bourse weekly review - january 11 2010 - 2010 outlook

8/8/2019 Bourse Weekly Review - January 11 2010 - 2010 Outlook

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BOURSE SECURITIES LIMITED

Weekly Market Review

January 11th, 2010

Weak earnings to impact 2010

The year 2009 was a slow one for the local equity market, and investors should notexpect easy gains in the year ahead. The global slowdown in economic growth hasreached our shores and weak economic conditions have filtered down into decliningcorporate earnings and limited investment opportunities in the stock market for 2010.Bourse projects the TT Composite Index to decline 2 to 5% this year. But for thediscerning investor, there are still a handful of equities with positive prospects this year.

Economic Outlook

The economic climate in 2009 was a challenging one for consumers and businesses alike.The coming year may continue the trend of stagnant GDP growth and foreign exchangeearnings, with unemployment rising from the 5.8% level recorded in the third quarter of 2009. Credit markets may see some tightening this year as the Central Bank continues tomop up excess liquidity causing interest rates to rise.

In the T&T Budget for the Fiscal Year 2010, revenues were based on an oil price of US$55/barrel and a natural gas price of US$2.75/MMbtu. Oil has gained since the start of the period in September to above $80 currently, and has averaged around $76 over theperiod, 38% above the budget price. However, natural gas which makes a moresignificant contribution to revenue has not seen a similar run-up in price. Over the same

period, world natural gas prices, as measured by the benchmark Henry Hub, has averagedaround $4.37. Budgeted prices are calculated at 55% of Henry Hub, at which T&T hasbeen realizing a natural gas price of approximately $2.40, 13% below the budgeted level.The combined effect of higher oil prices and lower gas prices would be a net gain inrevenue for T&T. On the revenue side this should improve the budget deficit from $7.7Bto around $6.6B based solely on changes in oil and natural gas prices.

Equity Market Impact

Companies in all sectors will continue to experience difficulties to increase revenues andprofits in 2010. Private sector credit fell by 2% year-on-year to October 2009 and growthin bank lending may stay subdued in 2010. Core profits have improved on increased

interest rate spreads but higher loan provisioning has reduced overall profitability in thebanking sector. This trend could continue in the New Year.

Local conglomerates and construction companies have also experienced declines inearnings of 5-10% and little improvement is anticipated in the coming year. Demandcontinues to be weak, with average daily volumes on the TTSE of 310,000 shares in2009, 42% down from the average 536,400 shares in 2008 (excluding RBTT shares).



Early indicators are for this trend to continue in 2010 as average volumes for the first fivedays was 198,100.

In terms of market valuations, the weighted average market multiple of 11.0 times at theend of 2009 was relatively cheap to historical levels, standing 20% below the ten-year

average of 13.7 times as seen in Exhibit 1. By the end of 2010, the P/E multiples may befurther reduced to single digit levels as earnings prospects remain muted.

Continuing the strategy from the latter part of 2009 into the New Year, investors

should look out for dividend stocks as this may be the surest way to generate

returns; dividend yields for a few stocks remain higher than that of money-market

and deposit rates. Other stocks to consider would be those which are relatively

undervalued with positive earnings potential.

Exhibit 1- Historical P/E Multiples of TTSE

13.2

10.7

13.1

16.5

19.4

16.0

14.1

11.810.7 11.0

13.7

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

P / E

P/E Multiple Average

Stock Picks

While we remain bearish on the overall Jamaican market, some stocks are expected to dowell, even after further currency depreciation. Last year despite growth in net earnings,

two Jamaican stocks suffered significant declines as the Jamaican economy deteriorated.It is the view that the current cheap valuations offer upside potential in these stocks,Scotia DBG Investments and GraceKennedy.

National Commercial Bank of Jamaica

Another cross-listed Jamaican company, NCBJ was one of the best performers on theTTSE last year despite concerns about the Jamaican economy. The bank reportedearnings growth of 17.5% over 2008 and this was reflected in the share price which



gained 30% for 2009. Given the forecasted economic slowdown, Bourse projects flatearnings for NCBJ in 2010 and further depreciation of the currency would placeadditional pressure on profits.

However, based on valuations the stock is quite attractive at the current price of $1.04.

The company is trading at a trailing P/E of 3.6 times on the TTSE, at a strong discount tothe Banking sector multiple of around 10 times. NCBJ has a low market-to-book ratio of 0.89 times and one of the highest dividend yields on the market at 9.2%. Capitalappreciation and dividends make this stock one of our top recommendations for this year.

BCB Holdings

Newly listed BCB Holdings was among the top performers on the TTSE in 2009. TheBelizean economy has shown a fair amount of resilience given the current globalcircumstances and BCB’s Belizean subsidiaries may see some improvement in 2010 if economic activity picks up. Palm oil prices have risen considerably in recent months andthis should help the Group’s earnings from palm oil producer Numar in Costa Rica. The

stock remains heavily undervalued to the market with a trailing P/E of 3 times andMarket/Book ratio of 0.5 times.

National Enterprises Ltd

NEL continues to be one of a handful of companies with a high dividend payout ratio.Although the company suffered from declining energy prices in 2009, operations at NFMhas since returned to profitability. The revenue outlook for NEL is more positive as therehas been some recovery in energy prices towards the end of 2009 which should continueinto this year.

Despite the potential for a lower dividend payout, the dividend yield is expected toremain above that of deposit and money market rates, and many of the other listedcompanies. NEL is fairly valued to the market at a forward P/E of 9.7 times and dividendyield of 8.7%.

WITCO

WITCO is another stock with a consistently high dividend payout. It also has shownstrong earnings growth with a 30.5% growth rate year-on year in its latest financialresults. The company has managed to grow by increasing revenues while containingcosts.The outlook for this company remains positive, although the full impact of the TobaccoBill being implemented will be seen this year. At a P/E multiple of 10.8 times the stock isfairly valued to the market, but its stability in earnings and high dividends make itattractive. The current dividend yield of 8.5% remains among the highest on the market.

Sagicor Financial Corp SFC has continued to grow at the top-line in a challenging environment but increasingcosts have eroded bottom-line profitability. Going forward, cost containment will becritical to the company’s performance. Trading at a forward P/E multiple of 10 times



(trailing P/E of 7 times) and a market to book ratio of 1, the stock is in line with marketvaluations but shows potential growth.

On the other hand, stocks which may be considered as overvalued include Readymix,Trinidad Publishing Company and One Caribbean Media. These stocks are trading at a

premium to historical levels and although they did not experience price corrections in thelast year. At current prices the supply on offer far surpasses the low demand.

It will be another testing year for local investors but there remain a few promisingopportunities.

This report is for informational purposes only and does not constitute an offer or solicitation to buy or sell

any securities discussed herein. The information and any data contained herein have been obtained from

financial data provided to us by the issuers of the subject securities. Investors wishing to purchase any of

the securities mentioned should consult an investment adviser. Projections and estimates are those of

Bourse Securities based on current available information.

E-Mail us at [email protected] or phone 623-0415/0416/9360

bourse weekly review - january 11 2010 - 2010 outlook

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