Scotia Group Jamaica Limited | Equity Analysis

To determine a fair value for SGJ, a two-stage dividend discount model and a Justified Price-to-earnings (P/E) valuation method were used.

2-Stage Dividend Discount Model (DDM)
Our 2-stage dividend discount model utilized the assumption of a payout ratio of 36.2% for 2024, which is higher than the trailing-twelve-month payout ratio of 23.6% but below the SGJ’s historical payout ratio (for reference pre-pandemic 2018 the SGJ had a payout ratio of 46.8%). As such, we assume that despite profits recovering to pre-pandemic levels, likely due to potential capital needs given other comprehensive losses seen in 2020 and 2021 as well as potential Basel 3 safeguarding, the Group will opt for a historically more conservative payout ratio in the short term before returning to their historic payout ratio in the medium term. Our final stage for the DDM therefore incorporated this estimated stable long-run payout ratio and uses a long-run fundamentally derived growth rate of 6.0%. Our estimated cost of equity which involved the averaging of two estimates came in at 13.4% which led to a one-year price target of $40.87.

Justified Price to Earnings Value (P/E)
Our dividend discount model was coupled with a Justified P/E valuation. Our estimated 1-year forward earnings for the Group was $5.69 per share and using the same cost of equity and long-run growth rate utilized in the above 2-stage DDM we arrived at a justified P/E multiple of approximately 7.19x; hence this resulted in a 1-year price target of approximately $40.92.

Fair Value
Averaging the outcome from both methodologies gave us our final 1-year price target for the stock of approximately $40.89. This represents an upside of 17.84% relative to the October 20, 2023, close price of $33.41 and represents a total return of 21.59% and therefore we recommend investors OVERWEIGHT SGJ in their portfolio. This recommendation calls for an allocation of between 5% and 10% for the stock in a diversified portfolio. Importantly, in our view, SGJ has taken less risk than other large-cap financial services companies. As such, the Company’s financial performance has been modest in recent years, but this has also worked in their favor in terms of quickly rebounding from the COVID-19 pandemic while continuing to make regular dividend payments. Against this backdrop, we think SGJ offers investors a more secure exposure to the financial sector while also providing stable dividend payments. However, the generally weak sentiment subduing financial stocks and the possibility of future profitability and dividends falling short of our expectation remains a risk to our price target.