several companies trading between six to eight times earnings.
There is also general optimism that the economy will rebound in the second half of the year, given projected normalisation in the construction industry. From this vantage point, long-term investors are presented with a lucrative opportunity to re-position portfolios in order to take advantage of the strong upside potential.
Bank of Nova Scotia (BNSJ)
Having exceeded expectations for the second quarter, investors are even more confident in the bank's ability to generate profits in tough times. BNSJ registered $3.3 billion in net profits for the six months ended April 2006, up 15.5 per cent on profits posted at the same interval last year. Profits were generated on net revenue of $9.5 billion, an increase of 13.2 per cent, driven by the general rise in inflows from net interest income, currency trading, insurance income and fees.
The bank's ability to improve shareholder return should be further enhanced by the new wealth management arm, as well as the bank's aggressive product development activities, keen front-end sales force and strong promotional campaigns.
BNSJ is also the most efficient local banking entity, which allows more of its revenues to flow to the profit line.
National Commercial Bank
National Commercial Bank followed up on the $1.1 billion posted in first quarter of 2006 with $1.2 billion in the second quarter, but investor interest waned amidst the group's involvement in the Supreme Ventures IPO.
Notwithstanding, there was strong organic growth in the group's loans business, which fuelled the 21 per cent jump in net interest income for the quarter.
Fee based income also surged 28 per cent, but a 40 per cent drop in trading gains (primarily related to the decline in local equities) muted growth in net revenue.
Simultaneously, however, the group managed to lower its productive ratio (operating expenses to net revenue) to a 5-year low. While NCB will rely heavily on growing customer deposits, the group's ability to tap the international market for funding promises continuous growth in investment assets and hence profits.
Carreras Group Limited
Despite the revitalisation in earnings since the restructuring conducted during financial year 05/06, Carreras continues to trade at a significantly discounted P/E of 6.32.
Given the fact that the company ceased the production of cigarettes in November 2005 and off-loaded San Souci earlier in the year, Carreras now operates a simple mark-up business.
Operations are very lean, as management now concentrates on its tobacco business that boasts operating profit margins close to 50 per cent.
The major appeal of this stock, however, is its propensity to pay healthy dividends - in excess of 60 per cent of earnings).
Still, Carreras faces declining demand for cigarettes and more importantly could be called upon to pay over some $5.7 billion in income taxes to the Government of Jamaica .
First Jamaica Investments
While most listed companies struggled to grow profits during the March quarter, profits from continuous operations at First Jamaica Investments (FJI) jumped 30 per cent to $256.1 million on the back of the restructuring activities of 2005.
"Moreover, FJI is now a leaner, more efficient entity dedicated to the property management business and investments. In addition to the potential price gains, investors should also expect regular dividend payments in keeping with its dividend payout policy.
Dehring, Bunting
and Golding
Despite tight local trading conditions, DB&G engineered $882.3 million in net profit for the year ended March 2006, ten per cent more than the prior year.
This achievement mirrored the Jamaica Stock Exchange (JSE) reward in which DB&G was voted the top performing listed company for 2005. DB&G boasts the most diversified income base of its peer group backed by a relatively wide distribution network and improving operating efficiency.
DB&G has also focused on restructuring its operations, paying greater attention to investment advisory services at the retail end, and fixed income and currency products at the treasury end of the market.
Plans are also in development to further strengthen the group's income streams through the introduction of mortgage-backed securities, consumer financing initiatives, US dollar Caribbean Funds and a renewed emphasis on corporate financing.
Jamaica Producers Group Limited
Jamaica Producers (JP) remains a strong value buy for investors. JP posted $224.3 million in net profit for the six months ended June 2006, up from $82.3 million at the same interval last year. Importantly, JP is a leader in the U.K. fresh produce and processed foods market through its thriving SunJuice brand.
It should be noted however that JP, similar to other agricultural-based operations, is particularly vulnerable to adverse weather conditions.
The European Union (EU) arrangement also affects the group's banana production in Jamaica, but market intelligence suggests that this may simply require adjustments to JPG's sourcing strategy in the United Kingdom.
Hence, barring another year of natural disasters, Jamaica Producers is expected to report significant organic growth and possibly stock price appreciation.
Vernon James is the senior manager in charge of DB&G's stock brokerage division, while Shane Ingram works as an analyst in that department.
