Valuation & Outlook
To value the company, a P/E valuation approach was used. We firstly forecasted the company’s forward earnings and arrived at an EPS of approximately J$0.31 for the financial year ending April 2023. Key assumptions used in this forecast include a continuation of the pace of revenue growth that the company has seen in recent quarters that have not been significantly affected by COVID-19 lockdowns, particularly as the economy reopens and restriction measures ease leading to less loss of work time as was the case for the company’s latest Q2 2022. These positives were, however, somewhat tempered due to the potential demand dampening effect of the recent interest rate increases spurred by continued inflationary pressures. We’ve also considered continued volatility in lumber prices which we factored into our forecast. Our expected 2023 EPS of J$0.31 compares to the current trailing 12-month earnings per share of J$0.26
For the comparable companies, we’ve used Junior Market companies whose main business line revolved around distribution. Utilizing these companies, we arrived at an average PE multiple of 16.80x. Applying this multiple to the forecasted EPS we arrive at a fair value estimate of J$5.14.
To supplement this valuation, a Justified Book Value metric was also utilized. To this end, we forecasted the Company’s sustainable long-run growth rate and arrived at a rate of 6.30%. To put that into perspective, in nominal terms the Jamaican economy has grown at an average rate of 7.37% over the 2007-2019 period while the construction industry, in particular, grew by an average of 7.57% over this same period. Given these comparisons, we believe 6.30% is a reasonable estimate. We then utilized a cost of equity of approximately 12%, developed from a build-up method; determined by adjusting the implied cost of funding from the adjusted for tenor and the recent rise in interest rates.
A forecasted ROE of 31.3% (this compares to the ROE of 56.7% as of the latest 2021 financial statement) was also utilized. From these inputs, we arrived at a justified PB ratio of 4.53x. When we utilize this ratio with a forecasted BVPS of J$0.88, we arrive at a fair value of J$3.96 as our base case scenario. Below we also present a sensitivity analysis of the Justified PB valuation based on different assumptions for the cost of equity and growth. The highlighted area represents likely valuations based on what we believe are realistic ranges for long-run growth and cost of equity:
As at March 8, 2022
Full Equity Analysis
