Page 1 of 7. Moniker: LASF Shares Outstanding: 1,228,102,990 units Market Value of Shares Outstanding: $1,842,154,485 Financial Year End: March 31

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1 Target Price: $8.39 Market Price: J$ Week Range: J$0.39 to J$ Recommendation: BUY Moniker: LASF Shares Outstanding: 1,228,102,990 units Market Value of Shares Outstanding: $1,842,154,485 Financial Year End: March 31 Executive Summary: Lasco Financial Services Limited (LASF) offers remittance and cambio services in Jamaica and Barbados. LASF appears to be low risk and has plans to expand its remittance services in the Eastern Caribbean. Over the past five (5) years, the company s Operating Income has increased from $55.7 million to $484.6 million and its Equity has grown from $36.39 million to $ million. The company has also maintained a profitable position over the years. This stock is fairly liquid with an increasing stock price. With the recent 10:1 stock split, the stock is more affordable and a good investment at this time. Financial Performance Snapshot 12 months ended March % 3 Total Assets ($M) Shareholders Equity ($M) Net Income ($M) EPS ($) ROE (%) ROA (%) months ended June 30 Total Assets ($M) Shareholder s Equity ($M) Net Income ($M) Company Overview: In 2010, Lasco Financial Services merged with Lasco Remittance Services and Lasco Properties to form Lasco Financial Services Limited (LASF). LASF is a part of the Lasco Affiliated Companies and is a licensed provider of cambio and remittance services. The company was incorporated in 2004 and was listed on the Junior Market in October Lasco Financial Services Limited has four main divisions: remittance, cambio, micro loans and property rental. It also offers courier and bill payment services and all these are provided through a network of 150 MoneyGram locations and 5 cambios across the island. LASF was the first Jamaican cambio to offer a drivethrough cambio service which allows customers to conduct transactions from the comfort of their vehicle. Also, towards the end of the 2012 financial year, Lasco Financial Services Limited registered a company in Barbados and signed an International Money Transfer agreement with MoneyGram International to provide remittance services there. Lasco Financial Services (Barbados) Limited (LFSBL) is a wholly owned subsidiary of Lasco Financial Services Limited. There are five branches across Barbados and begun trading in May The Managing Director of LASF is Mrs. Jacinth HallTracey and she has been with the company since Company Outlook: The outlook for Lasco Financial Services Limited remains positive. With their plans of expansion and the state of the Remittance industry, we expect Trading Income to increase in coming years. The company has plans to commence business in the Eastern Caribbean and diaspora markets in UK and South Florida. Also, the company is embarking on more aggressive marketing strategies in order to increase revenue through the Remittance and Currency Trading division. With all these activities, we expect revenues to increase and the profits of the company to continue to grow. Valuation and Projections: Based on our valuation, LASF has an average target value of $8.39 which indicates that the stock is slightly undervalued. The stock is currently trading at a P/E of 10.15x and with a price to book ratio of 3.49x. 1 As at July 29, As at July 29, Percentage Change Page 1 of 7

