Wisynco Group Limited | Equity Analysis

WGL was valued using a mixture of income and market-based valuation approaches. More specifically, we used a discounted cash flow (DCF) model as well as a relative approach with respect to the price-to-earnings (P/E) multiple.

For the P/E-based valuation approach, we forecasted a forward earnings per share (EPS) of $1.36 for FY 2024. We then applied the average P/E multiple of a group of Wisynco’s peers to the forward EPS. The average P/E multiple of the group of Wisynco’s peers as at January 11, 2023, stood at 15.30x. When this multiple was applied to our forward EPS estimate, this resulted in an estimated fair value of $20.81. We also utilized WGL’s 4-year average P/E multiple (excluding an outlier year) of 16.91x. When this multiple was applied to our forward EPS estimate, this resulted in a fair value estimate of $23.00.

For the DCF model, we assumed a cost of equity of 15.18% and a terminal growth rate of 5.0%. We used the capital asset pricing model (CAPM) to estimate the cost of equity. The terminal growth rate assumed is the mid-point of the Bank of Jamaica’s inflation target range. We forecasted Wisynco’s free cash flow to equity for the next 5 years and discounted these cash flows by our cost of equity estimate to arrive at an estimated fair value of $16.03.

Averaging these estimates of fair value results in a final estimated fair value of $19.95. Compared to the closing price as at January 18, 2023 of $17.31, this represents a potential upside of 15.26%.

Wisynco performed well in FY 2022, despite the gross profit margin compression, and its Q1 2023 performance suggests that this trend is likely to continue. WGL’s overall (net) profit margin has increased, despite operating in a high inflationary environment. While the gross profit margin has contracted, Wisynco’s strong operating cost control has helped it increase its operating efficiency and offset the contraction in the gross profit margin to lead to an expansion in the net profit margin. Additionally, the Group continues to maintain low leverage which reduces the risk of distress in the event of a decline in business activity or other challenges. This also provides the flexibility to use additional debt in its capital structure as it pursues its expansion agenda in the coming periods. The Group’s ROAE increased YoY, driven mainly by the greater efficiency of its assets and expanding margins, however, the marginal decline in leverage had partially offset this rebound. On a TTM basis, the trend seems to have continued with TTM ROAE continuing to increase.

It should be noted however that over the short term (within the next year), it is expected for not just the local economy but the global economy to, at the very least, experience a slowdown in growth, which may act as a headwind to Wisynco’s financial performance in the near-term. Notwithstanding, the Group’s product offering is comprised of a range of consumer staples, the demand for which tends to be less sensitive to economic cycles. Given the Group’s portfolio of strong brands, a healthy cash balance, low leverage, rising margins and healthy ROAE, along with the potential upside relative to our estimate of fair value, we recommend investors OVERWEIGHT WGL in their portfolio