Pan-Jamai can Investments Trust Limited

Transcription

1 October 31, 2008 Pan-Jamai can Investments Trust Limited Jamaica Stock Exchange Market Research Competition

2 Company Background Pan Jamaican Investments Trust Ltd. (JSE: PJAM) is one of the four listed conglomerates on the Jamaica Stock Exchange (JSE). PJAM is involved in a number of sectors, such as property management, financial and insurance services, and owns or is associated with other distribution, agricultural and trade companies. PJAM not only owns half of the Bank of Nova Scotia Center building in Downtown Kingston, major developers of New Kingston. as well as Manor Park Plaza, but it also holds prime commercial real estate in New Kingston, including a major stake in the First Caribbean International Bank building. The Facey family (of which Maurice Facey is PJAM s Chairman and Stephen Facey is PJAM s President and CEO) is known in Jamaica as the PJAM is the owner of four other buildings on the island and also holds a number of maintenance contracts for condominiums in the Manor Park residential area. In total, PJAM owns 350,000 square feet of land and building space and manages another 350,000 square feet. Outside of its property management, PJAM owns a 20.8% stake in Hardware and Lumber Ltd. (JSE: HL). It also holds substantial stakes in public financial services and insurance companies. PJAM holds a 73% 1 stake in First Jamaica Investments Ltd. (JSE: FJI), which holds a 24.64% 2 stake in 1 A subsidiary is defined as ownership of over 50% of shares, there FJI is a subsidiary of PJAM. 2 An associated company is defined ownership of 20%-50% of shares.

3 Jamaica s largest insurance company Sagicor Life Jamaica (JSE: SLJ), which in turn holds 52.67% of Pan Caribbean Financial Services (JSE: PCFS). By having ties to the above mentioned companies, PJAM is part of a Caribbean network which is held together under financial giant, Sagicor Group (LSE: SFI,TTSE: SFC, BSE: SFC). PJAM s Segment Analysis Property Income The bulk of PJAM s income (70%) is derived from its property income. In the 6M period ended June 30, 2008 (6M 2008), property income was 66.66% of PJAM s total income. Likewise, for PJAM s 2007 fiscal year ended December 31, 2007 (YE 2007), property income contributed 69.94% of PJAM s total income. A similar trend is seen in previous years when property income was 70.13% of total income in 2006, 66.82% in 2005 and 69.99% in The majority of this property income comes from rental income 3. In YE 2007, rental income contributed 66.68% of PJAM s total property income and the remaining 33.32% was from fair value gains on property evaluation. Similarly in 2006, rental income was 72.73% of total property income, 75.85% in 2005 and 80.76% in PJAM s property income has grown consistently year over year. In 6M 2008, PJAM s property income increased to JMD mm from JMD mm an increase of 21.69%. Similarly, the JMD mm in property income in YE 2007 is a 20.02% increase over the JMD mm in property income in YE A breakdown of PJAM s property income is shown in its annual reports. However, in the 6M financial statements, PJAM does not break down property income into segments, therefore the figures for rental income etc. have been excluded in the 6M 2008 analysis.

4 In the 6M 2008, the Company boasted average occupancy levels of greater than 98%. In 2007, it had occupancy levels of 94%, and in the past 4 years, average occupancy levels have been greater than 90%. Investment Income Investment income is the second largest contributor to PJAM s total income. In the 6M period ending June 30, 2008, PJAM s investment income contributed 28.24% of its total income. In YE 2007, investment income of JMD 281.2mm was 20.46% of PJAM s total income. Likewise in 2006, 2005 and 2004, investment income was 23.5%, 25.38% and 18.79% of total income respectively. The bulk of investment income is derived from interest on securities and loans 4, followed by realized gain on disposal of securities. In YE 2007, interest on securities and loans of JMD mm was 58.89% of total investment income. The other 41.11% of total investment income in YE 2007 is divided amongst realized gain on disposal of securities (which contributed 22.61% or 63.8mm in investment income in YE 2007), foreign exchange gains, dividends and other. Unlike property income that consistently sees significant increases in income each year, investment income fluctuates. In 6M 2008, investment income rose 33.68% to JMD mm from JMD mm though it declined in Q to JMD 98.66mm from JMD mm. 4 A breakdown of PJAM s investment income is shown in its annual reports. However, in the 6M financial statements, PJAM does not break down investment income into segments, therefore the figures for interest on securities and loans etc. have been excluded in the 6M 2008 analysis.

