Analyst Insights
Jamaica’s Manufacturing and Distribution (M&D) sector has felt and, in some ways, continues to feel the impact of the COVID-19 pandemic. While some companies have shown resilience during the pandemic, others have already begun to recover, indicated by the JSE Manufacturing and Distribution Index, which enables investors to invest in all the manufacturing and distribution companies that are listed on both the Main and Junior Markets. As at June 11, 2021, the M&D index value was 104.92, an increase above its pre-covid level of 14%. From some of our main market participants, we observe that their twelve-month-trailing (TTM) earnings have surpassed their TTM pre-covid levels. These companies have also seen a slight increase in their Price-to-Earnings (PE) ratio over their pre-covid levels, indicating that investor confidence in the trajectory of these companies has strengthened.
However, we observe that both Berger Paints and Seprod’s PE ratios have increased exponentially from their pre covid levels, by approximately 304% and 450%, respectively. This is in part due to a significant decline in the TTM earnings for both Berger (-64%) and Seprod (-95%) when compared to their pre-covid earnings.
Notably, for the first quarter ended March 31, 2021, Berger recorded an increase in revenues of 18% over the corresponding period of the prior year. Their gross profit margin improved by 3% to end the period at 41%, operating profit margins also increased by 1% to end the period at 24% and finally Berger’s profits increased from a loss of J$41 million to a profit of J$8.2 million. These improvements in the company’s profitability ratio are on the back of increasing overall revenues showcasing a strong fundamental push to the path of recovery.
For the three (3) months ended 31 March 2021, the Seprod Group achieved revenues of J$9.58 billion, an increase of J$443 million or 5% over the corresponding period in 2020. Seprod’s gross profit margin declined by 2% to end the period at 28%, this was due to the Group experiencing a higher cost of goods sold (COGS) as a result of the ongoing threat of COVID-19. Specifically, COGS increased by 8% to end the period at J$6.8 billion. Seprod’s Operating profit margin also declined by 2% to end the period at 10%. The Group’s net profit of J$546 million decreased by J$86 million or 14% versus the corresponding period in 2020. The decreased profitability was primarily driven by an increase in their operating costs and by supply chain challenges.
The current environment remains uncertain due to the sustained effects of the COVID-19 pandemic. However, with the global vaccination drive and select world markets slowly re-opening for business, there is cautious optimism for both these companies.
Year to date, the Main Market Index increased by 7.79% while the Junior Market improved by 25.89%. Though the Main Market underperformed relative to the Junior market, the driver of this underperformance has largely been the financial sector. This is made very clear once we look at several large cap non-financial companies that have performed well despite the pandemic including Grace Kennedy, Seprod, Caribbean Cement and Jamaica Broilers.
The BoJ has highlighted its expectation for the Jamaican economy to expand in the second half of 2021, supported by government infrastructure projects and normalization in the mining sector following the closure of a large production plant in 2019. This infrastructure spend will have positive tailwinds for Caribbean Cement Company, which we’ve highlighted in our most recent equity analysis of the stock.
Additionally, while Jamaica’s vaccination efforts have been below optimal, the US and the UK are well underway with vaccine administration which bodes well for our local tourism and remittance industries, both of which are major sources of income for the economy. With that said, the trajectory of the local economy is improving which should act as a tailwind for the Manufacturing & Distribution industry. we expect manufacturers to perform well, building on cost efficiencies developed and overseas consumer markets etched out during the pandemic. Additionally, segments of the manufacturing space that had a more muted performance throughout 2020 on the back of the closure of Tourism, Entertainment and Schools, are expected to rebound with these industries. Wisynco and Jamaica Producers are two such examples of companies that would benefit tremendously from an upturn in the economy. Altogether, we believe the local stock market remains poised for growth. However, the nature of our market is such that investors are reactive as opposed to proactive which presents an opportunity for investors willing to invest before the rebound materializes.
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Written by Jonathan Cook, Investment Strategist |
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