LIME offered highest returns to investors last year

BY STEVEN JACKSON Business reporter jacksons@jamaicaobserver.com

Friday, January 09, 2015    

Loss-making telecom LIME offered the highest returns to investors in 2014 based on its 200 per cent price gain on the Jamaica Stock Exchange (JSE).

But some stock analysts are unsure of the precise impact on LIME’s valuation given the announced acquisition by its parent, Cable and Wireless Communications Plc, of Columbus Communications, the parent company of Flow.

“We credit this performance to the steadily improving commercial story that we are developing at LIME, characterised by solid market share and revenue improvements across most lines of business and a continued focus on ensuring our operating model is optimally structured to meet the demands of our constantly changing, extremely competitive environment,” said LIME Chief Executive Officer Garfield Sinclair in an e-mailed response to Jamaica Observer queries.

“When the proposed C&W Communications (CWC)/Columbus merger is also considered, investors would obviously anticipate additional future growth,” added Sinclair, who sits on the boards of the three top-earning stocks of 2014.

Concurrently, the Fayval Williams-led Kingston Properties Ltd, of which Sinclair is chairman, offered the second highest gains on the JSE, up 66 per cent between January and December. Sinclair also sits on the board of the Chris Williams-led Proven Investments, which gained 46 per cent in 2014.

But LIME’s share price increased at a greater pace, starting 2014 at $0.16 and closing at $0.48. Even without the announcement, LIME led the market by mid-year, gaining 103 per cent at the end of June before doubling that gain with the announcement.

In November, CWC announced that it would acquire Columbus Communications for US$3 billion pending regulatory approval.

“LIME Jamaica’s stock price has reacted positively during 2014,” Ryan Strachan, fund manager at Stocks and Securities Limited (SSL), noted in an e-mailed response to Caribbean Business Report queries. “However, LIME is not on our buy list, and it has traded erratically between 17 cents and 70 cents during the 2014 calendar year. Also, we are [un]sure if and what the financial benefit will be from the acquisition, if any, to the local company. Lastly, LIME continues to make losses, and the parent company has to continue to make guarantees re going concern.”

Wade Mars, assistant vice-president, asset management at Mayberry Investments Limited, also acknowledges that the acquisition benefits remain unclear.

“It’s a little strange — the rationale that people would use to buy… However, what I can say is that the volumes traded and the different number of purchasers over a time period are not one-off. [There is] genuine demand out there,” Mars reasoned. “For that acquisition to benefit Jamaica there has to be some reorganisation of the group structure itself. And you really don’t know how it’s going to end up, if and when they do that reorganisation.”

In December, LIME Jamaica Chairman Chris Dehring told the Observer that LIME Jamaica expects to grow annual revenues to US$281 million with the Flow acquisition. It was a signal to investors vying to evaluate possible earnings arising from the local leg of the regional merger. The increase would equate to a two-thirds jump in LIME Jamaica’s $18.4 billion (US$170 million) total revenues earned at its March year end. The merger would not affect mobile revenues but augment other revenues currently at $12 billion (US$110 million) per annum.

Mars, however, added that LIME’s rise was commendable despite its losses. “LIME’s movement was impressive. They have made moves to turn around the company. But still, they are in the red. The majority of the price movement occurred after the Columbus acquisition announcement,” Mars said.

For the September second-quarter 2014, LIME grew its total revenue 15 per cent, and its earnings before interest, taxes, depreciation and amortisation (EBITDA) jumped 95 per cent year-on-year. Additionally, its mobile customer base grew 13 per cent and its mobile service revenue grew 42 per cent year-on-year.

However, the company made a $612 million net loss. Over 12 months ending March 2014 it made a net loss of $3.5 billion.

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LIME offered highest returns to investors last year

Oil information for investors

BY NOEL HARDY

Wednesday, January 21, 2015    

“To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit”.

The production of oil is controlled primarily by a group of 12 countries collectively called the Organization of the Petroleum Exporting Countries (OPEC). The countries are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

The group’s primary goals are stable prices, secure supply and sufficient investment. Stable prices let consumers and producers meet requirements; secure supply prevents disruption that can send prices spiralling and stall economic growth, and sufficient investment ensures that they will be able to provide the required oil to meet future needs.

The success of the group in meeting these goals has been brought into question in recent times as the price of Brent crude — the benchmark for oil prices — has fallen from US$115.00 per barrel in June 2014 to as low as US$43.00 in December 2014.

There is no doubt that OPEC is a prime example of an oligopoly. This is a market form within which the industry is dominated by a few players colluding to reduce competition that in turn makes prices higher for consumers. However, the recent downward spiralling of oil price begs the question as to whether OPEC still has the power to influence the price of oil collectively.

According to the Energy Information Administration (EIA), the analytical arm of the Department of Energy, United States oil production has moved from 5.0 million barrels per day in 2008 to 7.4 million in 2014. Oil production in 2015 is expected to average 8.5 million barrels per day and 9.3 million in 2016. An increase in the production of oil in the United States would make it less dependent on imported oil which would be a cause for concern to OPEC.

