PanJam Investments

PanJam Investments (PJAM) suffered a decline of 46.04% to J$1.56B in total income, being their revenues, for the 9MFY22 period. This was solely attributable to the Company’s core business operation, its investment portfolio which experienced an unrealized loss of J$362.3M versus a gain of J$1.28B in the prior year, translating to a J$1.64B decrease over the period. The loss was particularly driven by the underperformance of the Company’s portfolio of liquid securities which includes primarily local equities and bonds which were pressured by weaker investor sentiment caused by higher interest rates and the expectation of more sluggish economic conditions in 2023. However, PJAM’s income generating real estate portfolio, an alternative investment that is usually uncorrelated to liquid securities markets, increased marginally by 3.43% to close at J$1.56B for 9MFY2022 period. Also, the Company’s most recent hotel operation, ROK Hotel, which opened July 2022 raked in J$255.5M over the same 9M FY22 period, which outperformed management’s expectations.

Resultantly, PJAM’s operating profit was negatively impacted, highlighted by an overall loss of J$351M for the 9MFY22 period coming from J$1.55B reported for a comparable period in the prior year. This was jointly associated with Operating Expenses, which grew considerably by 43.08% in part due to the increase in overhead costs relating to the launch of ROK Hotel coupled with the year over year 46.04% decrease in total income. Of note, Finance Costs increased 9.64% year over year to J$754M for the period as a result of debt refinancing at higher interest rates against the background of several policy interest rate hikes by the Bank of Jamaica over the period.

The share of results from associated companies saw a 24.22% decline year over year to close at J$3.08B as at 9MFY22. This line item includes companies from sectors varying from tourism and manufacturing to Business Process Outsourcing, but primarily consists of a 30.2% stake in Sagicor Group Jamaica. For perspective, Sagicor Group Jamaica reported net profit attributable to shareholders of J$10.16B for their 9MFY2022, a year over year decrease of 22.5% due to deteriorating financial market conditions which translated to a sizable erosion of fair value gains. As a result, PanJam Investments reported a 61.16% year over year decline in Net Profits attributable to shareholders close at J$1.85B.

Against this backdrop, we expect earnings to have limited upside due to pressure from the significant quantum of interest rate hikes carried out by Bank of Jamaica (BOJ) over the last year. For context, the BOJ policy rate stands at 7% as at November 2022 coming from 2% in November 2021. This is compounded by broad a softening of earnings results of several listed companies due to slowing macroeconomic conditions.

These combined factors could hamper both PJAM and Sagicor Group Jamaica’s fair value gains, constraining the upside for SJ’s and PJAM’s earnings growth potential in FY 2023. For the year, volatility was pronounced, contextualized by Sagicor Investments Jamaica’s Capital to Risk Weighted Assets ratio falling below the Financial Service Commission (FSC) early warning level of 14% for the YTD 9MFY22 period.

As it relates to PJAM’s associated companies, we expect Sagicor Group’s insurance segment to continue to grow steadily due to the group’s market leadership. Also, Sagicor Group is undergoing corporate reorganization aimed at enhancing cost efficiency. Furthermore, according to the Planning Institute of Jamaica (PIOJ), Jamaica’s tourism industry expanded by 58.2% for the January to September 2022 period relative to the prior comparable period and the industry set to outperform pre-pandemic visitor levels for the tourism season according to the Minister of Tourism. This should support the performance expected for PanJam’s tourism investments including ROK Hotel, Courtyard Marriott and Chukka Caribbean.

Nonetheless, at a price of $57.40 the company currently trades at a P/E multiple of 14.37x which is above the average peer P/E level of 11.34x, contextualized by an annualized ROE of 11.26%. For the near term, we expect EPS to be J$2.88 for the FYE23, translating to a target price of J$37.27 based a blended P/E of 12.93x which includes the 5-year historical P/E of 14.53x and the peer multiple of 11.34x. The fair value of J$37.27 implies a downside of 35.07% compared to the trading price of $57.40. Coupled with a dividend yield of 2.25%, the total projected downside is 32.82%. Based on the foregoing, PROVEN Wealth Limited recommends that investors SELL at the current trading price.