2 Dividends Payments and Policy Ordinary Shares Dividend Timetable Payment date August 15 July 31 March 8 Dividend Per Share (J$) Twelvemonth dividend yield was 3.19% at the end of the 2013 financial year. LASF paid approximately 3% of 2011 s Net Income as dividends in August 2011, 16% of 2012 s net income as dividends in July 2012 and 22% of 2013 s net income in March This shows a trend where dividend payments are increasing year on year and could continue to increase as the company increases its net profit. Dividend payments are usually made during the summer. However, the dividend payment in 2013 was made in March, prior to the tax increase implemented in April This increased the tax on dividends payable to residents from 10% to 15%. This is more than likely just a one off event and we do not expect another dividend payment for the year. Management and Corporate Governance LASF is managed by Mrs. Jacinth HallTracey. Her career in management spans twentytwo (22) years, most of which was spent in the banking and financial services. Over the years, she has developed expertise in remittance and cambio services. Supporting her is Financial Accountant, Atasha Bernard, Credit Manager, Walter White and Deputy General Manager, Beverly Douglas. The Board of Directors of Lasco Financial Services Limited comprises professionals within the financial services sector. These directors bring expertise which could give LASF an advantage. The Board of Directors is ultimately responsible for ensuring accountability and transparency within the company. The Board has established three subcommittees, the Audit & Compliance Committee, the Assets and Liabilities Committee and the Compensation Committee. However, the company fails to comply with the PSOJ Corporate Governance Code, which states that, in addition to an Audit Committee and a Remuneration/Compensation committee, companies should have a Nomination Committee that is responsible for election and reelection of directors. The company has also sought to keep the Board lean, currently maintaining only 6 directors. Directors Hon. Lascelles Chin O.J., C.D. (Executive Chairman) Jacinth HallTracey (Managing Director) Dr. Eileen Chin Gary Peart R.N.A. Henriques, O.J., Q.C. Compton Rodney Experience Chairman and Founder Lasco Affiliated Companies; Director University of the West Indies School of Nursing Advisory Board, Kings House Foundation Past President Cambio Association of Jamaica Managing Director Lasco Manufacturing Ltd.; Board Member Lasco Distributers Ltd. CEO Mayberry Investments Past Chairman Jamaica Deposit Insurance Corporation; Past Commissioner Financial Services Commission Chairman Multicare Foundation, Secretary/Treasurer American Chamber of Commerce The last four directors listed above are nonexecutive directors. However, R.N.A. Henriques and Compton Rodney are both independent directors while Dr. Eileen Chin is a dependent director and Mr. Gary Peart could also be considered as a dependent director due to Mayberry Investments role as lead broker in the company s IPO. Therefore, only 2 of the 6 board members are considered fully independent. This does not comply with the PSOJ Corporate Governance Code which states that at least twothirds of the board should be independent nonexecutive directors. Top 10 Shareholders 4 Number of Units Held Percentage Held (%) East West (St. Lucia) Ltd. 60,177, Lascelles Chin 37,873, Wayne M. Chin 1,711, Joel Izquierdo Gonazalez 1,536, Michael A. Campbell 1,236, Mayberry Investment Limited Pension Scheme 1,000, Jamaica Money Market Brokers Ltd. 859, Guardian Life Limited/Pension Fund 792, Mayberry Managed Client Accounts 692, Huixiong Liao 500, Total 106,379, As at June 30, 2013 Page 2 of 7

3 SWOT Analysis Strengths Wide distribution network Company maintains a profitable position Innovativeness. The company has introduced new products to the market. The Lasco brand has a reputation of providing a wide range of products at affordable prices. Opportunities Expansion of remittance division to key markets in the Eastern Caribbean could increase revenues. Weaknesses Great exposures to fluctuations in the exchange rate, as most of the company s transactions are in US dollars and may affect pricing. Threats The contraction in the economy could lead to deterioration in the company s loan quality High competition from other companies such as GK Remittance Services and JN Money Services Risk of customers not meeting loan obligations Financial Statement Analysis Revenues: When Lasco Financial Services conducted the merger in 2010, it experienced a 307% increase in its Operating Income. Over the three (3) years since, its income has increased by 47% p.a. on average. Other Operating Income increased significantly in 2012, but this was mainly due to a change in accounting policy. As of April 1, 2011, the company adopted the fair value method of accounting for investment property. This caused a spike in Other Operating Income by 1,175% in Trading Income also increased throughout the period. However, in 2013, it increased significantly by more than 70% from Trading Income reflects the margin between buying and selling rate of foreign currencies, commission received from remittances and interest received from granting loans. During the April June period, trading income increased by 47% over the same period in This increase was mainly due to commencement of trading in Barbados. As the company continues to expand these offerings, Trading Income could continue to increase. Expenses: Once the business merged in 2010, it experienced a 369% increase in Operating Expenses, from $39.9M to $ M. Over the periods, Operating Expenses have increased by 31% p.a. on average. There was a significant increase of 44% in Administrative and Other Expenses in 2012 due to the company hiring more experienced and better qualified personnel. The Company also incurred oneoff expenses from the purchase of Supreme Ventures MoneyGram Network in December 2011 valued at $46M. Selling and Promotion expenses have increased steadily over the 4 year period. Compared to the April June period in 2012, Selling and Promotion Expenses increased by 59% due to increased investments in marketing of their products Trade Receivables Breakdown MoneyGram International Loans Other 33% 7% 60% Administrative and other expenses Selling and Promotion expenses Other income Trading Income Page 3 of 7

