The main index of the Jamaica Stock Exchange (JSE) fell as expected for the second consecutive year in 2006, and 2007 will see another year of decline. Our recommendation is for investors to hold cash and wait for bargains on sell-offs then position for the initial phase of a bull market in 2008.

2006 review

In January 2006 the following stocks were selected as top performers; the outcome is given here by the percentage gain(loss) and its place against other listed companies:

            Selection                                % Gain(Loss)                  Ranking

            First Caribbean Jamaica                        44.4%                      5

            Montego Freeport                                  6.7%                     15

            Pegasus                                               54.4%                        3

            Salada Foods                                     299.6%                       1

All the companies selected beat the main index which declined by 3.7%. As shown the number 1 spot was taken by Salada Foods after investors foolishly dumped the stock on news of plans to reorganize the company. At a price of $10.01 it was a steal, given that its book value per share was $17.75 or a price to book of 0.56. The reorganization ended costing the company $1.86 per share but the stock which traded at $22.00 at the time of the announcement in July 2005 went as low as $9.00 in early December and closed the year at $10.01.

Selection for 2007

In 2006 our selection was very narrow and this year it is worse. After careful review, we have only been able to identify three companies that we believe will provide good returns for investors, namely:

            First Caribbean Jamaica

            Pegasus

            Salada Foods

In case it was overlooked, the three are from four of those selected in 2006. The one omitted, Montego Freeport did not do well last year as it was expected that they would have sold some property in the hotel building frenzy. It should not however be written off, it still trades below its book value of $3.24 per share.

For those who are quick to point out that a stock that does well in one year will not repeat it in the following, the fact does not support that argument. Jamaica Livestock Association (JLA) was the number one performer in 2005, up 54.3% and in 2006 gained a further 85.2% at second place. Over the two years bear market it is the overall best with a combined gain of 185.7% against a decline of 10.6% for the main index.

-First Caribbean Jamaica: For the year ended October 2006 income before taxes moved from $443.2 million (excluding capital gain) to $921.6 million or by 108%. Earnings per share were however distorted by the capital injection of $1.3 billion during the second quarter when the JSE unwisely allowed the majority shareholder to solely fund the injection. That decision has only fed further uncertainty about the possible delisting by First Caribbean International Bank. Excepting for that risk, First Caribbean Jamaica aggressively grew its loan portfolio by 74.9% and is well positioned to have another good year in interest income. Amongst the financial sectors it has the second lowest price earnings ratio (p/e) of 9.56 against the average 12.4 and the lowest price to book of 1.09 compared with the average of 2.3.
 

- Pegasus: Since taking over the management of the hotel from Meridien SA in April 2002, the local managers have done a splendid job in wiping out the accumulated losses. In June 2005 it was able to pay a dividend of $0.20 after a seven years hiatus. As long as the company keeps its head above water it’s a buy- it sits on 16 acres of prime land in New Kingston with a book value of $21.03 and trades at a price to book of 0.71. For the six months ended September 2006 the company made more profit than it did for the complete financial year to March’06. And World Cup Cricket this year is a boon; already from the advanced bookings the company was able to pay down some of its long-term loans in advance and profit will more than double in this financial year.
As intimated earlier, the main attraction to Pegasus is its real estate and the development prospects of the property. Over the years there have been rumors about possible suitors but only Karl Hendrickson have so far put forth a bid in June 2002 which was soundly rejected by shareholders as inadequate. At that time the stock traded on the exchange at $2.00 per share. Other names mentioned over the period are Michael Lee Chin and Ray Chang (brother of Thalia Lyn, a director of National Commercial Bank). Remarkably, Mr. Chang is on the list of the top ten shareholders of Pegasus and has reportedly said that the local market is too thin for him to invest in. Pegasus is the only listed company in which Mr. Chang has shares and a block of 864,915 units that crossed the floor on December 28, 2006 could end up in his portfolio. The Jamaican-born Chairman of Canada’s third largest mutual fund managers, CI Funds Management is no feeler for cash.

- Salada Foods: If ever there was a success story, this is it and the directors and managers must be congratulated for the turn in fortune. Loan to Salada was part of the non-performing loan portfolio of National Commercial Bank taken over by the Financial Sector Adjustment Company Limited (FINSAC) in 1998. The loan was subsequently restructured and the accumulated unpaid interest was capitalized with a moratorium on interest payments until repayment of principal, after which outstanding interest will be repaid interest free monthly ending 2009. Understandably, the company has no incentive to retire its long-term debt and in the year ended Sep’06 cash grew by 45% and represents 47% of equity. The big question is what does the company plan to do with the cash given that it has spare capacity?

Rule number 1- eat or be eaten. Directors the world over knows that they place themselves in a tenuous position when excess cash is held. And those at Salada could soon to find out. Early last year when Lee Chin bought United General from Neville Blythe he got almost a million shares of Salada in the package. His close confidant and a director of NCB, Donovan Lewis under his various hats held close to 2.1 million units. Their combined holdings give them a 30% stake and could see them making a controlling bid. To diminish the risk of that happening the company should consider paying dividend of $1.00 this year as revenue is expected to grow by 10% over last year and earning per share should exceed $4.00.

Election in mind

The upcoming general election will not affect the performance of the market. Since 1972 the market has advanced in 6 out of 8 election years, only in 1976 and 1993 did it decline. It therefore appears reasonable to expect no change in the bear fortune should the election be called in 2007.

Source: Jamaica Stock Exchange