INGRAM
LUKEWARM CORPORATE results and sustained pressure in the currency market joined forces to pull on equities prices this week.
Although positive results were reported by the likes of Goodyear and Carreras in the September quarter, the heavyweights such as PCFS, LOJ, JMMB, DB&G and RJR all endured challenging economic conditions in the period.
COMPANY SPOTLIGHT: LIFE OF JAMAICA
For the quarter ended September 2005, Life of Jamaica reported $446.5 million in net profits compared to $296 million during the same quarter last year. Despite the positive absolute change in profits during the quarter, real shareholder value (earnings per share) actually fell from $0.12 to $0.11 because the growth in shares exceeded the earnings generated from the additional business brought in. That is, some 1.17 billion shares were issued between December 2004 and September 2005, approximately 1.16 million of which were issued to satisfy its acquisition of the insurance portfolio of First Jamaica Investments (FJI) as well as and additional 37 per cent equity stake in PCFS.
Notwithstanding the decline in earnings per share in the period, this deal with FJI will form a major linchpin in the future progress of LOJ. Importantly, the acquisition of First Jamaica's insurance business effectively doubled LOJ's interest in group life, health and pension management operations thereby cementing it as the largest, most profitable local life insurance provider. This will further sharpen LOJ's ability to extract operating synergies and efficiencies while improving its distribution network. Likewise, 51 per cent equity-interest in a major banking entity such as Pan Caribbean Financial Services is likely to create additional business value over coming periods. These primary expectations were highlighted in the results to date as LOJ reported $1.6 billion in net profits for the nine months to September 2005, 72 per cent better than the $930 recorded a year earlier. Revenues surged to $8.6 billion, up from $5.3 billion in the same period last year.
Accompanying this transaction, however, is the risk arising from the fact that LOJ is now more exposed to the potential issues that could befall PCFS. This was forcefully brought home in the September quarter when profits at PCFS declined by 24 per cent, which prompted a contraction in LOJ's profits from $788.4 million in the second quarter to $446.5 million in the third quarter. Moreover, with the inclusion of PCFS, a greater portion of LOJ's business is vulnerable to economic developments affecting interest rates, exchange rates and other investment prices. Thus, with only muted returns from local investment options the imbalance between the rate of growth in profits relative the shares outstanding could widen over the short-term.
Insurance operations have also been challenged by a doubling of taxation on premiums and investment income. And, weakening local income will reduce the incentive to purchase insurance products, ironically! Despite this, LOJ does have an enviable tradition of product development, which should continue to refresh revenues from the insurance operations. Of course, there is always the option to grow by another acquisition. To this end, LOJ is looking to acquire Cayman General Insurance Company Ltd (CGI). From a market perspective, LOJ is quite defensive and management tends to pay regular dividends.
RECOMMENDATIONS
Given the depressed market conditions, investors are encouraged to remember that stocks are long-term investment options. Among the better long-term options currently available are LOJ, Carreras, BNS, NCBJ, RJR, and CWJA. Short term gains could surface from CRTS, KW, Seprod, D&G, and Goodyear. Please contact DB&G's Stockbrokerage department at 1-888-CALL DBG for further information on these and other stocks or visit for detailed analyses.
Disclaimer: All information contained in this article has been obtained from sources that DB&G believes to be accurate and reliable. All opinions and estimates constitute the Author's judgement as of the date of the article. No warranty as to the accuracy, timeliness or completeness of this article and as to the opinions based thereon is given or made by DB&G. DB&G and/or its employees or directors and/or any associated person may have an interest in, or interest in the acquisition or disposal of, the securities or class of securities mentioned herein. Call 1-888- CALL DBG if in doubt about the content of this article. Decisions based on information contained in this article are your sole responsibility.
