Today we at Bourse put forward our local stock picks for the second half of 2014. As highlighted in our article last week, the Trinidad and Tobago Composite Index (TTCI) contracted 1.6 per cent as at the end of June 2014, emphasising the importance of stock selection within a market which, on average, is at the high end of its 5-year valuation. (Price-to-Earnings ratio 18.6x.)
2014 Stock Picks
The stock picks have been developed with several themes in mind. In particular, we focus on attractive relative value and good dividend yield. In no particular order, our picks include:
1. Neal and Massy Holdings Ltd (NML)
2. Sagicor Finance Corporation (SFC)
3. Guardian Holdings Limited (GHL)
4. First Citizens Bank (FIRST)
5. Clico Investment Fund (CIF)
Neal and Massy Holdings Limited (NML)
During the half year 2014, NML undertook several growth initiatives and a strategic rebranding exercise in order to increase company and shareholder value.
The Group’s diversification strategy included its entrance into the Central and Latin America region, manifested by the acquisition of two car dealerships in Colombia and a 20 per cent stake in an IT Services firm in Costa Rica, in order to capitalise on the growing economies of the region.
In June, NML embarked on a comprehensive rebranding exercise in order to increase consumer awareness and boost business synergies of subsidiaries in the Group. The introduction of a Group loyalty card, for use in NML’s expanding consumer retail business lines, bodes well for consumers, the company’s bottom line and by extension, its investors. These initiatives, whilst having upfront costs, may be beneficial going forward.
Bourse sees NML value…
At a current price of $69.52, NML’s dividend yield is 2.26 per cent and below the Index average of roughly 3 per cent. NML’s trailing P/E multiple stands at 12.0x. The other locally-based conglomerate and NML’s closest competitor—ANSA McAl—currently trades at a trailing P/E multiple of 15.9x and a dividend yield of 1.96 per cent, highlighting the relative attractiveness of NML. Investors may recall that NML was one of Bourse’s top picks at the beginning of the year. As at 11 July 2014, the stock has appreciated 15.9 per cent. Given the company’s growth initiatives and seemingly low price on a relative value basis, Bourse maintains a BUY rating on the stock.
Sagicor Financial Corporation (SFC)
Despite muted performance in financial year 2013, mainly due to discontinued operations in Europe, SFC has delivered positive results thus far in 2014. The disposal of all European exposure and related provisions thereto, as well as the realignment of the Group’s growth strategies have resulted in stronger top and bottom line figures for SFC as at the end of Q1 2014. A 100 per cent increase in Q1 2014 diluted EPS to USD$0.03 was facilitated by a 5 per cent increase in Q1 2014 Revenue and highlighted the strong start to 2014 for SFC. In an effort to reaffirm the Group’s banking footprint, SFC acquired RBC Royal Bank (Jamaica) Limited as well as RBTT Securities Limited from the Royal Bank of Canada. Moreover, this did not increase net exposure to Jamaica, with the company opting to instead reallocate its Jamaican asset portfolio.
Bourse sees SFC value…
At a price of TT$6.50, SFC has contracted 10.3 per cent year-to-date (YTD) and is at the lower end of the stock’s 5-year price range (Exhibit 2) which offers an attractive entry point into the stock. Its trailing dividend yield stands at 3.86 per cent. SFC’s Market to Book ratio is 0.60x, as compared to its closest comparable GHL (trading at 1.1x Market-to-Book) which indicates to us that the stock may be undervalued. Bourse has revised its rating from a HOLD at the beginning of the year to a BUY rating, on the basis of a possible improvement in earnings and good dividend yield.
For Q1 2014, GHL saw growth in its core Insurance business segment, which contributed to a 25 per cent increase in diluted EPS to $0.35 from $0.28 reported at the end of March 2013.
Having terminated all European exposure and with the expectation that write offs in the Group’s Point Simon investment are now behind it, the company expects that 2014 would highlight a much improved performance.
Bourse sees GHL value…
At a price of $14.31, GHL has appreciated 2.21 per cent year-to-date. The company’s trailing 12 month dividend yield stands at 3.63 per cent, offering investors reasonable income generation. More stable earnings in the absence of significant write-offs, coupled with moderate business growth in the company’s business lines makes GHL appear to be a good addition to an investment portfolio. For these reasons, Bourse has revised its rating from a HOLD at the beginning of the year to a BUY rating.
First Citizens Bank
For the six months ending March 31st 2014, FIRST recorded a 1.6 per cent increase in EPS to $1.28 from the $1.26 in the comparable period for 2013. This performance occurred despite a prevailing low interest rate environment locally, and a decline in business loan demand according to data released from the Central Bank of Trinidad and Tobago.
A stronger performance is expected for the remainder of 2014 as the Group has stated its intentions to focus on enhancing efficiency and generation of Fee income, which should contribute to positive revenue and margin growth.
Bourse sees FIRST value…
At a current price of $35.01, FIRST has contracted by 13 per cent YTD, offering investors an attractive entry point into the stock. Currently, FIRST is trading with a trailing P/E multiple of 14.4x while the dividend yield stands at 3.11 per cent. Locally, the banking sector trades with an average P/E of 17.9x, thus positioning FIRST relatively cheaper than its peers (by market cap) in the sector. FIRST’s Market-to-Book ratio stands at 1.4x, well below the average of other major locally-listed banks (2.3x) (See Exhibit 1). Given its good dividend yield, attractive relative valuation and sharpening of corporate focus. Bourse has revised its rating from a HOLD at the beginning of the year to a BUY rating.
CLICO Investment Fund (CIF)
CIF remains one of Bourse’s picks for the medium term investor. Since its debut in January 2013, the CIF has been one of the most liquid stocks on the stock exchange and as at the end of quarter two 2014 offered a trailing 12-month dividend yield of 4.47 per cent. As at June 30th 2014, the NAV on the CIF was $27.21, which is 27 per cent above the trading price of $21.50 (See Exhibit 2).
Bourse sees CIF value…
Investors may have observed that CIF has, in recent times, settled within a trading range of $21.50 to $22.50. Arguably, investors holding CIF units are gaining indirect RBL exposure at a discount relative to RBL’s market price. For an attractive dividend yield and the prospects of medium term capital appreciation, BOURSE maintains a BUY rating on the stock. Overall, the remainder of 2014 present selective opportunities on the local equity market for investors to gain. Investors should remain vigilant and alert to capitalise on market opportunities. As always, it makes good sense to consult with a trusted investment advisor, of which Bourse is one, when making investment decisions.
For more information on these and other investment themes, please contact Bourse Securities Limited, at 628-9100, email us at Research@boursefinancial.com or visit us at any one of our three offices located in Port-of-Spain, Chaguanas and San Fernando. Investors can also visit our website at www.bourseinvestment.com or Bourse Securities Limited Facebook page.
The production of this publication is not to in any way establish an offer or solicit for the subscription, purchase or sale of the any securities stated herein to US persons or to contradict any laws of jurisdictions which would interpret our research to be an offer.