Good things may come in small packages: a look at the JSE Junior Market

SSL in the money

Deirdre Witter

Wednesday, January 12, 2011    

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In different cycles of the US Economy traditionally, different Companies, depending on their capitalization have performed well or poorly. Small cap stock returns tend not to move in lockstep with stocks of larger Companies. Instead, small-cap performance has in the past, either led or lagged behind that of larger Companies for periods of several years. Given such cyclical differences, small cap stocks in the US market have offered investors an opportunity to help manage the overall risk of a portfolio of large-Company stocks by including a small-cap component.

The Jamaica Stock Exchange (JSE) Junior Market has clearly brought this emergence to the Jamaican perspective. That is, Jamaican investors are able to safely invest in smaller or mid-size Companies in our Economy that are regulated. Since its first listing in October 2009, the Junior Market has received strong interest from the investing public with seven Companies listing on the Exchange in 2010. This begs the question - what is the driving force behind this robust activity?

Firstly, it is important to note that during a prolonged recession, most large or mature Companies register flat or declining revenue and earnings growth. On the other hand, smaller Companies with sound fundamentals tend to be on a path rapid revenue and earnings expansion. Moreover, many investors are grasping the opportunity to buy into Companies that have the potential to grow at a faster rate than some of the mature Main Market listings. They also foresee the significant value that the tax-free benefit adds to a Company's bottom line in the future. Notably, all the JSE Junior Market listings in 2010 were oversubscribed, within minutes of the opening of the offer.

While blue chip stocks with large capitalizations are well-established Companies that are cautious in their operational and strategic moves and as such offer the investor a strong and stable outlook, these same attributes make it harder for large Companies to grow rapidly. Consequently, a small cap stock may offer investors more growth opportunities, as they will often reinvest the majority of earnings into the business to fuel growth. Therefore, an investor looking for a steady stream of income from dividend payments may want to consider larger cap Companies, as they are usually more willing to return a larger proportion of earnings back to shareholders.

For example, for GraceKennedy Ltd's (GK) nine month period ended September 30, 2010, Net Profit attributable to Shareholders, declined by 15 per cent to $1.55 billion as revenue streams continued to be pressured in light of the prolonged recessionary climate globally and weak consumer demand. In 2010, the stock price appreciated 26 per cent to close at $51.00; however this is still below pre-recessionary levels of as much as $90.50 in 2008. On the other hand, Lasco Manufacturing Ltd (LASM), which reported results for the first time since listing on the Jamaica Stock Exchange (JSE) Junior Market, posted a more-than twofold increase in Net Profit, as Revenue climbed and the Company kept a tight rein on Operating Expenses for the six month period ended September 30, 2010.

It is not surprising therefore that the performance of the JSE Junior Market has significantly outpaced that of the JSE Main Market. To put this into perspective, an investor who bought each of the Junior Market stocks at the respective Initial Public Offering (IPO) prices would have seen a cumulative gross return on their portfolio of 54 per cent on average at the end of 2010. Meanwhile, the JSE Main Index, which includes all ordinary stocks on the Main Market increased only marginally by two per cent from January 1, 2010 to December 31, 2010, versus a four per cent gain in 2009.

Access Financial Services Ltd (AFS), which was the first Company to list on JSE Junior Market in 2009, has seen a stable performance over the past year. The stock listed at a price of $18.34 and after gaining 90 per cent to $34.85 in April 2010, the Company conducted a 10:1 stock split to improve liquidity. Hence, an investor who invested $100,000 in AFS at its IPO price would have seen a cumulative gross return of $272,628 based on a closing price of $5.00 at the end of last year.

Each of the other stocks also performed well last year. In particular, at the end of 2010, LASM had gained 130 per cent from its list price of $2.50 in October 2010, the most robust performance of any Junior Market listing over the same period. Dolphin Cove Ltd (DCOVE), which is the most recently listed, also displayed strong growth, climbing 45 per cent in less than two weeks of listing, to close at $4.52 on December 31, 2010.

The remaining five listings also saw their stock prices climb by the year end, though by smaller percentages. Lasco Distributors Ltd (LASD) advanced 40 per cent, Blue Power Group Ltd (BPOW) by 21 per cent, Jamaican Teas Ltd (JAMT) by 19 per cent, while Lasco Financial Services Ltd (LASF) and Cargo Handlers Ltd (CHL) both gained four per cent.

Despite the lacklustre performance of the JSE Main Market Index, some stocks did display strong gains in 2010. These included Stocks & Securities Ltd's (SSL) recommended stocks such as Carreras Ltd (CAR), which grew 51 per cent, Scotia Group Jamaica Ltd (SGJ), which was up 10 per cent and National Commercial Bank of Jamaica Ltd (NCBJ) which rose 21 per cent. However this was offset by significant declines led by stocks not recommended by SSL, such as Ciboney Group Ltd (CBNY), Pulse Investments Ltd (PULS) and Pegasus Hotels of Jamaica Ltd (PEG), down 70 per cent, 58 per cent and 40 per cent respectively.

Using past economic cycles as a guide, the expectation is that as the economy improves, so too will the financial performance of blue chips and/or larger cap Companies and attractiveness of their stock. Currently, however, SSL sees significant value in the JSE Junior Market, which has provided a medium through which investors can invest in smaller or mid-size local Companies that are regulated.

Deirdre Witter is an Investment Analyst at Stocks & Securities Ltd. You may contact her at




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