Modest growth in 2012
As the second half of the year is underway, Bourse presents the outlook for the local equity market for the remainder of 2012. We have since raised our forecast given at the beginning of the year as we now see the TT Composite Index ending the year flat to up 3 per cent. Many stocks have appreciated over 10 per cent in the first six months of the year, trading near to ten year highs in P/E valuations. Thus there may be limited upside for the market and in particular certain stocks. With valuations at these elevated levels investors must be mindful that downside risks exist, especially if there is depreciation in share pricesof large cap securities.
In terms of market valuations, the weighted average market multiple of roughly 21 times is significantly higher than the ten-year average of 14.2 times as seen in Exhibit 1. We note however, that this is inclusive of P/Es of companies that experienced one-off items or had losses from discontinued operations. If we adjust for those losses from discontinued operations, the Market P/E will be around 19 times. Current valuations are reaching the 2004/2005 highs. First Caribbean International Bank (FCIB) is currently trading at a P/E multiple of 44 times and would account for the higher overall market valuation. If FCIB is removed, the market valuation is in the region of 14 times. The high valuations have proven to be sustainable even in the face of low economic growth as dividend yields remain attractive in the low interest rate environment. Corporate performance has been reasonably healthy in many of the local sectors.
Overall, we continue to recommend investing in stocks that offer stronger dividend yields as well as potential for capital appreciation. There are very few attractive stocks on the market at this time and our stock picks for the remainder for 2012 include Sagicor Financial Corporation, One Caribbean Media Limited, Unilever Caribbean Limited and Neal and Massy Holdings Limited. A dark horse for the last six months of the year is Scotia Investments Jamaica Limited.
Sagicor Financial Corporation
In the first quarter of this year Sagicor Financial Corporation (SFC) showed some signs of recovery after a very difficult 2011 when the Group was unable to generate profits for shareholders. Barring any catastrophes in 2012 investors should expect normalisation of earnings and an improvement in performance.
The Group has been pursuing acquisitions in recent months. Earlier this year the Group would have disclosed the pending acquisition of a life insurance operation in its US subsidiary. Last week it was reported that an agreement was also signed by the judicial managers of British American Insurance Company (BAICO), together with the governments of the Eastern Caribbean Currency Union (ECCU), to sell the traditional life insurance business of BAICO to Sagicor Life Inc (Sagicor), a wholly-owned subsidiary of Sagicor Financial Corporation.
The stock is currently trading at a market to book of 0.58 times compared to a five year average of 0.96 times (see Exhibit 2). The trailing P/E is 12.3. With improved performance expected in the last three quarters of the year the P/E valuation should show some improvement. The dividend yield remains relatively attractive at 3.5 per cent, above the five year average of 2.8 per cent.
Neal and Massy Holdings Limited
Neal and Massy Holdings Limited (NML) underwent a number of strategic initiatives in 2011, some of which have begun to bear fruit. We anticipate that benefits from these initiatives should continue to unfold in 2012 and contribute to growth of the local conglomerate.
Last financial year the Group's performance would have been impacted by significant losses from discontinued operations. This year there has been an improvement in overall performance despite further losses from discontinued operations. For the first six month of the year the Group recorded a growth in net profits of 5.4 per cent (inclusive of discontinued operations). Revenue growth was strong at 10 per cent with the two main segments reporting profit before tax growth of over 6 per cent.
At a current price of $43.00 NML is trading at a trailing P/E of 9.8 times from continuing operations, below the ten year average of 11.3 times (see Exhibit 3). The dividend yield on the stock is 3 per cent.
One Caribbean Media Limited
In the first quarter of the year the Group delivered flat results as revenue declined and operating profit margins improved.
One Caribbean Media Limited (OCM) has undertaken a number of expansion initiatives which can potentially improve overall profitability. Earlier this year the Group entered into an agreement to purchase Citadel Group, owners and operators of i95fm, Red 96.7fm and Hitz 107.1fm and Sidewalk Radio Ltd, owners of radio frequency 92.3fm. In August a subsidiary of the Group is expected to acquire a small distribution company.
At the current price of $13.96 the stock is trading at a P/E of 13.6 times compared to the 5 year average of 14.1 times. The dividend yield is attractive at 4.9 per cent.
Unilever Caribbean Limited
Unilever Caribbean Limited (UCL) is in its eightth year of consecutive growth in profits attributable to shareholders, averaging an annual growth rate of 10 per cent. The Company has been able to maintain the momentum through a combination of growth in revenue and cost management.
The Company operates within the consumer goods sector where demand for many of its products is relatively inelastic. Despite the highly competitive environment UCL continues to command strong market shares in several of its categories. Ongoing improvement initiatives such as systems upgrades and plant optimization projects continue to ensure the Company's sustainability.
The share is fairly valued at a forward P/E multiple of 16 times compared with the 10 year average of 15 times. With higher market multiples for many large cap listed companies there is still the potential for capital appreciation. The dividend yield is attractive at 4 per cent.
Scotia Investments Jamaica Limited
Scotia Investments Jamaica Limited (SIJL) has been successful in the diversification of its revenue streams, moving away from a concentration on net interest income. Other income as a component of operation income has grown from 25 per cent to 32.6 per cent within the last twelve months. The largest contributor to this growth has been net fees and commission income.
Cost management has also been a key success factor for the Group with the Productivity ratio at 31.7 per cent at the end of April 2012. Impairment losses on loans have also been contained thus far.
At a price of $1.99, SIJL is trading at a P/E of 5.5 times, below its 5 year average of 6.8 times. With the recent increase in dividend payments, SIJL continues to pay one of the most attractive dividends in the local market commanding the position as the highest dividend yielding stock with 6 per cent.