May 2009 Financial News

Hot stocks for the rebound? Analysts bet on financial, productive sector stocks

May 25, 2009

The Jamaican stock market, for the most part, has suffered due to the current economic crisis that has affected all areas of financial activity in the local economy. But, in today's beat down market, analysts concur that identifying fundamentally-strong companies and buying their stocks at a discount may be one of the easiest, low-risk opportunities investors will ever have to make substantial long-term financial gains.

The key index of the Jamaica Stock Exchange (JSE), the Market Index, has been stagnant since the outer bands of the financial storm crippled equities over the fourth quarter of 2008 - help steering it to a 26 per cent decline over the calendar year from which it still hasn't recovered. On Friday, the index closed at 82,224.44 points, just marginally up since the beginning of the year and just 12 out of 39 stocks are trading at higher year-to-date prices. This 'dismal' statistic, analysts say, is a 'positive' for the savvy investor.

"The current valuations on the stock market now are well below previous levels due to the sharp decline in prices seen in the past twelve months, and have made equities an attractive asset class," said Vernon James, vice- president corporate and private client services at NCB Capital Markets Limited.

James pointed to the fact that at the end of June last year the market average Price to Earnings ratio (P/E) was 11.5 times compared to the market average P/E of 6.86 times as at Wednesday. This, he noted, augurs well for a market recovery, "given the apparent significant upside potential".

Mayberry Investment Limited's research analyst Maurice Vaccianna, and senior research manager Rex Shettlewood, agreed with James' assessment.

Said the analysts in a joint statement to Sunday Finance: "Despite declining levels of confidence within the local economy and mixed signals emanating from key global markets, it is our view that the island's stock market does present a long term value proposition at this time."

What's more, the analysts said, is that there are financial indicators that may cause a positive shift in the market. James identified the recent stability in the foreign exchange market, and the resulting gradual reduction in interest rates, while the Mayberry analysts noted that the Market Index was up almost one per cent for the month of April.

The upshot is that the analysts have cautiously identified several fundamentally poised companies -primarily from the productive and financial sectors - whose stocks they believe are a great bet for a rebound.

Pan Jamaican (Pan Jam) Investment Investment Limited
Pan Jam's stock, which last traded at $35 a share, was the most popular choice among the analysts interviewed for this article. James believes Pan Jam is one of the better managed companies listed on the Exchange.

"Over the years, the Pan Jam group has shifted focus from the direct involvement in the day to day operations of the different companies in which it has ownership interests, to becoming a Holding Company," he said, adding that the company has an excellent track record of profitability with a five year average earnings growth of 39 per cent.

"Pan Jam's investment in Triple A properties in some of Kingston's prime business districts has provided a stable base for growth in earnings," James continued. "Given the nature of the businesses which occupy these properties and the existing long term lease agreements, it is expected that the downturn in the local economy will have a minimal impact on the company's operations, and the group will continue to experience high occupancy levels (average of 96 per cent over the last two years) which augurs well for continued increase in rental income."

Stocks & Securities Limited (SSL) research analyst, Shari DaCosta, was equally bullish on Pan Jam.
"Pan Jam has consistently increased earnings and expanded its book value. It is a blue-chip stock which increased its EPS (earnings per share) 50 per cent for the first quarter of 2009," she said, adding that the company grew all three of its segments - Investment Management Services, Property Investment Management and Other Services - substantially.

Vaccianna and Shettlewood added that Pan Jam is one of the stocks that "...do present long term value propositions given the value of hard assets held, limited leverage and/or regular dividend streams."

Financial Stocks - Scotia Group Jamaica (SGJ), ScotiaDBG, NCB

"In our estimation, investors should eye financial stocks such as ScotiaBank, its related brokerage arm ScotiaDBG and National Commercial Bank (NCB)," said the Mayberry team, who shared the same exact view as James.

The analysts are largely buoyed by the strong earning power of these companies in light of the ongoing reccession.

James said that over the years, Scotia Group has demonstrated its ability to continuously improve net profit, adding that the company has had a three year average EPS growth rate of 17.5 per cent. He expects the company to again post strong growth in the current year.

"SGJ is also likely to continue to benefit from continued growth in its wealth management segment as the current high interest rate and stringent spread management should boost growth in net interest income," said James. "The current focus on growing the corporate loan portfolio, managing delinquent loans and improving the level of efficiency is also expected to yield positive results in the current year."

"With a projected EPS of $3.52, our twelve month target price for SGJ is $23.83," said James of the stock which last traded at $18 a share.

With net interest income being the company's dominant income stream and higher interest rates being offered on the money market, James anticipates that ScotiaDBG will garner higher earnings over the forthcoming quarters.

"Additionally with the company still leveraging ScotiaBanks large client base, the momentum from last year should be carried over into this financial year. The earnings are expected to grow at a measured pace this year and EPS should reach $3.75 by the end of its financial year. With a projected price of just over $22 per share over the next 12 months, we recommend SDBG as a BUY," declared James.

In the banking sector, James also recommended NCBJ as a BUY.

"NCB over the years has reported stellar earnings, mainly driven by the growth in its loan portfolio in addition to the other major divisions," said James. "Although the group is expected to see a slowdown in retail loan growth as the recession in the local economy reduces the demand for consumer loans, corporate loan growth should continue to be moderate.

"Additionally, the higher interest rates available in the market at this time should boost net interest income," he continued. "Furthermore, ongoing cost management efforts within the group, along with the recent benefits obtained from the revision of the NCB insurance model should drive further efficiencies and lead to bottom line growth."

Other stocks

Shettlewood and Vaccianna added Seprod Limited and First Jamaica do there list of stocks which presented good long term value, and identified Carib Cement and Supreme Ventures as others to eye for the long term, "though with some inherent risks".

SSL's DaCosta also had GraceKennedy and Jamaica Producers (JP) on her list of BUY's.

"GraceKennedy Limited is another company which is fundamentally strong. GK has diverse subsidiaries/businesses and undisputable brand value and recognition locally and abroad. In the first quarter of 2009, it increased EPS 38.14 per cent to $2.68 and the company saw growth in four out of its five core segments," said DaCosta.

She added: "JP appears to be turning things around as they earned a first quarter profit, after six-straight quarterly losses. It disposed of Serious Foods Limited which had become a burden on their bottom-line and is now shifting its focus to its core business."

All of the analysts advised that investors speak to their respective financial advisors on these reccommendations and other equities before placing orders, as there are many factors which may impact on prices.

They also stressed that the prospects are for the long term. James, for instance, noted that the factors that have resulted in the depressed share prices still exist at this time, including the higher level of interest rates that currently persist, and the deterioration of the overall economy, with the economy contracting 2.8 per cent in the first quarter. He added that while the recent stability in the foreign exchange market, and the resulting gradual reduction in interest rates is a welcome sign, "it is difficult to envision a sustained portfolio shift without significant improvement in the macro-economic situation. This is not projected in the near term given the recent opinions of the Planning Institute and the Bank of Jamaica."

Article by: Julian Richardson Assistant business coordinator richardsonj@jamaicaobserver.com
Source: Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20090523T170000-0500_152073_OBS_HOT_STOCKS_FOR_THE_REBOUND_.asp
Date:25-05-09