Wednesday, May 28, 2008

Financials drive the market

Published: Wednesday May 28, 2008

On the Jamaica Stock Exchange (JSE), financials are running the show. This is a common fact globally, where financials account for the bulk of exchange. Jamaican investors are shifting their attention from some manufacturing companies and conglomerates and placing it on financials. This comes as no surprise as the financial companies are posting outstanding earnings and as result, their stocks have piqued investor interest.

For starters, both National Commercial Bank Jamaica (JSE: NCBJ) and Scotia Group Jamaica (JSE: SGJ) wowed the market by releasing better than expected results.

NCB reported Earnings per Share (EPS) of J$1.83 for the 6M period ending March 31 which is a significant increase over the previous year when EPS was J$1.27. These results are exceptional due to the Visa Initial Public Offering which took place in March 2008. If we were to exclude this from earnings, EPS would be J$1.62 which is still a significant climb. Net Profit soared 44 per cent to J$4.5B from J$3.2B for the 6M period and 64 per cent to J$2.6B from J$1.6B for Q02 2007/2008. If we were to exclude the one off gain of J$517mm from the Visa IPO from the calculations, net profit for the 6M period would have increased 28 per cent, which is still a remarkable increase. NBCJ has a twelve month trailing EPS of J$3.25 and at current trading levels of J$23.94 the stock price is 7.37 times earnings - relatively cheap given their performance.

Scotia Group Jamaica (JSE: SGJ) also released stellar earnings results for the first six months of the financial year. The Company reported Earnings per Share of J$1.50 or J$4.6B which represents an increase of 44 per cent over the J$1.16 EPS it recorded last year. With a twelve month trailing EPS of J$2.81 and using the last traded price of J$26.01, the stock has a Price to Earnings ratio (P/E) of 9.26 times. Any P/E ratio of 10 or less for a financial company makes it cheaply priced.

Scotia DBG Investments Ltd (JSE: SDBG) was not about to be left behind. For the 6M period ended April 30, 2008, the Company's net income was J$637mm, doubling from the previous year when net income was J$319mm. EPS for the 6M period was J$1.51 compared to J$1.03 in the comparable period last year. However, we must bear in mind that during this time DBG was acquired by Scotia.

Undeniably, great earnings spark investor interest. The volumes of units traded on the Stock Exchange since the start of the year has been lead by financials, outside of Cable & Wireless (JSE: CWJA). NCBJ for one has seen 117,894,315 units trading hands since January 1, 2008. In one day of trading (May 21) the stock traded 49 million units, the highest trading volume of any stock since the start of the year.

Likewise, SGJ has traded 31,470,889 units since January 1, 2008. Immediately after the Company posted its tremendous earnings results last Friday, investors flocked heavily to the stock with over four million units being traded yesterday. There is now a situation of dwindling supply of SGJ shares on the market as buyers significantly outnumber sellers.

The chain reaction from excellent earnings to investor interest also has a parallel effect on the stock price. Investor emphasis on a stock usually results in a change in its price. Scotia's stock price has appreciated 15.6 per cent from J$23.01 at the beginning of April to J$26.01 on May 27.

NCBJ is an odd ball in this instance as its stock price does not follow the trend. Its stock price has been depressed due to heavy selling of shares by AIC (Barbados) and has not managed to break out of the J$22.00-24.00 range. Once this blows over, we expect the stock price to reflect its exceptional earnings.

Let's now compare the performance of financials with that of manufacturing companies. Berger (JSE: BRG) has traded only 3,020,541 units since January 1, 2008 and Carib Cement Co. (JSE: CCC) has traded 12,080,747 units - significantly less than NCBJ and SGJ.

Additionally, DG, Goodyear (JSE: GYR) and Berger have seen their stock prices stagnate since the start of the 2008. Jamaica Producers (JSE: JP) stock has plummeted 17.5 per cent from J$40.00 at the end of March to J$33.00 at the close of trading yesterday.

As many manufacturing companies are faced with adverse effects from economic conditions such as soaring oil, wheat and corn prices, and also confront natural disasters, Jamaican investors have limited confidence in these equities. Investors are putting their faith in financials where they feel more secure. If the global economic situation stabilises in the latter half of the year, as some analysts predict, we can expect interest in manufacturing to pick up. However, for now financials will continue to be in the limelight.

Michelle Hirst
Jamaica Observer

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