BOURSE SECURITIES LIMITED
31st March, 2020
GKC Flat, JMMB Advances
This week, we at Bourse review the financial performance of GraceKennedy Limited (GKC) and JMMB Group Limited (JMMBGL). GKC delivered lower earnings due to the incurrence of expenses associated with IAS 19 and the implementation of IFRS 16, as well as the non-recurrence of extraordinary gains in 2018. JMMBGL experienced growth across all operating segments.
As COVID-19 continues to spread, Jamaica and the wider Caribbean region will experience the negative health and economic impacts of this crippling pandemic. The Bank of Jamaica (BOJ) has acted to pump liquidity into the system through a plan to buyback fixed and variable rate instruments issued by the Government of Jamaica. Additionally, the Government of Jamaica (GOJ) has implemented a plan to provide J$5.9B (~TT$300M) in relief to workers adversely affected by the economic impact of the virus. This week, we will examine the performance of the aforementioned companies and their outlooks in the present climate.
JMMB Group Limited
JMMB Group Limited (JMMBGL) reported Earnings per Share (EPS) of TT$0.12 for the nine months ended 31st December 2019, a 29.7% improvement over the prior comparable period.
Net Interest Income for the period rose 5.2% to TT$350.5M from TT$333.2M, while, Operating Revenue Net of Interest Expense climbed 26.3% (TT$181.0M) to $868.2M. The Group recorded an 18.2% increase to Operating Expenses and a TT$1.8M decline to Other Income. Nevertheless, JMMBGL was able to record a 41.6% increase to Profit Before Tax amounting to TT$289.0M as compared to TT$204.1M recorded last period. Taxation Expenses incurred moved from TT$53.4M in 9M 2019 to TT$89.3M in 9M 2020. Profit for the Period improved 32.6% (TT$49.2M) YoY to stand at TT$199.8M. Overall, Net Profit Attributable to Equity Holders rose 32.1% to record a value of TT$195.9M for FY 2019.
Outlook
Over the past three years JMMBGL has been able to record constant growth to its Operating Revenue, reporting an average growth rate of 19.8%. All four segments responsible for the Group’s revenue generation have improved in 9M 2020. Net Interest Income continues to be the primary contributor of Operating Revenue, accounting for 40% of overall value, while Gains on Securities Trading stands as the second largest contributor at 32%.
COVID-19 is expected to have a profound impact on the Jamaican economy, curbing tourism and non-tourism related activity. An estimated 19.7% of Jamaica’s total Gross Domestic Product (GDP) is attributed to tourist activity, a figure which increases when considering related services. A similar story unfolds in the Dominican Republic, another of JMMBGL’s key geographic jurisdictions. A prolonged slowdown in activity from border closures and travel restrictions could impact everything from loan quality to asset valuations, which could negatively impact performance.
JMMBGL has also expanded its operations to include insurance, pension and asset management services through the acquisition of a 22.5% stake in Sagicor Financial Company Limited, which is also heavily based in the Caribbean region.
The Group has expanded its Profit Before Taxation (PBT) on a consistent basis, driven by its strategy of growth and diversification. In the last three years JMMBGL’s PBT has grown 68%, while the Group has also managed to strengthen profit margins with its PBT Margin moving from 29.7% in 9M 2019 to 33.3% in 9M 2020.
However, with the ongoing effect of the novel coronavirus across international markets and economies, JMMBGL could experience an adverse impact to its growth trajectory in coming periods.
The Bourse View
At a current price of $1.99, JMMBGL trades at a trailing P/E of 14.1 times, higher than the Non-Banking Finance sector average of 13.3 times and offers a trailing dividend yield of 1.2%, well below the sector average of 2.3%. On the basis of above-average valuations, the expected adverse impact of COVID-19 on its operations and an evolving capital structure, Bourse maintains a NEUTRAL rating on JMMBGL.
GraceKennedy Limited (GKC)
GraceKennedy Limited (GKC) reported Diluted Earnings per Share (EPS) of TT$0.23 for the financial year (FY) ended December 31st 2019, down 10.5% from the EPS of TT$0.25 recorded in the previous comparable period.
Total Revenue advanced 5.7%, from TT$4.9B in FY 2018 to TT$5.1B in FY 2019. The Group incurred a 5.2% year on year (YoY) increase to Total Expenses, which moved to TT$5.0B from a prior TT$4.7B. Other Income for the period stood at TT$125.8M, 27.7% down from the previous year. Resultantly, Profit from Operations declined 6.3%. The Group recorded Profit Before Tax of TT$305.8M, a 12% reduction from FY 2018. Net Profit for the year moved to TT$254.5M from a previous TT$281.6M, a 9.6% YoY decline. Overall, Net Profit Attributable to Equity Holders fell 10.4% from TT$250.0M to TT$223.9M for FY 2019.
Outlook
In 2019, GKC focused its time and resources in improving their brand and employing digital and innovative solutions for customers, to broaden their market share. The Food Trading segment contributed to 79.2% of Total Revenue with the domestic market being the main contributor. Internationally, both Grace and La Fe brands contributed 16% and 4% to the Group’s Gross Profits in the USA. Financial Services, added to improved revenue, with Insurance Services being the most dominant contributor in that segment.
Like most other companies, GKC’s operations are likely to be impacted by a slowdown in economic and consumer activity at the global level. Although the Food Trading segment accounts for 79% of Total Revenue, it accounts for just 32% of the Group’s Profit Before Tax. Money Services, powered by remittances from Jamaicans living abroad, accounts for over 50% of Group PBT. Overall, remittances as a % of Jamaican GDP is estimated to be 16%. As the world slows down, it is likely that volume and value of remittances could slow, affecting not just the bottom line of GKC’s money services segment, but the spending power of consumers in the wider Jamaican economy.
At its Investor Briefing held on the 4th March GKC, acknowledged the potential impact of the novel coronavirus and stated measures put in place to safeguard the operations of the company. The company stated that it has two months’ supply of finished goods and raw materials, and plans to improve operational efficiency to counteract effects on revenue. The company also noted plans to source materials from alternative suppliers in unaffected regions, a measure which given the progression of the virus may be difficult to uphold.
The Bourse View
At a current price of $2.75, GKC trades at a Trailing Price to Earnings ratio of 12.4 times, higher than the Conglomerate’s sector average of 11.9 times. The stock also offers a Trailing Dividend Yield of 2.9%, below the sector average of 3.5%. On the basis of US dollar dividend payments, but tempered by a low trailing dividend yield and a likely meaningful adverse impact of COVID-19 on the Group’s operations, Bourse maintains a NEUTRAL rating on GKC.
For more information on these and other investment themes, please contact Bourse Securities Limited, at 226-8773 or email us at invest@boursefinancial.com.
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