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NML and RBL: acquiring growth

Today we at Bourse review the half year performance of the two large cap companies listed on the local stock exchange: Neal and Massy Holdings Limited (NML) representing $6.5b or 5.6 per cent of the TTCI and Republic Bank Limited (RBL) representing $19b or 17.3 per cent of the TTCI.

Neal and Massy
Holdings Limited
For the six months ending March 31st 2014 (the period), Neal and Massy Limited (NML) reported diluted earnings per share (EPS) of $2.73 which represented a 1.9 per cent increase from the $2.68 reported for the corresponding period of the year prior. At a current trading price of $67.56, NML’s trailing P/E remained at 11.7x as of May 16th 2014, when compared to its 2013 P/E multiple, as shown in Exhibit 1.
Relative to the TTCI, which has contracted by 0.2 per cent year-to-date (YTD), NML’s price has steadily appreciated, climbing 12.6 per cent to $67.56 as of May 16th, 2014.
For the period, NML’s top line grew by 10 per cent to $5.2b from $4.8b due to a stronger performance in the majority of the group’s business segments (See Exhibit 2).
Operating profit increased during the period by 2.8 per cent to $385.3m from $374.8m when compared to the equivalent period a year earlier. This marginal increase was mainly attributed to declining revenue recognition in the Barbados operations and increasing front-loaded operational costs incurred at the group’s head office, which were deemed necessary to facilitate the company’s strategic initiatives.

Expansion Initiatives and Outlook
For the first half of the FY 2014, NML aggressively pursued numerous growth initiatives while rationalising its existing portfolio of companies, manifested in the completion of three acquisitions and two divestments. Having ventured into Central and Latin America with the acquisitions of an IT Services company in Costa Rica and two car dealerships in Colombia, the firm has strategically entered new geographical territories.
NML continues to maintain a robust regional presence having launched two Super Combo stores in Trinidad and Barbados and a new distribution company in St Lucia, all of which have been reported as positive additions for the group. Additionally, the Group has entered into an agreement with Mitsubishi Gas Chemical and Mitsubishi Corporation to act as a consultant and negotiator for the construction of both the methanol and dimethyl ether plant in the La Brea Union estate. This partnership, once profitable, opens the door for NML to fully enter the downstream petro-chemical sector. The joint project is carded for completion in the third quarter of 2016 with commercial production to commence at the end of 2016.
Overall, NML’s continued core profitability and aggressive growth initiatives offer investors the opportunities for an attractive medium to long term return.
In order to finance future growth projects and restructure their current debt portfolio at lower interest rates, NML has notified shareholders of a TT$1.2b bond issue, to be offered to investors in Trinidad and Tobago. Of the total amount, $700m would be used to refinance existing debt, while $500m would be used for future growth undertakings.
The debt refinancing efforts should bode well for investors as lower interest rates should result in lower interest expenses, having a positive effect on the company’s bottom line.
At the current price of $67.56, investors are receiving a trailing dividend yield of 2.6 per cent on the stock. For the period, NML has declared an interim dividend of $0.51 per ordinary share, payable on the 16th of June 2014. The stock goes ex-div on the 28th of May 2014. As a result of NML’s forward looking growth initiatives, BOURSE recommends a BUY on the stock.

REPUBLIC BANK LIMITED
Republic Bank Limited (RBL) reported diluted EPS of $3.47 for the six months ending March 31st 2014, a marginal increase of $0.03 compared to the same period last year. Net Interest Income grew by 4.6 per cent from $1.08b last year to $1.13b at the end of the bank’s second quarter.
Profit before taxation increased 3.7 per cent from $739m to $766m. Total assets for the period grew by 6.9 per cent from $54.8b to $58.6b, buoyed mainly increases in cash, advances and investment securities.

HFC Bank Acquisition
In June 2013, RBL’s total stake in Ghana’s HFC Bank of 40 per cent triggered a legal requirement to make a bid for the remaining shareholding. On April 30th 2014, RBL raised their offer price per share from GHS1.30 (USD0.48) to GHS1.60 (USD0.58). The transaction, which represents 10 per cent of RBL’s total capital, would be financed by surplus USD liquidity. RBL maintains that the transaction would have a negligible impact on its USD liquidity ratios but an accretive impact on shareholder value.
It is anticipated that RBL’s takeover of HFC Ghana will be mutually beneficial. HFC stands to benefit from the added value of RBL’s extensive knowledge and expertise in retail banking, which could aid in developing the bank’s growth. RBL’s experience in the energy sector, credit card financing and mortgages can also prove to be fruitful for the Ghanaian bank.
RBL could, in turn, take advantage of exposure to Ghana’s growing economy and secure its growth outside of the Caribbean region. Sustained by oil, cocoa and on-going investments, Ghana’s economy expanded 7.1 per cent in 2013. Such exposure should provide positive spill-over effects for RBL’s shareholders.
At a current price of $120.38 and a P/E Multiple of 16.5x as at 1HY 2014, RBL is trading above its historical 5 year historical average of 13.9 times (see Exhibit 4). RBL has declared a half year dividend of $1.25 per share, payable on May 29th 2014. With a trailing dividend yield of 3.5 per cent, BOURSE recommends a HOLD on this stock.
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