bourse weekly review - 10 january, 2011 - 2011 outlook

8/8/2019 Bourse Weekly Review - 10 January, 2011 - 2011 Outlook

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BOURSE SECURITIES LIMITEDWeekly Market Review

January 10th, 2011

Dividend Stocks in 2011

The year 2010 was one for dividend stocks as local investors gravitated towards higheryielding instruments in the wake of the low interest rate environment. Investors shouldnot expect any significant turnaround in the economy in the year ahead. Corporateearnings could continue to feel the pinch in 2011 as economic activity remains slow andconsumer spending tightens. In addition to this, investors lack of confidence in themarket could limit investment opportunities in the stock market for 2011. Bourseprojects the TT Composite Index to decline 5 to 10% this year. Despite this, there arestill a handful of equities with positive prospects this year.

Economic Outlook

The economic environment in 2011 may be a challenging one for consumers andbusinesses alike. The weak credit demand combined with high food inflation and lowinterest rates in 2010 may continue to haunt investors in this coming year. According to alatest Central Bank report, private sector credit fell by 2.7% in the twelve months toSeptember 2010 with consumer lending dipping 0.4%, while business lending was down6.8%. The relatively subdued demand for credit combined with large fiscal injections haskept liquidity quite buoyant. Excess liquidity in the system is around $1.4B. For 2011,Bourse expects liquidity to remain high initially, with gradual absorption as state

borrowing increases. Interest rates are expected to remain low in the coming year. Reporates are expected to be between 3-4%, while TTD Mutual Fund interest rates shouldremain in the range of 2-3%. In 2011, the cycle of stagnant GDP growth should continue.Driven by a weakened construction sector, the unemployment rate continued to rise in2010. The latest official statistics show that the unemployment rate was 6.7% in the firstquarter of 2010, the highest since June 2007.The weak prospects of market activity andthe general slowdown in the economy limit the chances of improvement in employment.

Equity Market Impact

Given the subdued domestic economic activity ahead, companies across the range ofsectors, from banking to manufacturing, will continue to be confronted with challenges ingrowing both revenue and net profits.

Local conglomerates and construction companies should continue to feel the pinch in thecoming year. In 2010, the local construction industry remained relatively inactive. Therecent change in Government has presented few stimulus measures that can boosteconomic growth.


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If early trading activities on the local equity market are an indication of things to come,investors can expect another year of low volumes and values as demand remains weak.

In terms of market valuations, the weighted average market multiple of 13.5 times at theend of 2010 is in line with the ten-year average of 13.6 times as seen in Exhibit 1.However, when compared to the last three years market valuations in 2010 wasexpensive.

Continuing the strategy of 2010, investors should continue to keep a close eye on the

dividend stocks as this may be a positive way to generate returns. Dividend yields

for a few stocks continue to be higher than that of money-market and deposit rates.

It should be noted that for some stocks there exist the potential for capital

appreciation, despite the muted outlook and challenges ahead. Other stocks to

consider would be those which are relatively undervalued with positive earnings

potential.


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Stock Picks

National Commercial Bank of Jamaica (NCBJ)

NCBJ was one of the best performing stock of the cross-listed Jamaican companies on

the TTSE in 2010. NCBJ must be commended for the growth in Net Interest Income inthe wake of the Jamaica Debt Exchange (JDX) and lower interest rate environment.NCBJs Risked-Based Capital ratio remains relatively healthy at 16.5%. The bankreported earnings growth of 8.17% in 2010 and this was reflected in the share price whichgained 40.1% for 2010. Going forward, NCBJ should be able to maintain earnings in theNew Year.

Based on valuations the stock is quite attractive at the current price of $1.46. Thecompany is trading at a trailing P/E of 4.4 times on the TTSE, at a discount to its fiveyear P/E average of 5.9 times. NCBJ has a market-to-book ratio of 1.0times.Traditionally NCBJ has had a high dividend payout ratio of around 30%

contributing to a healthy dividend yield. The potential for capital appreciation anddividend yield make this stock one of our top recommendations for this year.

National Enterprises Ltd (NEL)

NEL remains one of the attractive dividend yielding stocks, with a dividend yield ofaround 6%. Although the company suffered from declining energy prices in 2009, in thelast few months commodity prices have picked and this can be reflected in theimprovement in its share of profits in 2010. In addition, operations at NFM have returnedto profitability. In the second half of the financial year, Ammonia prices have jumped16% over the average prices in the first half.

The dividend yield of NEL is expected to remain above that of deposit and money marketrates, and many of the other listed companies. NEL is trading at relatively cheapvaluations to the market, at a forward P/E of 9.3 times and dividend yield of 6.0%.

Prestige Holding Ltd (PHL)

PHLs T&T operations should continue to outperform its provincial counterparts.Regionally, the Group expects performance of its operations in Barbados to improve aftercompletion of construction at the Marriot Hotel. PHL may continue to achieve growth inits profits, as it appears to have cleaned-up its major unprofitable business units andoutlets, with the most recent closure of the Long John Silvers business unit.

At the current price of $4.55, the stock is trading at a forward P/E multiple of 9.1 timesbased on earnings from continuing operations, which is relatively cheap when comparedto its 10-year average of 15.7 times. The dividend yield of almost 4% is also attractive.


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Unilever Caribbean Ltd (UCL)

UCL was able to improve on the efficiency of its operations in 2010 in the face of aslowdown in top line growth. EPS was up 25% at the end September 2010, while revenuegrew a mere 3%. In the New Year the company may be challenged to grow earnings at

current pace but it should be able to outperform many other listed companies.

Going forward, its top line revenue may continue to be challenged due to the sluggisheconomic conditions ahead.UCL could expect marginal, if any, sales growth if consumerschange their preference towards more economical brands of home and personal careproducts.

Over the years, UCL has been an attractive investment because of the high dividendyield. Given the conditions of the market ahead, investors may choose to keep stocks thatoffer a reasonable dividend payment. In the last three years, the Group dividend payoutaveraged 66.0% and dividend yield has averaged 5%.

At the current price of $22.55, UCL is trading at a trailing multiple of 12.3 times at adiscount to its 5-year average of 13.7 times. Taking into consideration the fair valuation,a dividend yield of approximately 5% as well as the potential of capital appreciation,makes this stock one of Bourses top picks for 2011.

Guardian Holdings Ltd (GHL)

The recent transaction between GHL and the IFC should strengthen the companys abilityto execute its strategic expansion plans as the Group benefited from a lower debt tocapital ratio stemming from the transaction. Cash and Cash equivalents amount for 8.8%of the total Assets of the Group. The economic downturn over the last two years andcontinued uncertainty in the next year should provide attractive investment opportunitiesfor the cash rich company.

From a valuation standpoint, at a current price of $13.00, GHL is trading at a market-to-book of 1.03 times, comparatively favorable with its 5-year average of 1.3 times. Theinvestment opportunities that lie ahead for GHL combined with the potential of capitalappreciation and a fair dividend yield of around 3% make GHL one of the stock picks for2011.

This report is for informational purposes only and does not constitute an offer or solicitation to buy or sell

any securities discussed herein. The information and any data contained herein have been obtained from

financial data provided to us by the issuers of the subject securities. Investors wishing to purchase any of

the securities mentioned should consult an investment adviser. Projections and estimates are those of

Bourse Securities based on current available information.E-Mail us at [email protected] or phone 623-0415/0416/9360

bourse weekly review - 10 january, 2011 - 2011 outlook

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