(left) Maurice Facey, chairman

(right) Stephen Facey, chief executive officer

The casual observer could easily assume that Pan-Jamaican Investment Trust, controlled by the Facey family, has gone to sleep.

It sold its insurance arm as well as its financial services subsidiary Pan Caribbean Financial Services Limited to the Sagicor group, in a deal that included 25 per cent in Sagicor Life Jamaica. Pan-Jam used that same tact with its Hardware & Lumber retail business, which it merged with GraceKennedy's outfit, and at the same time pulled back from manufacturing.

It, however, remained active in real estate service.

But take a closer look, and the picture becomes clearer. Pan-Jam's change of strategy earlier in this decade of transforming itself into a company with stakes in other firms, without necessarily having controlling interest, is paying off hugely.

Indeed, in StockTrack's survey, Pan-Jam emerged as the leading performer in delivering quality to investors among the four listed conglomerates on the Jamaica Stock Exchange.

Conglomerates

Of the 10 variables used to assess performance among the conglomerates, Pan-Jam outperformed its peers in four and did more than creditably in the others. When the scores received by Pan-Jam for its performance in each of the variables were aggregated, its total was 192, three points ahead of the 189 for GraceKennedy, the sector's giant and 184 for Lascelles deMercado, the group that was recently acquired by the Trinidad-based Angostura Ltd.

Pan-Jam displayed efficient management in debt collection. The company's revenues were 104 times more than its average receivable. This allowed the company to book 46 per cent of revenues as profit relative to the industry average of 15 per cent.

The group's shareholders also enjoyed a 19 per cent share of profits the highest in its category of companies. Pan-Jam was also the least leveraged among its peers. Its liabilities at the review period was only 12 per cent of capital.

As it is now structured, Pan-Jam, owned 43 per cent by the Faceys, operates mainly within the financial services and property management sectors. The company owns 73 per cent of First Jamaica Investment Trust Limited (FJI) an investment-holding company, which has a 25% stake in Sagicor Life Jamaica. Pan-Jam also owns 20.8 per cent of Hardware & Lumber Limited.

Opportunities

The company maintains ownership in prime commercial properties, which provides for a less volatile stream of revenues. Significantly, it now has access to cash to look for opportunities in the business segment if opportunities become available. In late June the International Finance Corporation (IFC), a World Bank subsidiary, approved a US$25 million to FJI to undertake real estate development projects throughout the Caribbean. The company is also expected to benefit from the acquisition of Blue Cross health portfolio by Sagicor Life Jamaica.

Its various income streams, clearly, have served Pan-Jam well. For the six-month period to June 2008, both the parent company as well as FJI reported strong increases in their earnings per share. Pan-Jam's was up 16 per cent to $1.44 while FJI's was up 15 per cent to $1.11. Both companies were buoyed by higher investment and property income, which grew by 34 per cent and 22 per cent respectively.

There are issues to watch, however. Operating expenses rose by more than 30 per cent as the increase in property operating costs exceeded 50 per cent. Going forward, Hardware & Lumber's contribution to profits is expected to decline consequent on reduced consumer spending.

Sector Analysis - Conglomerates

A conglomerate is a corporation consisting of several companies in different businesses.

Conglomerates allow for diversification of business risk, but, the lack of focus can make managing diverse businesses more difficult.

Four of the companies listed on the Jamaica Stock Exchange are regarded as conglomerates, namely GraceKennedy (GK), Jamaica Producers (JP), Lascelles deMercado (LAS) and PanJamaican Investment Trust (PJAM).

With the exception of Jamaica Producers, which is undergoing a transformation of its business mix, all are highly profitable.

Jamaica's conglomerates are diversified across three main sectors financial services, manufacturing and retail trade.

All except, PJAM, which earns 59 per cent of profits before tax from property services, derive a significant portion of revenues from exports.

In this regard, these companies will be impacted by the anticipated downturn in global economic activity.

Since mid-2007, global financial markets have been sent into a tailspin by a crisis that originated in the United States sub-prime mortgage debacle.

Fear dominated financial markets with holders of cash refusing to lend due to uncertainty regarding the quality of assets presented as collateral.

The resulting credit crunch starved major financial institutions such as Lehman Brothers and American International Group of working capital forcing them to the brink of failure.

Investors sold risky assets and hoarded cash resulting in trillions of dollars being lost as stock and bond prices plummeted.

After months of failed initiatives world leaders met on October 10 and agreed on three measures geared towards restoring confidence in global financial markets.

Firstly, it was agreed that no major financial institution would be allowed to fail essentially removing fears regarding 'who is next?'

Secondly, respective governments would inject capital into struggling banks in return for preference shares. Thirdly, governments will guarantee loans between banks paving the way for a resumption of lending between financial institutions and a subsequent ease in the current credit crunch.

Initial responses to the new measures point to a resurgence in confidence.

However, it is still expected that developments in recent months will hurt world economies given the steep decline in real estate values, reduced consumer activity and lower financing flowing to the productive sector.

Lower consumer spending will result in reduced demand for Jamaican exports while the limited access to capital will result in higher financing costs for local companies. The end result will be a downturn in earnings over the near-term.

In recent years Jamaican conglomerates have focused on expanding through acquisitions as reflected in the purchase of Lascelles by Angostura.

This allows LAS to generate income from the distribution of a full range of Angostura Limited's products.

Similarly, JP purchased the United Kingdom smoothie manufacturer, Sunjuice Limited.

The company also purchased Hoogesteger, Holland's leading fresh juice and smoothie manufacturer. Simultaneously, JP sold its loss making subsidiary Serious Desserts and terminated banana exports. For its part, GraceKennedy also went on a buying spree with the most notable acquisition being WT Foods, which effectively added 20 per cent to the company's revenues.

GraceKennedy, with Douglas Orane at the helm as chairman and CEO, has also moved to increase its share of the remittance business through the sale of 25 per cent of GraceKennedy Money Services to Western Union for US$29 million.

Pan Caribbean's outlook on Pan-Jam

PJAM's core revenues remain largely intact despite the anticipated economic downturn. The company benefits from long-term leases on its properties while its 25 per cent stake in Sagicor Life Jamaica (SLJ) enhances revenues. SLJ's earnings is expected to be propelled by the purchase of Blue Cross health portfolio. As market conditions normalize, PJAM is expected to trade above its book value of $56.80, which is 30 per cent above the current price of $43.60. Pan Caribbean recommends the stock as BUY at current prices.