Sterling Investments expects greater earnings during COVID-19

Sterling Investments expects greater earnings during COVID-19

Observer Business Writer

Friday, September 04, 2020

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With COVID-19 haemorrhaging financial companies and interest income declining across the industry, Sterling Investments Limited (SIL) has seized the opportunity to purchase undervalued assets and expand their portfolio which has appreciated over the last 6 months.

At their recently held AGM, president and chief executive officer of Sterling Asset Management, Charles Ross, posited the company's most recent success to the structure of SIL's portfolio quality and calculated use of their margin loan facility to purchase several bonds in the recent market sell off.

“While there are certain kinds of uncertainty, there are many opportunities. The fall in numerous securities presents an opportunity to buy. One of the benefits that has arisen for SIL is that there has been a collapse in interest rates in the US. That has lowered the cost of margin for securities purchased which has increased the profitability of the portfolio,” Ross said.

This translated to the company's most recent six months— results where net interest income was up 32 per cent while net profit went up by 30 per cent to $74.4 million.

These higher results were mainly attributed to the capital gains derived from the asset purchases made near the end of quarter three and foreign exchange gains on the 3.4 per cent devaluation of the Jamaican dollar (JMD) since March.

SIL's total asset base has also increased by 12 per cent over the same period last year to $1.67 billion.

Following the company's successful rights issue last February when they raised $206.2 million, the company decided to engage in an additional public offering (APO) where the company would possibly issue up to one billion ordinary shares in an effort to raise capital for some of their upcoming plans.

“A lot of the bonds that have both attractive yields and prospects with price appreciation trade with fairly large volumes. We think there a lot of present opportunities thanks to the COVID-19 upset to the market. Having a larger portfolio will allow for better diversification and spreading the risk across the portfolio. The company is fairly well positioned and we will be able to take advantage of opportunities after the fund raise.” Ross explained to shareholders.

As at the company's AGM date, the company's stock price had been hovering around $2.50- $3 which would mean a potential capital raise of possibly between $2.5 billion - $3 billion. The company has yet to determine the details of the APO until the final approvals are given by regulators.

This was one of the several APO's which have been announced in recent times as many companies indicate potential opportunity to grow their operations in a weaker business environment caused by COVID-19.

Ross pointed out that the company's deployment of funds into bonds from last year's rights issue benefited the company during the year and has continued to benefit them now.

“We think SIL will perform well throughout the COVID-19 crisis and shareholders can expect a general increase in profit in the short to medium term,” Ross informed.

This would represent an active push by SILto increase their shareholder base which grew by 67 per cent last year thanks to the stock split and subsequent rights issue. The APO would open up the opportunity to members of the public since the issue wouldn't be restricted to shareholders or accredited investors which make up a large portion of the company's top 10 shareholders.

When asked about the company's prospects for purchasing gold and the general American region's outlook, Ross reiterated the focus of SIL and its core objectives.

“SIL has delivered an attractive risk adjusted returns to its shareholders since 2012 with a compound annual growth rate (CAGR) in net profit of 14.1 per cent and total assets rising by 22.2 per cent by strategically investing in the global capital markets. The company exists to protect and grow the capital of its stockholders by investing in bonds and equities. Gold is a very attractive option, but we have to remember that it's very speculative and doesn't generate interest.

“We are looking at a very slow recovery in North America and may take a year or two for output to rise to levels before the pandemic. The outlook for the Caribbean is much more dire. North America is a major source of visitors for tourism. Slow economic recovery in North America would hurt the recovery here [Caribbean]. The pandemic has hit leisure and tourism hard with people asking if they will be able to travel safely to the Caribbean again. The economic outlook for the region isn't good and we hope next year turns out better,“ he said.

As the Jamaican dollar continues to depreciate, SIL will continue to benefit from the depreciation of the currency since their portfolio has less than two per cent exposure to Jamaican securities.

SIL's results are reported in Jamaican ollars with the rest of their assets denominated in US dollars. The company will be paying out a $19 million dividend to shareholders this month which would bring the company's total dividend payment for the year to $31 million.

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