4 Total Assets Total Liabilities Balance Sheet: Between 2010 and 2013, Total Assets have increased by 92% to $641M. The main contributor to this is the increase in Receivables. Between 2011 and 2013, Trade receivables increased significantly due to the addition of the Supreme Ventures MoneyGram Network in December This added 88 locations to the LASF network which already had 66 locations. This addition increased earnings by 63%. In 2012, Receivables from MoneyGram International increased to $133M from $35M (277%) in the previous year and continued to increase in 2013 to $168M (26%). Another contributor to the increase in the total assets was the revaluation of Investment Property in 2011 which increased the value of Investment Property by $90.299M (935%). Also, with the addition of Lasco Financial Services Barbados, amounts due from related companies increased and with the plan of expansion in the Eastern Caribbean, the company s Assets should continue to increase. During the first quarter of 2013, Total Assets increased by 34% over the same period in Over the past 4 years, Liabilities have also increased but not as rapidly as Assets which augurs well for the company. Between 2011 and 2013, Payables increased due to larger daily reimbursements for MoneyGram transactions. In 2012, Trade Payables increased to $117.46M from $29M in 2011 and further to $142M in Again, as the company plans to expand, this figure could go up even further. During the April June period, Liabilities grew by 25% in 2013 compared to the same period in Shareholders Equity has been increasing, influenced by increases in Retained Earnings as it posts ever increasing Net Profit each year. Over the past 3 years, on average, Retained Earnings have increased by 40% p.a. and for the 2013 financial year, the company had a profit retention rate of 78%. Cash Flow: Net cash used for financing activities increased over the past 2 years due to higher dividend payments. This was facilitated by an increase in cash generated from both operating and investing activities. Net cash from operating activities fell to a negative position in 2012 mainly due to the fair value gain on investment property and an increase in payables. However, operating cash flow increased in 2013 and is expected to continue to increase going forward. Cash proceeds from investing activities increased throughout the 4 year period. Ratio Analysis Financial Health: The company s Debt to Equity position (a measure of the degree of financial leverage) was significantly higher than the recent trend in 2010 due to a director s loan. However, this loan was paid off and the ratio was stabilized in Throughout the past three years, the company s Debt to Equity position has remained below 1x equity, indicating that its creditors have less money invested in the company than its shareholders. Times (x) Debt/Equity Liquidity: Lasco Financials Current Ratio declined in 2012 due to a 40% decrease in cash and cash equivalents. Cash from Operating Activities was negative due to the increase in Fair Value Gain on Investment Property. However, this was not repeated in 2013 and the ratio increased. During the April June 2013 period, the current ratio increased by 30% to 1.29x compare to the same period in The company continues to be in a position to adequately cover its short term expenses with its Current Assets which augurs well for LASF. Times (x) Current Ratio Page 4 of 7

5 VMWM Research Department, August 9, 2013 Profitability: The company s operating and net profits increased in the past 2 years after falling in In 2011, both profits and sales increased. However, the increase in sales was much larger than the increase in profits, reflecting additional expenditure. Since then, Operating Profit Margin (OPM) and Net Profit Margin (NPM) have continued to increase. We anticipate that profit margins will remain fairly stable in the next few years. During the first quarter of 2013, OPM and NPM remained the same as the same period in 2012 at 27%. The company s Return on Assets (ROA) and Return on Equity (ROE) have increased steadily throughout the last three years. This shows that the company is efficient in using its assets and shareholders equity to generate profit. In 2013, ROE increased by 6 percentage points and ROA increased by 5 percentage points and these ratios are expected to remain stable in the upcoming years as the company grows in tandem with its sales efforts % 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% OPM 28.40% 17.56% 27.92% NPM 20.15% 13.13% 27.49% % 33.82% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% ROE ROA Price Movement In September 2010, Lasco Financial Services Limited made an Initial Public offering of 24.5M ordinary shares at $2.50 per share. During the three years since then, the share has traded as low as $2.00 April 2011 and, recently, as high as $ The company declared a 10:1 stock split with an exdividend date of July 5, This increased the number of shares outstanding from million to 1, million. As a result, the share price fell to $1.35, making it more affordable for small investors. Since the company listed on the Junior Stock Exchange, the stock has been fairly liquid. Volumes are high when compared to other companies in the market and, year to date, the (adjusted) stock price has increased by 175%. With the recent stock split, we expect the volumes traded and the stock price to continue to increase. 1.5 LASF Stock Pricing October 2010 July ,000 LASF Volume Traded October 2010 July 2013 (Excluding 600M unit trade in Nov. 2012) Price ($) Thousands 15,000 10,000 5, Page 5 of 7