5 However, in YE 2007, investment income rose minimally by 4.77% to JMD 281.2mm and in YE 2006, investment income grew 3.36% from JMD mm. Premium Income & Other Premium income and other income are PJAM s remaining sources of income. In 6M 2008, other income was 3.85% of total income and premium income was only 1.26%. During the same period, other income increased 1.89% to JMD 29.1mm from JMD 28.57mm and premium income fell 2.47% to JMD 9.49mm. In YE 2007, other income was 8.1% of PJAM s total income and premium income was 1.5%. Notably, in YE 2007 other income almost doubled, increasing 92.92% to JMD mm from JMD 57.7mm. This is attributable to the 188% increase in miscellaneous income 5 to JMD 75.85mm from JMD 26.32mm. Key Notes From PJAM s Most Recent Financials 6M Period Ended June 30, 2008 PJAM reported fully diluted EPS of JMD 2.97 compared to JMD 2.55 for 6M 2008 an increase of 16.47%. EPS in Q02 increased minimally by 2.17% to JMD 1.41 from JMD Income increased 23.51% to JMD mm from JMD mm. This is attributable to a 33.68% jump in income investments and 21.69% rise in property income. Notably, property income saw the largest increase in income of all 4 sectors in Q02. Operating expenses climbed 27.98% to JMD 317.8mm from JMD mm primarily due to a 51.2% rise in Property Operating Costs of JMD 31.3mm. As a result, operating profit increased 20.46% to JMD mm from JMD mm. Interest expense increased 75.75% to JMD 22.75mm from JMD 12.94mm. Share of results of associated companies increased 21.92% to JMD mm from JMD mm. 5 During 2007 the group recovered JMD 77.59mm on an impaired loan with a carrying value of JMD The gain of JMD 59.6mm has been included in miscellaneous income.

6 Though Net profit in Q02 was flat, it increased 15.97% in the 6M period to JMD mm from JMD 614.5mm. Total assets grew by 11.13% to JMD 10.95B from JMD 9.85B. Investments increased by 3.11% to JMD 10.27B from JMD 9.96B. Cash and bank balances fell to JMD mm from mm. Liabilities increased 24.52% to JMD 1B from JMD mm. Shareholders equity (excluding minority interest) increased slightly, by 2.46% to JMD 7.27B from JMD 6.63B. Using a trading price of JMD and PJAM s twelve month trailing EPS of JMD 6.13, its price to earnings ratio (P/E) is 8.32 times. Its Book Value per Share (BV/Share), which has been continually growing, now stands at JMD and the the stock is trading at a P/BV of 1.22 times. Financial Highlights From PJAM (2004 Present) PJAM $'000 $'000 $'000 $'000 Income 1,374,526 1,142,106 1,023, ,746 Net Profit Attributable to Shareholders 996, ,050 2,796,373 1,640,607 ROE 14.1% 12.6% 39.7% 33.4% Total Assets 10,592,615 10,528,927 9,363,841 9,176,238 Shareholders' Equity* 7,097,272 6,991,015 6,102,785 4,187,953 Dividend Payout Ratio 81.0% 20.1% 8.2% 10.8% P/E BV/Share P/BV Stock Price at YE $49.50 $56.50 $55.00 $53.00 Avergae Outstanding Shares 171, , , ,796 Note: Using PJAM's YE financials * Shareholders' equity excludes minority interest Net profitable attributable to equity holders increased at an average annual rate of 10.72%. In 2005, there was a significant increase in net profit attributable to equity holders as a result of PJAM acquiring a 25% stake in LOJ 7 on April 1, LOJ reported exceptional net income of JMD 2.42B in 2005 up from JMD 1.43B in Last traded price at the end of the 6M 2008 period ended June 30, Life of Jamaica Ltd. was renamed to Sagicor Life Jamaica on May 16, 2008.