NCB Financial Group Limited Banking and Investments

The NCB Financial Group Limited (NCBFG) reported net revenues from banking and investment activities of $107.3 billion representing an increase of 9% over the prior period. The main drivers of this growth were a 21.7% increase in net interest income (NII) and a 16.2% increase in net fee and commission income year over year as at FY 2022. Net interest income contributes to 55.2% of the total revenues from the segment while fee and commission income contributes 24.3% of the total.

Interest income increased to $84.9 billion (up 13.9%) for the period while fees and commission income ended the period at $35.3 billion (up 24.8%) on the back of robust loan disbursements. These increases were however tempered by reduction in gains from the sale on foreign currency following increased interest rates in the local and global markets which resulted in lower bond prices and, by extension, fair value gains. Credit impairment losses reflected a $662 million or 19.5% reduction compared to the prior year due to a reversal of previously booked provisions stemming from an improvement in the quality of the loan portfolio on the back of the post COVID-19 pandemic economic recovery.

Insurance Activities

Net results from insurance activities ended the FY 2022 period at $42.3 billion representing an increase of 84.3% or $42.3 billion. Reinsurance on policy holders had a major impact on these results as the Guardian Holdings Limited (GHL) Group implemented a number of initiatives in its life, health and pensions (LHP) segment in Trinidad and Jamaica. Apart from this, premium income grew by 9.8% year over year to $164.7B as GHL enjoyed growth in core operating activities as business conditions improved in key markets over the period.

From this, NCBFG’s net operating income of $149.6 billion (up 23.5%) for the FY 2022 period was primarily led by insurance activities, as NCBFG has enhanced the cost efficiency of GHL over the year. This enhanced net operating income performance was however tempered by a 10.1% year over tear uptick in NCBFG’s operating expenses flowing from growth in staff cost due to redundancy payments, staff incentives and was largely influenced by above average inflation which lifted utilities over the period. Operating expenses totaled $44.4 billion for the financial year ended September 30, 2022.

As a result, NCBFG reports consolidated net profit of $39.9 billion for the year ended September 30, 2022, an increase of 98.9% or $19.8 billion over the prior year. The group’s consolidated net profit attributable to stockholders totaled $27.3 billion reflecting a $13.1 billion or 92% increase over the $14.2 billion result achieved in FY 2021.

The Board of Directors maintain the position on retaining profits and did not issue interim dividends in the period. The Company paid its last interim dividend on May 31, 2021.

With the looming concerns about the expected global economic recession predicted for 2023, we must remember that NCBFG is materially exposed to both financial markets and economic conditions which makes it vulnerable to economic shocks. For perspective the International Monetary Fund (IMF) forecasted the Caribbean’s economic growth to be 12.4% and 7.3% for 2022 and 2023 respectively. Despite the expectation that the world GDP will continue to experience slow growth amidst monetary policy tightening and labour market softening, it is however expected that inflation to moderate in 2023 as supply chains ease. This is underpinned by IMF’s inflation projection of 12.3% for 2022 and 9.6% in 2023 for the Caribbean.

There also lies the possibility that the Company’s securities portfolios could grow in 2023 with the expectation of possible interest rate hike reductions or pauses, spur some asset price recovery but this may be limited given that several market participants have not priced in the chance of a recession in the next 24 months. Importantly, we believe Guardian Holdings Limited is likely to see modest premium income growth as the Caribbean labour force remains largely underinsured and the total coverage of the market being small compared to more developed countries.

The NCBFG currently trades at a P/E of 7.53x which is below the normalized peer average of 10.68x. Based on the risks highlighted and The Group’s 3-year historical average P/E of 16.67x and within the context of its Return

on Equity (ROE) of 17.6%, we believe that a 12x P/E is a fair level for the stock. Also, based on the impact of the inflation in 2022, as well as slowdown in consequent policy rate hikes, we expect the lingering effect to carry through for FY2023 impacting earnings. We expect earnings (EPS $9.82) to fall below the current level (EPS $11.89). Using our FY 2023 EPS of $9.82, and a P/E multiple of 12x gives a fair value of $117.84 which gives an upside of 41.4% from the current price of $83.35. Based on the foregoing, PROVEN Wealth Limited recommends that investors BUY at the current trading price with a medium-term investment horizon.