6 VMWM Research Department, August 9, 2013 Projections and Valuation Lasco Financials Limited is becoming a mature company which pays increasing dividends year on year. Therefore, the Constant Growth Dividend Discount Model (Gordon Growth Model/DDM) is an appropriate model for valuing this company. The Cost of Equity, which was calculated using the Capital Asset Pricing Model (CAPM), is 12.33% and includes a Country Risk and Equity Risk Premium. Using an estimated growth rate of 10%, LASF has a current fair market value of $8.39. This stock is currently undervalued and trades below its price to book ratio of 3.49x. Its P/E ratio of 10.15x is also low when compared to the market. Expected Market Equity Risk Country Risk Risk Freee Rate Beta Return Premium Premium Industry Outlook Remittances account for approximately 14% of Jamaica s GDP. Remittance companies make up approximately 85% of total remittance inflows. Remittance inflows from remittance companies increased by 6.2% in April to March 2012 over the same period in the previous year and by 0.04% in the same period in According to the Bank of Jamaica Remittance Report April 2013, during the period January to April 2013, remittance inflows from remittance companies have declined by 3.2% when compared to the same period in However, remittance inflows are positively related to the rate of economic development. Therefore, as economies across the world continue to grow, remittance inflows are expected to improve. Also, with more Jamaicans seeking jobs abroad, remittance inflows should continue to increase in the coming years. US$ Millions Remittance Inflows from Remittance Companies April March Company Outlook The company expects that Remittance Services will continue to be its biggest contributor to revenue. In recent months, we have seen declines in Net Remittances in Jamaica. However, for LASF, remittance inflows grew by 27% during the first quarter of With plans on entering into new markets, we expect remittance inflows to continue to increase. The company s Cambio and Loans divisions are also doing well and contribute substantially to the company s revenue. During the first quarter of 2013, income from the loans division increased by 17% and income from the Cambio division increased by %. These are expected to continue in the same manner in upcoming years The company has already begun executing its expansion plan by beginning business in Barbados in It has plans to expand even further in the Eastern Caribbean and Diaspora markets in the UK and South Florida. Entering into these markets would present many more opportunities to the company and we expect revenues to increase even further. Lasco Financials has become more rigorous with its marketing activity in an effort to increase income in the Remittances and Currency Trading divisions. This would increase Operating Expenses while increasing Revenues. The company should increase its market presence and its profits should continue to improve in upcoming years. LASF is also strengthening its staff quality by hiring more qualified persons. This move could improve lower operating expenses as these persons would work more efficiently and make decisions which could improve the profitability of the company. The company is under good management who is conscious of the state of the economy and industry and is taking steps to mitigate risks and increase its profits. The company s increasing Retained Earnings augurs well for shareholders. With the expected increasing profits, we expect dividend payments to also increase and shareholders should benefit greatly from this stock. Page 6 of 7

7 Recommendation BUY: LASF continues to maintain a profitable position and revenues are expected to increase as the company expands its market reach in the eastern Caribbean and as the company diversifies its product offerings. Although, the company could be adversely affected by fluctuations in the exchange rate, the company manages its risk well and has strong investor support. The stock is attractively priced and dividend payments have increased year on year and is expected to continue in said manner in upcoming years. Prepared by VMWM Research Department August 9, 2013 Disclaimer: This Research Paper is for information purposes only. The information stated herein may reflect the opinion and views of VM Wealth Management in relation to market conditions and does not constitute any representation or warranties in relation to investment returns and the credibility of the sources of information relied upon in the preparation of this report, without further research and verification. Before making any investment decision, please consult a VM Wealth Management Advisor. Page 7 of 7