7 Diluted earnings per share increased annually at an average rate of 11.23%. This is noteworthy as PJAM s EPS growth in 2005 was inflated by LOJ s robust YE 2005 performance. However, in 2006 and 2007, EPS proved to be resilient despite no one off gains. The Company has consistently grown its book value year over year at an average annual growth rate of 14.25% from JMD 4.19B in 2004 to JMD 7.1B in ROE fell at an annual rate of 12.5% due to its 68.26% decline in 2005 to 12.6% from 39.7% in However, it is important to note that ROE of 12.6% in 2005 was still above the yearly inflation rate of 5.8%. In all 4 years ROE was above inflation, except for 2007 when ROE was 14.1% and inflation was 16.8%. Since 2004, PJAM s total assets have grown at an average annual rate of 5.03%. Total assets increased from 9.18B in 2004 to JMD 10.59B in 2007 despite a high dividend payout ratio in Over a one year period, PJAM s beta in comparison to the JSE Main Index stands at 1.22, indicating that it s stock is less volatile than the market. Notably, PJAM also has a beta of 1.22 over a 5 year period.

8 Snapshots Subsidiaries & Associated Companies Shares Outstanding EPS Share Price P/E Shareholders' Equity* BV/S P/BV 52-Week HI 52-Week LO ROE Pan-Jam 171,299, ,097,272, % First Jamaica Investments Ltd. 302,280, ,939,637, % Hardware & Lumber Ltd. 80,842, ,211,266, % Sagicor Life Jamaica Ltd. 3,742,337, ,507,025, % Pan Caribbean Financial Services 544,135, ,530,930, % Note: At each company's year end * Excluding minority interest PJAM s subsidiaries and associated companies have been performing well, with strong ROE and P/E of 10 times or below. P/BV for all is below 2 times. EPS grew in 2007 vs. 2006: FJI s EPS grew 20% to JMD 4.52 vs. JMD 3.79 for YE SFC s EPS climbed 25% to JMD 0.40 from JMD HL s EPS rose to JMD 1.65 from JMD 0.47 a % increase yoy 8. PCFS EPS increased 8% JMD 2.23 vs. JMD 2.06 for the YE Comparison to Other Conglomerates 2007 PJAM LAS JP GK $'000 $'000 $'000 $'000 Shares Outstanding 171,299,000 96,000, ,024, ,280,255 Stock Price at YE $49.50 $ $35.05 $71.50 Revenue 1,374,526 21,053,644 3,305,959 48,749,434 Net Profit 1,383,793 2,665, ,649 3,435,532 Diluted EPS Total Assets 10,592,615 23,972,321 10,641,891 80,005,762 Shareholders' Equity* 7,097,272 22,532,031 9,076,575 20,038,517 ROE 14.1% 13.0% 5.0% 17.4% ROA 13.1% 12.7% 1.0% 5.7% P/E Dividend Payout Ratio 81.0% 10.81% 35.00% 0.31% P/BV Note: At each company's year end Compared to its peers, PJAM is performing very well. LAS and GK also have strong positions while JP is being challenged. PJAM has the highest dividend payout ratio of 81%, a P/E below 10 times and a P/BV close to 1 times. However, GraceKennedy has the highest ROE of 17.4% (which is above YE 2007 s 16.8% inflation) while PJAM s ROE is below inflation. In spite of this, PJAM has the highest ROA of 13.1%. 8 However, for the 9M period ended September 30, 2008 (9M 2008) HL posted poor results, with EPS falling 92.2% to JMD 0.06 from JMD 0.76 in 9M 2006.

