Analysts choose eight companies to watch in 2016
Local analysts say that while many companies saw stock value improve under the bull market of 2015, there are some companies which are still worth watching as they are considered undervalued.Eight companies, including some dark horses, made the cut for our analysts.
The four top picks for stocks with price improvement potential from analyst Richard Gordon, senior manager Asset Management at Proven Transition Ltd, were Sagicor, Lasco Manufacturing, AMG Packaging and National Commercial Bank.
The top picks for Devon Barrett, general manager of Victoria Mutual Wealth Management, were Pan Jamaica Investment Trust, JMMB Group, Eppley and Berger Paints.
Share price per unit on January 5 – $3.52
Lasco Manufacturing Ltd is one of the companies on the junior market that I think will continue to do well. Lasco Manufacturing is deemed to be a growth company, with an annual average Return on Equity of approximately 25 per cent over the last two years (though declining over the last two years). Against this background, earnings are expected to improve given the company’s expansion and lower oil prices, which should improve profit margins. Admittedly, although the Price to Earnings ratio is trading at 16X versus the industry average of 14.4X, I believe it is factoring in the expected growth over the medium term. Earnings could be volatile going forward, but that’s what you can expect with growth companies within these sectors.
National Commercial Bank
Share price per unit on January 5 – $40.09
I think NCB is pretty undervalued in the banking sector. I believe the company has shown its ability to grow earnings irrespective of the state of the economy. Furthermore, the investment arm is expanding its business model into other countries, going into more private equity ventures while also recently being designated as an approved financial institution by the Development Bank of Jamaica. This is likely to contribute to the earnings growth of the NCB group over the medium term.
The 30 per cent stake in Guardian Holdings should also help to bolster earnings over the medium term. With interest rates coming down and the banking arm likely to continue growing its loan portfolio while improving efficiencies, the overall group should still be able to deliver creditable performances over the medium term driven by a strong management team. With the stock trading at one of the lowest P/E multiples in the industry, I definitely believe there is room for further upward movement in the share price. At the same time, the company has demonstrated a stable dividend policy, so I believe investors could also take comfort in receiving dividends which could translate into a dividend yield above five per cent annually.
AMG Packaging & Paper Company Ltd
Share Price on January 5 – $16.00
AMG Packaging & Paper Company Ltd has been able to display improved profitability over the last five financial years despite a few blips here and there. Revenues have also grown considerably, averaging over 20 per cent over the same period. With the economic outlook improving and the company now expanding its product offering from being a leader in corrugated boxes to manufacturing toilet paper and hand towels, the company could see increased growth in revenues and profitability over the medium term.
This, however, will not come without some challenges given that the market space for this product is fairly competitive. Nevertheless, the valuation side of it appears fairly compelling. The stock is trading at a P/E of roughly 9X last year’s earnings and a P/B of 1.90X, both of which are considerably below the industry averages of 14X and 3.3X, respectively.
The company has generated an average ROE of close to 20 per cent over the last four years and the earnings growth trend is likely to increase in the near term, taking into consideration the potential improvement for profit margins given lower oil prices. Further, our 2016 forecast for net earnings suggest that the P/E of the stock would fall to approximately 5X, all other factors held constant, which would make the stock undervalued from a valuation perspective.
Share price on January 5 — $20.00
Sagicor Group Jamaica has been a consistent performer with regards to performance. Earnings have grown over the last three years on average by 15 per cent, driven primarily by the acquisition of RBC. Importantly, the dynamics of the company – particularly the acquisition of the commercial bank licence – warrants its trading closer in line with the financial services industry which has an average P/E ratio of approximately nine times relative to its current P/E of seven times. We could even see it trading at a higher P/E multiple, seeing that it is generating a higher ROE relative to its competitors and given the company’s appetite for acquisitions.
Earnings for the 2016 financial year, which is anticipated to show an improvement driven by the impact of RBC acquisition and subsequent efforts to improve efficiencies in its operations, should lead to attractive capital gains for investors.
*Analysis for Sagicor group, NCB, AMG packaging and Lasco Manufacturing provided by Richard Gordon, senior manager, asset nanagement at Proven Transition Limited.
The four top picks for Devon Barrett, General Manager of Victoria Mutual Wealth Management were Pan Jamaica Investment Trust, JMMBGL, Eppley and Berger Paints. His analysis is as follows:
Pan Jamaica Investment Trust (PJAM)
Share price January 5 – $94.00
PJAM was up only 59 per cent for the year 2015, way below the JSE Main Market’s advance of 97 per cent over the same period. Also, the company closed the year at a price to earnings (P/E) ratio of 5.94x trailing earnings versus the JSE Main Market’s average of 11.19x, despite its strong earnings growth prospects and stable cash flows. Our view is that the price of the company’s shares is constrained by the market’s view that the shares are expensive due to the high nominal price of $94.00.
We believe the significant increase in liquidity expected in the local market in February 2016 will swell asset values, allowing PJAM to benefit from its huge diversified holdings of commercial assets. The market should then afford them their true value.
JMMB Group Ltd
Share price January 5 – $10.26
JMMB was up only 44.62 per cent for the year 2015, lagging the JSE Main Market’s gain of 97 per cent. The company trades at a current P/B (price to book ratio) of 0.75x versus the financial sector average P/B of 1.36x. The stock’s under-performance last year could be attributed to volatile earnings growth evidenced by a 33 per cent decline in profits for the year ended March 31, 2015.
The company returned to strong profit growth in 2015 and we expect this growth to continue as the company executes its long-term growth plans. We expect the Caribbean expansion to show improved results for the Group in 2016 and increased liquidity in the local market to boost trading gains.
Berger Paints (BRG)
Share price January 5 — $3.19
BRG was up 84 per cent for the year 2015, close to the JSE Main Market’s advance of 97 per cent. Despite this, the company trades at a P/E of 7.62x, much lower than the market average of 11x. This could change significantly in the coming years as huge tourism construction plans are expected to result in heavy demand for paint. Additionally, the lowering of mortgage interest rates and the recent increase in the NHT benefits could help drive residential housing construction which will in turn increase demand for BRG’s paint products.
Share price January 5 — J$400.00
Boutique lending company EPLY was up only 5.26 per cent for the year 2015, significantly lagging the JSE Junior Market’s 16184 per cent advance. The company trades at a P/E of 6x trailing earnings, much lower than the JSE Junior Market average of 13x, despite ROE of 16.84 per cent .
This under-performance of the stock has been attributed to the lack of adequate float of the stock in the market and the high nominal price of the stock ($400). A 10:1 split in the stock price could make it much more attractive to the market.
*Analysis for Pan Jamaica Investment Trust, JMMBGL, Eppley, Berger Paints done by Devon Barrett, General Manager of Victoria Mutual Wealth