Conglomerate Sector Performance Drivers

• • Increased Economic Activity
  • Easing Cost Pressures
  • Acquisition Activity

 

• Ansa McAL Limited: Target Price – $60.00, Rating: OVERWEIGHT

 

• GraceKennedy Limited: Target Price – $5.25, Rating: OVERWEIGHT

 

• Massy Holdings Limited: Target Price – $5.05, Rating: OVERWEIGHT

 

This week, we at Bourse consider the outlook for the Conglomerate Sector of the Trinidad & Tobago Stock Exchange (TTSE), the second largest sector by market capitalization accounting for approximately 17.4% of the TTSE’s total market value. The Conglomerate sector market capitalization fell 16.7% in 2022, as accelerating price pressures and increasing uncertainty weighed on investor sentiment. Could fortunes reverse for the sector’s constituents in 2023? We discuss below.   

 Conglomerate Value to Grow in 2023?

The Conglomerate Sector accounts for roughly 18% of total index value on the Trinidad and Tobago Stock Exchange (TTSE). Stocks in the sector recorded lower price movements in 2022 with Ansa McAL Limited (AMCL), Massy Holdings Limited (MASSY) and GraceKennedy Limited (GKC) declining 13.4%, 26.4% and 14.3% respectively.

Data from the Trinidad and Tobago Stock Exchange (TTSE) shows that the value (market capitalization) of the Conglomerate sector contracted 16.7% from $26.9B in 2021 to $22.4B at the end of 2022. The Conglomerate sector – based on Bourse’s internal forecasts – is expected to grow in market capitalization by 14.9% to $25.8B in 2023.

 Sector Constituents all Positive

Ansa McAl Limited (AMCL)’s is the ultimate parent company of a diversified group of companies engaged in trading and distribution, construction, manufacturing, packaging and brewing, banking and insurance and the media, retail and service industries. AMCL and its consolidated subsidiaries (“the Group”) operate in Trinidad and Tobago, the wider Caribbean region and the United States of America. Its largest operating segment by Profit Before Tax is Manufacturing, Packaging & Brewing. The Caribbean’s largest conglomerate was significantly impacted by its subsidiary, Ansa Merchant Bank Limited (AMBL) in 2022 due to volatile global financial markets reflected in its accounting treatment of financial assets. The forecast for FY2023 is expected to be more positive, underpinned by (i) recovery of economic activity, (ii) modest revenue growth and (iii) a stabilization across financial markets. 

MASSY Holdings Limited (MASSY) is engaged in trading, service industries and finance in Trinidad and Tobago, the wider Caribbean region and Colombia. The Company has primary listings on the Trinidad and Tobago and Jamaica Stock Exchange. Despite its successful cross-listing on the Jamaican Stock Exchange (JSE) and 20:1 stock split during the course of 2022, as well as commendable earnings growth, MASSY struggled to find momentum from a stock price perspective. The Group continues its strategic realignment to its core portfolios of integrated retail, and gas products, evidenced by a number of pending and completed acquisitions. Its successful divestments unlocked capital to optimally reinvest its strategic priorities and pursue growth plans. Organic revenue growth, coupled with stabilization of operating margins form the basis for positive earnings growth in 2023.

Earnings should be further bolstered in FY2023 by MASSY’s acquisition activities. The Group announced three acquisitions in Q42022: Rowe’s IGA Supermarkets Limited, Air Liquide Trinidad and Tobago Limited and I.G.L. (St Lucia) IBC Limited which according to the Group will represent an increase in the Group’s PBT of approximately 4.0%, 3.0% and 7.1% respectively- suggesting a combined increase of 14.1%. MASSY has indicated its focus on achieving a more optimal capital structure in an effort to free up equity capital to fund future acquisitions, which could be accretive to earnings in 2023.

Grace Kennedy Limited (GKC) is organized into two divisions namely, GK Foods and GK Financial Group. The GK Foods division comprises all the food related companies while the GK Financial Group division comprises all the financial services companies in the Group. The Group reports its results under four segments; Food Trading, Banking and Investments, Insurance and Money Services.

The Group has increased its emphasis on cost containment initiatives while at the same time implementing strategies to grow revenues and profits sustainably. The anticipated cooling of inflationary pressures and distribution costs could lead to margin stabilization in 2023 – providing a boost particularly to its Food Trading segment. Financial market stabilization should also bode well for its Banking and Investments and Insurance segments.

Like MASSY, acquisition activity has been a key part of GKC’s growth strategy in recent years. This approach is expected to continue with, GKC executing on inorganic growth opportunities as they arise.

The Conglomerate Sector’s performance will depend on the health of regional economies, the path of inflation and the ease of doing business (supply chains). The impact of increased economic activity and accretive earnings from recent acquisitions is expected to offset the uncertainty of inflationary pressures, pushing the momentum of stocks within the sector.

Sector Outlook Brightens

From a macroeconomic perspective, all sector constituents could be impacted by key factors including:

• Increased economic activity– Trinidad and Tobago’s economy is poised to benefit from the commencement of several upstream projects, which is expected to have a knock-on effect to the non-energy sector in the form of increased economic activity and consumer demand. At the wider Caribbean level, economic activity is expected to improve as COVID-19 concerns continue to diminish.
• Cooling Inflationary Pressures – the latest US inflationary report showed that prices rose 6.5% in December. This was the smallest increase in more than a year, marking the sixth month in a row of the rate falling. Locally, the Central Bank of Trinidad & Tobago’s latest inflation update showed that headline, core and food inflation slowed in September for the first time since June. Additionally, the Global Container Freight Index showed that shipping prices declined significantly from a peak of $11,109 on September 10^th 2021 to $2,178 on January 20^th 2023, an 80.4% decline. These factors could translate into higher margins and earnings as operating costs subside.
• Stabilization of Financial Markets – The MSCI World ETF, an index that tracks equities in developed markets, has climbed 6.9% year to date. This may signal a stabilization of financial markets globally following a moderate decline in inflationary pressures. Moreover, a recovery in financial markets should positively impact the investment portfolios and earnings of conglomerates.

Are Conglomerates Undervalued?

The Conglomerate Sector is forecast to grow 15.0% in 2023, from a market capitalization of $22.4B to $25.8B. The forecast was developed using various inputs to estimate earnings for each constituent member of the sector, combined with assumptions of various valuation multiples. Based on our analysis, constituents of the conglomerate sector are forecast to generate price-based returns ranging from +12% to +17%.

Accordingly, Ansa McAL (AMCL) has been upgraded from ‘Marketweight’ to ‘Overweight’, with a price target of $60.00. If realized, this would correspond to 1-year price return of 16.5% from its $51.50 2022 closing price.

Additionally, GraceKennedy Limited (GKC) was upgraded to “Overweight” from “Marketweight” with a price target of $5.25, a 16.8% increase from its 2022 closing price of $4.49. Massy Holdings Limited was upgraded from “Marketweight” to “Overweight” with a target price of $5.05, representing a projected 12.4% increase from its 2022 closing price of $4.50.

 

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