9 Technical Analysis Trend Analysis Between January 02, 2001 and October 28, 2008, PJAM s stock price has trended upwards with a LO of JMD 7.50 on January 2, 2001 and a HI of JMD on April 27, Between January 2, 2001 to March 11, 2004, PJAM traded below or close to the trend line. However, the stock trended upwards after March 25, 2004 when PCFS status was changed from subsidiary to associated company on its merger with Manufacturers International Ltd. Between March 24, 2004 and November 24, 2005, PJAM s stock skyrocketed, appreciating % hitting its HI of JMD on April 27, 2005 (this was significantly above the trend line). This surge in price was a result of PJAM s acquisition of a 25% stake in LOJ. Since then, the stock quickly worked its way back to the JMD range fluctuating above and below the trend line during earnings season but not seeing any major increase/decrease in price. As of February 9, 2007, PJAM has been trading below the trend line, breaking it slightly between February 25, 2008 and March 6, Currently, the stock is pressured by the current global meltdown which is suppressing investor confidence and stock prices worldwide.

10 Moving Average Analysis Between 2003 present, PJAM s stock price has moved closely in line with its 40 day moving average and the JSE Main Index. Its support level of JMD 32.50, which hit on May 31, 2004 was an excellent BUYING opportunity. Shortly after, the stock surged creating a resistance level of JMD on February 15, PJAM then fell to JMD before soaring once again, breaking through its resistance level to create a new resistance of JMD on April 27, After that, the price plummeted and hasn t broken the support level. Opportunities to BUY and SELL: BUYING opportunity (below moving average): November 24, PJAM traded at JMD SELLING opportunity (above moving average): January 5, 2006 PJAM hit JMD If an investor did this, he would have made a return of 29.38%. Similarly, if an investor bought PJAM on August 23, 2006 at JMD (below the moving average) and sold it on December 29, 2007, at JMD 56.50, he would have made a 54.79% return.

11 SWOT Analysis Strengths Diversification PJAM s subsidiaries and associated companies are in different industries Presence outside of the country PJAM is part of a Caribbean network under Sagicor Group Reports consistent growth in earnings and book value Subsidiaries and associated companies have performed well and have a positive outlook High dividend payout ratio and high ROA Over 90% occupancy levels in the last 5 years Weaknesses PJAM has not expanded its property management in over 3 years Though the increase in property value on financial statements reflected higher net rentals in 2007, current values are still significantly below replacement and development costs Declining ROE Illiquid stock Opportunities Through FJI s USD 25mm loan for the World Bank, PJAM has the option to expand outside of Jamaica and as well as into another industry A correction in the real estate industry is due, therefore opportunities will arise for PJAM to expand its property management division Threats Escalating inflation and tightened credit lines Global meltdown and lack of investor confidence Rental and real estate value depreciation globally due to subprime crisis Home owners not building new homes or expanding so difficult for HL to increase revenues

12 Future and Recommendation PJAM has consistently proven itself with a robust balance sheet and growth in core earnings. It has a high ROA and dividend ratio payout. With expansion on the horizon, investors can look forward to higher earnings and a higher ROE. However, in the short-medium term given the current economic climate of soaring inflation (year over year 25.3%) a rapid devaluation of the JMD currency, low investor confidence and the global financial crisis, projected earnings for PJAM s YE 2008 is 1.06B, 23% less than YE 2007 of 1.38B. PJAM s management has proven to be very prudent, and so we do not expect to see declining profits for 2 consecutive quarters. At current trading levels of JMD 43.00, PJAM is trading at 1 times book value and 6.84 times earnings - an excellent opportunity to BUY this stock.

13 Bibliography 1. Bloomberg 2. Jamaica Gleaner 3. Jamaica Observer ( 4. Jamaica Stock Exchange website 5. PJAM Annual Report 2007, 2006, 2005, Investopedia website 7. Statistical Institute of Jamaica