Capital market initiatives
Budget Review Part 2:
This week, we at Bourse present the finale to our two-part series on the recent national budget presentation with focus on the announced capital market initiatives.
In an attempt to reignite the capital markets the Government has once again presented several new initiatives aimed at increasing activity in the local stock exchange. These include:
—an Initial Public Offer (IPO) of a newly established company into which the National Gas Company of Trinidad and Tobago (NGC) will transfer 39.0 per cent shareholding in Phoenix Park Gas Processors Company Ltd (PPGPL) recently purchased from ConocoPhillips
—the IPO of Trinidad and Tobago Mortgage Bank (which is a proposed merger of Trinidad and Tobago Mortgage Finance Company and Home Mortgage Bank)
—possible listings of the Vehicle Maintenance Company of Trinidad and Tobago and the National Helicopter Services Ltd.
—divestment of government’s ownership of National Flour Mills Limited (NFM) and Point Lisas Industrial Port Development Corporation Ltd (PLD)
The success of the First Citizens IPO which was 3 times oversubscribed speaks to the demand among investors for new and viable options on the local equity market. The recent bank listing has expanded the options available for investment in the banking sector, which now accounts for 49 per cent of total market capitalisation.
While the banking sector represents almost half of the market cap of the local stock market, a closer look at the GDP composition of Trinidad and Tobago paints a different picture. As seen in (Exhibit 1), the finance, insurance and real estate sector contributed an average of 14 per cent to GDP over the past five years vs. 40 per cent from the energy sector.
Despite being a key driver of the Trinidad and Tobago economy, direct investment options into the energy sector via the capital market are almost non-existent, with the best available route being through National Enterprises Ltd (NEL).
Examining the Initiatives:-
1) The listing of the Trinidad and Tobago Mortgage Bank (which will be a merger of Trinidad and Tobago Mortgage Finance Company and Home Mortgage Bank)
This proposed merger of Trinidad and Tobago Mortgage Finance Company (TTMF) and Home Mortgage Bank (HMB) will have a combined asset base of approximately $5.2B, based on the latest available
financials. The listing of Trinidad and Tobago Mortgage Bank should contribute a market capitalisation of approximately $1.97B and account for approximately 1.8 per cent of the TTCI. This calculation is premised on a market to book ratio of 1.43 times, which is the median of the locally listed banks, and the shareholders equity of the amalgamated entities.
2) Possible listings of the Vehicle Maintenance Company of Trinidad and Tobago (VMCOTT) and the National Helicopter Services Ld (NHSL).
The latest financials available for VMCOTT showed a net loss of $11.5M as at September 30, 2010, with Shareholders’ Equity of $46.5 million. Using comparative ratios for analysis and applying a discount for size and liquidity, we estimate the listing of VMCOTT potentially adding 0.03 per cent to the TTCI. A similar analysis was done for NHSL, which recorded net income of $7.4 million as at September 2011. Based on the latest financials available, we estimate the listing of NHSL could add 0.09 per cent to the TTCI. With additional and updated data a more comprehensive could be provided.
3) The divestment of government’s ownership of National Flour Mills Ltd (NFM) and Point Lisas Industrial Port Development Corporation Ltd (PLD)
The current issued share capital of NFM is 120.2 million shares, 51 per cent of which is held by National Enterprises Ltd (NEL). NFM currently accounts for approximately 0.08 per cent of total market capitalisation. The divestment of NFM would not have an impact on market cap, but will increase free float (number of shares that are in the hands of public investors and not locked-in). For PLD, of the 39.625M shares in issue, 51 per cent (20.2M) is owned by the Government of Trinidad and Tobago. Like NFM, the divestment of government’s ownership will have no impact on market cap, but will increase the amount in free float.
4) A newly established company into which NGC will transfer 39.0 per cent shareholding in PPGPL recently purchased from ConocoPhillips.
Assuming that all 39 per cent of the shareholding in PPGPL is listed at a market value of US$600 million (the reported purchase price), the listing of PPGPL-related shares could boost the current market capitalisation of the Trinidad and Tobago Composite Index (TTCI) by 3.5 per cent. An alternative scenario, in which 49 per cent of the holding of PPGPL is divested to the public, would allow NGC to maintain its controlling interest. This will still increase the market capitalisation of the TTCI by 2 per cent.
This initiative is commendable, as it will be the first direct energy listing when it occurs. More importantly, the listing would also provide investors with a sense of ownership of a key driver to the local economy.
Some amalgamation may need to be considered, since NEL currently owns 51 per cent of NFM and other significant energy holdings in Tringen and NGC (See Exhibit 2). The current structure of NEL may not be best suited to maximise shareholder value, since investors are given exposure to various industries and corporations that may not be desirable to their individual investment portfolio.
Investment Ownership No. of Shares
National Flour Mills Ltd (NFM) 51 per cent 61,301,998
Telecommunication Services of Trinidad and Tobago (TSTT) 51 per cent 144,238,384
Trinidad Nitrogen Co. Ltd (TRINGEN) 51 per cent 306,000
NGC NGL Company Ltd 20 per cent 9,406,950
NGC Trinidad and Tobago LNG Limited 37.84 per cent 9,226
Ministry of Finance holds 66 per cent of shares in issue for NEL while 17 per cent is held by NGC, leaving 17 per cent in free float. Year to date (as at 19 September 2013), a total of 910,746 NEL shares crossed the exchange, representing 1.3 per cent of the total volume traded on the TTCI. The relative illiquidity of NEL highlights the limited options available to investors, especially when considering that it is the only listing to offer some form of indirect exposure into the energy sector.
It is evident, then, that significant opportunity exists for further investment in the energy sector through the reconstruction of NEL. Using the example of NEL’s holding of TRINGEN, the listing of TRINGEN (on the assumption of a one-to-one share issuance basis) will add 306,000 shares to the market. Applying comparative multiples to the latest book value of TRINGEN available, we estimate this listing would add 0.08 per cent to the market cap of the TTCI. Using similar valuations, NGC NGL could potentially add 0.24 per cent to market cap with NGC LNG adding another 0.13 per cent.
Individuals would likely be better off with direct exposure to the energy sector through the local equity market, while reaping the benefits of sector’s economic contribution.
Overall, the initiatives mentioned in the budget will add approximately 4 per cent to the current market cap of $110B. This is comparatively lower than the most recent IPOs of the CLICO Investment Fund (CIF) and First Citizens Bank (FIRST) which when combined, added approximately 10 per cent to the TTCI. As it stands, the proposed initiatives can be considered a step in the right direction to capital market development.
For more information, investors can call Bourse at 628-9100 or visit us at any one of our offices. Further information is also available on Bourse’s website at www.bourseinvestment.com and Bourse Securities Limited Facebook page.