JMMB disposes of stake in CMMB

Published: Monday October 27, 2008

Jamaica Money Market Brokers

Jamaica Money Market Brokers (JMMB) has announced that it has sold its 45 per cent stake in its Trinidad affiliate Caribbean Money Market Brokers (CMMB) to majority partner CL Financial for US$41.37M or JA$3B, following discussions for about a year and a half.

This sale effectively injects liquidity into the brokerage firm at a time when many international financial institutions are experiencing capital and liquidity problems. JMMB indicated that the cash will be used to boost its balance sheet by increasing its capital base. The Group CEO expressed the view that the additional capital during this time of uncertainty in the financial markets is important in order to give shareholders a level of confidence. The regulator, The Financial Services Commission has assured investors that JMMB and the securities industry are fundamentally sound.

The sale comes at a time when the brokerage firm is in the process of building its business to enter into commercial banking at home. If the Jamaican Central Bank signs off on its plans for a commercial bank, it would cost JMMB at minimum JA$1B in start up costs. The Group CEO also indicated that JMMB will still have a presence in Trinidad through Intercommerical Bank Limited (IBL) in which it has 50 per cent ownership. The CEO went on to say that the sale proceeds will also support the expansion of the commercial bank IBL, as well as the build-out of JMMB Dominicana, its 2005 acquisition in the Dominican Republic.

Share of Profits of Associated Companies, which comprised CMMB and its securities subsidiary, accounted for approximately 19 per cent of Pre-tax profits of JMMB at the end of the 2008 financial year (See Exhibit 1). At the current price of $0.76, shares of JMMB are trading at a forward P/E multiple of 9.3 times on projected earnings. BOURSE maintains a HOLD recommendation at this time.

Local Market Update

The international financial meltdown and the fallout of the international capital markets have rapidly become a hot topic among investors and even the non-investing public. While no one is immune to the immediate and long term effects of this international crisis, the extent of these effects varies and are unique to every country.

On the local arena, some of the local and cross listed companies have publicised minimal exposure to some of the failed international investment banks. Among them include Sagicor Financial Corporation (SFC), who in a recent statement from its Barbados headquarters said that its exposure to financially distressed companies such as Bear Stearns, Lehman Brothers and Washington Mutual was limited, and that any potential loss would be immaterial to the performance of the Group. SFC has already accounted for a loss of US$2.4M and has estimated potential further losses of US$3.3M. This represents 0.14 per cent of its total assets.

In a letter to shareholders of Guardian Holdings Limited (GHL), the Group CEO pointed out that while its foreign investments are not immune to the volatility of the world markets, in total they represent less than 2 per cent of the Group's investments. Jamaica Money Market Brokers (JMMB) indicated that the exposure of its own account investment portfolio to the collapse of the international financial sector was approximately 3 per cent. Despite the relatively insignificant exposure outlined by these companies, investor reactions were much more adverse, with SFC, GHL and JMMB share prices falling 21 per cent, 22 per cent and 22 per cent respectively.

Domestic GDP growth was recently revised downward in the Annual Budget presentation to 3.5 per cent by fiscal year end 2008, with a 5.5 per cent growth rate projected by fiscal year end 2009. Whether or not this kind of economic growth is achievable with falling world oil prices remains questionable. Even in a situation where economic growth flattens out, our local economy still remains relatively robust when compared to other Caribbean countries and the United States. Other macroeconomic indicators point to our ability to withstand the global financial instability. According to the Finance Minister of T&T, our import cover stands at 11 months, while we have experienced a decline in external debt from 41 per cent in 1994 to 6 per cent at the end of 2007. The country's external current account surplus is approximately 26 per cent of total GDP. It must be said that certain sectors such as Manufacturing may experience slower growth as trading partners such as North America and Caricom suffer from sluggish economic growth.

In spite of these market and macroeconomic factors, our local capital market has continued on a downward spiral over the last two to three months. International events and the extreme volatility of international capital markets have had a psychological effect on local investors, instilling fear and uncertainty.

Thin volumes coupled with large price declines suggest many investors are panic selling. On October 6, shares of Republic Bank Limited fell almost 10 per cent in that one day on just 3 trades totaling 365 shares. To prevent very small trade volumes from moving share prices up or down materially, the Securities and Exchange Commission has approved a rule which sets volume thresholds based on price intervals for a share price to change on the Trinidad and Tobago Stock Exchange (TTSE).

The decline in share prices over the past few months has had a negative effect on valuations. Low investor demand and the lack in investor confidence is expected to continue as long as uncertainty and volatility persists in the international financial landscape. As long as low investor confidence in the market endures and supply outstrips demand, further declines can be expected.

These declining valuations present an opportunity for local investors to come back into the market. However, the circumstances surrounding the current market and economic environment are unique. Although similarities may exist between the current situation and past periods, investors must realise that we are in uncharted territory with no precise indication of where the market is headed, both locally and internationally. Investors are advised to keep a cautious eye out for valuable buying opportunities in the local equity market.


Source: Trinidad Express Newspapers
http://www.trinidadexpress.com/index.pl/article_business?id=161393260