At the start of each year we pre-select, what we believe will be, the best performing stocks on the Jamaica Stock Exchange (JSE) for the year. Usually we pick four or five companies, but in 2009 only two were identified: Pan Jam and Palace. Our research has confirmed that Caribbean Cement and Kingston Wharves will also likely outperform the market, so they are now being added to the 2009 pick-list.
Caribbean Cement
In 2005 the Government of Jamaica agreed to impose a 40% tariff on imported cement (protection) over three years in return for an undertaking by Caribbean Cement to spend US$133 million to modernize its plant. But things went horribly wrong: first the hurricane in 2005 adversely affected the company’s production, and second the release of sub-standard cement produced between February 19- 26, 2006 resulted in a very costly recall. Within the space of a month after the date of that production, the stock price fell from $8.50 on Feb 27th to $3.70 on Mar 23rd.
Since hitting $3.70 at the start of the cement crisis, the stock price has retested that level a few times, the most recent being March of this year. The stock price initially recovered from the March’06 fall by November’06 and held above $8.00 for almost two years. In the last two months of 2008 the price fell precipitously with the overall market, and with the value of the local currency, and closed the year at $3.95.
The final stage of the modernization is due for completion in the third quarter of 2009 with the commissioning of Cement Mill #5, but already the efficiency of the plant is showing in the numbers. Operating profit are as follows: 4.5% (FY 2006), 5.8% (FY 2007), 9.4% (FY 2008), and 15.5% (Q1’09). And although there has been consistent year over year decline in tonnage total revenues have even increased because price increases have more than offset the declines. More importantly, prices are rising faster than costs; the efficiency is flowing to the bottom line.
Despite the reduction in tariff on imported cement, Caribbean Cement continues to grab a bigger share (85%) of the shrinking domestic market. The Ministry of Industry and Commerce is set to rule on the renewal of tariff on imported cement in September; regardless of the decision by the Minister, the ball is solely under the control of CCC. Re-imposition of the tariff means less competition and its removal opens the possibility of a price war which CCC is fully capable of fighting to its advantage.
Earnings per share in 2009 are projected at $1.00 based on the fact that in Q1’09 the company earned $0.15 per share after suffering a foreign exchange loss of $199 million ($213m loss FY 2008) shaving off $0.17 per share from net earnings; no further devaluation is expected for the rest of this year. At a PE of 10, and net book value at $4.13 we set the target price at $10.00 by the end of this year. Tip- if EPS for Q2’09 comes in over $0.30 as we expect the stock price will take-off from there. We are surprised that the stock is currently trading at $4.39.
Kingston Wharves
Two significant capital expenditure projects were completed in early 2008: the redevelopment of Berths 8 & 9, and the central processing facility at Ashenheim Road. Although the timing of those capital expenditure programs appeared to be bad, it is proving to be a boon to the company, as the drop in tonnage handled at the ports is being compensated for by improved efficiency.
The gross margin has held over 45% in the last three financial years, and has edged up to 49% in Q1’09. The greatest threat to profitability is losses arising from slippage of the local currency against the US dollar. The earnings per share for the following selected periods are:
Q1’09 Q1’08 FY 2008 FY 2007 FY 2006
EPS as reported (0.12) 0.11 0.15 0.32 0.40
EPS adjusted for
‘exchange losses 0.10 0.11 0.41 0.40 0.43
Ascribing a PE of 10 to the average adjusted earnings of the last three years of $0.41 will set the target price at $4.10. We are quite comfortable here given that the net book value in Q1’09 is $6.67.
Montego Freeport
The tendency of Freeport to pay dividend and or capital distribution makes us reluctant to set year-end target price on the stock. The last sale price on June 26 was $2.30 which is a bargain considering that the net book value at Q1’09 is $3.47. Cash per share alone is $1.75 and we expect a distribution (dividend) of about $0.80 later this year.
Source: Jamaica Stock Exchange
