10 stocks to watch
Publisher of Investor's Choice magazine and financial analyst, John Jackson and Stock and Securities Limited research manager, Kimberly Thelwell identified a few choice stocks to watch during 2012. On the basis that the economic environment will remain relatively stable for some time into the future, there a few companies on the Jamaica Stock Exchange (JSE) which could be good buys.
According to Jackson, several of the stocks listed on the JSE are undervalued and trade below the main market average based on 2011 figures, but investors should have a clearer picture of the price-to-earnings ratios (an indicator of how the market prices shares based on financial performance of companies) by March. He said that there is some expectation that good profit performance will continue in 2012 and that low interest rates will likely remain, which makes the equity market more attractive.
Here are 10 stocks to watch.
National Commercial Bank (NCB) High
Thelwell points out that NCB has seen at least seven consecutive years of annual growth, with gains in corporate banking and net fee and commission income, as well as strong growth in its loan portfolio. The bank's profits in its consumer and SME (small and medium enterprises) segment were up 22.4 per cent over the year to September 30, 2011, while the bank has an attractive dividend yield of 5.71 per cent of the share price. Jackson expects slow profit growth in banking sector during 2012, with the exception of NCB due to its aggressive loan growth. His calculations show that the bank's share price relative to earnings (PE) trades below the market but its net assets are valued below its market capitalisation (price of shares times number of shares). On the other hand he expects that NCB has the potential to see high share price appreciation. Thelwell cautioned that the bank still hasn't given any guidance on its planned listing on the New York Stock Exchange (NYSE) while its non-performing loans (loans unserviced for over three months) reached 7.16 per cent of its loan portfolio in 2011 compared to 3.45 per cent in 2010.
Pan-Jamaican Investment Trust (Pan Jam) Moderate
Thelwell believes Pan Jam has a strong value proposition, which continues to benefit from diversified revenue streams. Its almagamation with its subsidiary, First Jamaica Investment, has removed market confusion and its PE and share price compared to its net assets are below industry average. Jackson also noted that Pan Jam being the dominant property company has taken on new co-owned ventures (its latest acquisition was a majority share in Tortuga Rum Company, following its joint venture acquisition of Blue Mountain Coffee outfit, Mavis Bank). Thelwell said the downside risks to investing in Pan Jam include the possibility of gains from its investment management strategy continuing to decline and the high exposure to the share of associated results (namely Sagicor Life Jamaica), which accounts for more than 60 per cent of its pre-tax earnings. The company's stocks are also not readily available and freely traded. Jackson believes that insurance companies have reasonable profit growth potential in 2012 but only expects a moderate increase to Pan Jam's share price.
GraceKennedy (GK) High
GK has experienced a turnaround in performance (in particular in its food trading segment), according to Thelwell, while further expansion in overseas markets, such as Africa and the US, could boost its bottom line. Good expense management, its focus on efficiency, its upgraded juice plant and its 10,000 square feet distribution centre in St Catherine could also yield additional benefits to the conglomerate. Jackson said that some conglomerates may have had a bad fourth quarter last year (results not yet published) but he said 2012 could see improved numbers provided the economic environment is not tough. He showed that GK trades below the industry average while it is considerably undervalued (price is 37 per cent below net assets value). He projected moderate increase in the company's share price. Thelwell identified GK's exposure to markets currently facing economic challenges, such as the UK as a possible downside to the stock.
Desnoes and Geddes (DG) Mixed
The analysts had mixed views on the manufacturer of Red Stripe. Jackson showed that the share price trades below the industry average while the stock carries a premium above its net asset value. He expects the price to move downwards. On the other hand, Thelwell said the brewer had a turnaround (profit up 9.53 per cent over the comparative period in 2010) in its first quarter of 2011/2012, which began last July. DG should benefit from lower distribution costs and less volatility in earnings due to its shift in local production of beer destined for the US to a licensed production model there. The company is also undertaking an aggressive expansion drive, which include new product lines such as a Malta variant and possibly a rum. She did note that DG may be challenged to boost local demand for Red Stripe.
Jamaica Broilers (JB) High
Jackson sees strong growth prospects for JB's share price, given that the companies share price trades below industry average and the companies net asset value (32 per cent below). Thelwell points out that the company's reduced finance costs as a result of lower debt, its expansion initiatives, and decline in commodity prices (which should mean lower feed costs for Best Dressed Chicken) could yield the company strong returns. On the other hand, the group's ethanol division and its Haiti investment could weigh against profit growth.
AMG Packaging High
AMG continued robust earnings growth during the first quarter of its current financial year and saw an increase in production capacity, according to Thelwell. She noted that the purchase of new equipment using a portion of its initial public offer (IPO) proceeds has resulted in a reduction of raw material wastage and will add to increased capacity and growth. Furthermore, plans underway for expansion including implementing broader product line and achieving greater production flexibility present additional prospects for the company. Thelwell cautioned, however, that the only a few key customers account for the bulk of its revenue. Jackson's perspective is that while the share price is trading below average and it carries a premium over its net asset value, he sees prospects for very high price appreciation during 2012.
Lasco Manufacturing (LASM) and Lasco Distributors (LASD) Moderate to High
LASM and LASD gained 168 per cent and 296 per cent on the JSE Junior Market in 2011, respectively. Thelwell said it is difficult to project results over the next 12 months due to rapid growth in earnings, while the benefits from major expansion may already be priced into the stocks. Both stocks are trading at high multiples (even though they trade below industry average they are highly priced above the firms' net assets). Using a range for potential profit growth of between 10 and 30 per cent, Thelwell said that should the higher end of the projected earnings range be achieved, it would be a suitable stock to buy. Otherwise, it would be a stock to hold. Jackson sees the potential for high share price appreciation for LASM, while he expects a moderate price increase for LASD.
Jamaica Teas (JAMT) High
Robust earnings growth over the past five years, the significant market share and consistent growth path that the tea business enjoys, the benefit from international expansion that the company stands to gain, and its acquisition of supermarkets make JAMT an attractive stock, according to Thelwell. However, its foray into unrelated business lines, such as recently announced plans to do real estate development, may be risky. Jackson believes that JSE Junior Market companies that are expanding have big potential for higher profits. Even though he showed the company's share price was trading above industry average and was considerably higher than its net assets, he sees the potential for high share price appreciation.
Blue Power (BPOW) Low
The company's soap division continues to perform well while it has already retired a significant portion of debt as a result of its IPO, says Thelwell, who believes BPOW's strong cash position offers flexibility to take advantage of opportunities. Thelwell added that the lumber division could continue to see decline in its results due to competitive environment in the building sector. However, she noted that its PE of 5.39 is among the lowest on the JSE Junior Market. Jackson showed that even with the below average PE the share price is higher than net asset value. He expects flat share price performance.
**High, Moderate and Low refers to the potential for price appreciation.
*Mixed implies that analysts have differing outlooks.