Independent reviews said to boost Barita as APO nears deadlineSunday, September 19, 2021
With anticipation building over Barita Investment Limited's (BIL) high-profile additional public offering (APO) of shares, which is expected to close early this week, at least four prominent brokerage institutions have delivered positive independent analyses of Barita's push to raise $10 billion from the initiative, a news release from Barita's publicist has said.
The independent analyses have come from Scotia Investments, JN Fund Managers, VM Wealth, and JMMB.
According to the publicist, in an investment analysis of the Barita APO, JMMB alluded to Barita's past performance and wrote that “over the past three financial years, BIL has seen its net operating revenues grow by an average annual rate of 67.5 per cent, while net profits have expanded at a compound average growth rate of 138.6 per cent”.
JMMB noted that this performance has been “industry-leading and the share price has appreciated accordingly”, the publicist said in a release.
JMMB continued by highlighting the fact that over the last three years, BIL has been very aggressive in its efforts to realise its objectives, best evidenced by its talent acquisition efforts, as well as the robust capitalisation of its balance sheet. BIL's 10-fold increase in its profitability over the past three years is fully matched by the rate of increase in its shareholders' equity, rising from $3.07 billion at the close of the 2018 financial year to $30.3 billion at the close of the nine-month period for 2021, the publicist stated.
“The analysis from JMMB observed that even with the significant increase in equity and shares outstanding, Barita Investments has been able to move its return on equity from single digits, pre-Cornerstone takeover, to double digits, whilst its earnings per share has continued to expand. JMMB attributes this, in part, to 'the competence of the management team in realising their vision for the company and executing on the various initiatives that they have come to the market in the past to fund',” the release said.
JMMB, which is the largest securities dealer in Jamaica, gave a target price of $113.42 per share, which was derived from applying the average of the one year historical price to book value and price to earning ratios to an estimate of the future earnings of Barita. JMMB noted that the estimated target price of Barita shares ranges between $107.52 and $119.33.
JN Fund Managers (JNFM) also weighed in on the APO by nothing that it “recommends the purchase of Barita's shares at the APO price of $80.00 for a potential upside of 56.61 per cent” the publicist also said.
In their analysis (JNFM) wrote that “Barita's best in class leverage ratio, well below average expense ratio, strategic plans, and past performance, provide indication of Barita's potential for much higher growth than its peers and is a rare growth opportunity in the local financial sector”, the publicist added.
JNFM noted that, “The profits generated implies an EPS [earnings per share] of $3.38, which is already above the EPS generated over the entire FY 2020, and which further implies that, so far, the new shares issued have not had a dilutive effect on earnings due to the group's operating performance. BIL's return on average equity of 17.3 per cent for the nine-month period ended June 30, 2021, was above the peer group average, even with lower-than-average leverage.”
In its valuation summary JNFM indicated primary reliance on the price to earnings growth (PEG) method, which is an appropriate valuation methodology whenever the earnings growth rate of the stock being valued is expected to materially exceed those of its peers.
The release also stated that the thesis for JNFM's valuation conclusion was based on its expectation for Barita to continue to grow at a faster pace than its peers, which JNFM indicated was a reasonable assumption in view of Barita's “lower leverage and high operational efficiency” relative to its peers. The brokerage firm posited that, “While over the last five years BIL grew its EPS annually on average by over 3.6x more than its peers, we project BIL future growth in EPS amounts to only 1.5x that of its peer average. If Barita grows at 1.5x its peers' projected growth, its projected EPS growth equates to 24 per cent. When applied to the industry PEG of 1.18x and forward earnings of $4.42, the stock is valued at $125.29.”
VM Wealth Management (VM Wealth) also delivered an analysis of Barita's growth prospects and outlook. VM Wealth said it used a combination of a residual income model with a required rate of return of 10.6 per cent and a market approach based on the price to earnings ratio in arriving at a price target of $95.21.
“VM Wealth's outlook for Barita was largely influenced by expectations for investment banking to continue to drive revenue growth, expansion of asset management business lines, the increased profitability of proprietary portfolios, and the optimising of Barita's operating structure,” the release said.
Additionally, the release stated that VM Wealth noted that, notwithstanding the continued challenging operating environment occasioned by the lingering effects of the novel coronavirus pandemic, they “expect that the company will continue to build on its current momentum, with revenue growth expected to average around 21.5 per cent over the next four years.
“This continued growth is expected to come from further product and geographic diversification and by leveraging its strong capital base to remain flexible. The company had a capital to risk weighted assets ratio of 41 per cent, which would increase following a successful closure of the APO,” the Barita release said.
It also said that Scotia Investments, which is considered to be relatively conservative in its strategy, in contrast to its peers, gave Barita's stock a target price of $100.22, assuming the APO is successful.
Scotia Investments also delivered an optimistic outlook by noting Barita Investments consistent growth in the asset management and securities trading lines and highlighting Barita's financial strength even as its leverage remains low.
The brokerage firm's investment thesis was supported by Barita's revenue diversification, consistent revenue growth, experienced management team, and high level of capitalisation, which positions Barita “favourably to pursue opportunities and deals that are currently in the pipeline”.
Barita's APO opened for subscriptions on September 6, 2021 and is scheduled to close on September 21, 2021.