Update as of January 16, 2015 according to Bloomberg: “US drillers have taken a record number of oil rigs out of service in the past six weeks as OPEC sustains its production, sending prices below $50 a barrel. The oil rig count has fallen by 209 since Dec 5, the steepest six-week decline since Baker Hughes Inc (BHI) began tracking the data in July 1987. The count was down 55 this week to 1,366. Horizontal rigs used in US shale formations that account for virtually all of the nation’s oil production growth fell by 48, the biggest single-week drop.”

US producer prices in December recorded their biggest fall in more than three years on tumbling energy costs while underlying inflation pressures were tame, a cautionary note for the Federal Reserve as it ponders its next step on monetary policy.

Another cause for concern to OPEC is the resilient Russia who for years refused to become a member of OPEC despite its standing as the world’s largest oil-producing nation. Despite falling oil prices, Russia has been significantly producing more oil in an attempt to shore up incoming hard currency that has fallen off due to sanctions imposed by a United States-led embargo.

The economic slowdown in Europe and China which has seen a fall in the demand for the commodity is yet another cause for concern for OPEC.

The fall in demand for imported oil in the United States, Europe and China, albeit for separate reasons, has caused an oversupply of the commodity. Normally, the OPEC countries would have reduced the production of oil with the aim of reducing supply, as this is a natural move for oligopolies given the circumstances. OPEC members, however, could not come to an agreement to cut supply hence the freefall in its price.

We can all speculate about the price at which oil will stop falling, however, what is known is that if prices continue to fall, the ability of OPEC countries to remain viable will be determined by their cost of producing the commodity. If oil prices continue to fall, at some point in time it will become unprofitable to drill.

The cost of producing oil is not the same for all countries as according to a CNBC report supplied by Turner Mason Consulting firm, it costs between US$5 and US$10 to drill for oil in Saudi Arabia, between US$50 and US$100 in North America, less than US$30 in Venezuela, US$70 in Brazil US$20 to $40 in Nigeria and US$40 to $60 in Russia.

It is not anticipated that oil producing countries and, by extension, companies and their related firms will fall off the face of the Earth if oil prices continue to fall. There is obviously a bottom price.

What is also clear is that OPEC’s coming to an agreement will stabilise the price of oil, in turn fulfilling one of the group’s primary goals. Investors will need to make informed decisions as to which oil-related company to buy.

Oil-related companies are known for paying large dividends and this can act as a buffer to any short-term fall in the share price. Companies, however, can suspend dividend payments and this could impact one’s portfolio.

Diversification and risk assessment are critical in investing and must be borne in mind at all times.

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Oil information for investors

Investors in Norman Manley Airport privatisation given end of month deadline

Investors have been given until the end of  the month to submit expressions of  interest in the privatisation of Jamaica’s Norman Manley International Airport.Written submissions should be made to the Development Bank of  Jamaica (DBJ) by 6pm July 30. According to a notice from the DBJ, the Transport Ministry is trying to find a private sector operator with experience in the aviation sector to operate, finance, develop and maintain Norman Manley International under a long term concession agreement.IFC, a member of  the World Bank Group, has been appointed lead advisor on the structuring and implementation of  the project. Interested parties will have the opportunity to participate in  investor conferences. The one-on-one meetings will discuss feedback on the airport project. One of  the conferences will take place in London on July 21 and 22 and the other in Kingston on July 28 and 29.The development of Norman Manley International Airport is in keeping with Jamaica’s Global Logistics Hub Initiative.

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Investors in Norman Manley Airport privatisation given end of month deadline

Phillips warns investors not to rely on gov’t paper

MINISTER of Finance and Planning, Dr Peter Phillips, has warned Jamaican investors against depending on high-yielding government paper to protect them from competition, under the new Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF).

Dr Phillips’ caution was aimed primarily at financial institutions and other businesses depending on government paper over the years to remain profitable, as well as commercial traders thriving on the importation of foreign goods.“In many respects, having existed in an environment which over many, many years of high interest rates and a lot of protected sectors, protected from the winds of competition, are able to secure profits simply by holding government paper, many elements in the investor community have lost the knowledge, skill, talent, to really face the competition,” Dr Phillips said Thursday.“Bankers will have to return to the business of banking, rather than just simply purchasing (government) paper. Companies who had huge portfolios will have to learn, again, what it takes to take an idea from concept to production. That, in itself, will take time, but it is also, I suspect, going to cause some degree of apprehension,” he stated.“People who lived simply on the basis of buying things from outside and selling them in the domestic market, if they want to sustain their profit levels, are going to have to look at how they are going to have to stop being traders and become producers, in some way; because those are the things that the programme is intended to achieve, to incentivise production and, in a sense, disincentivise the support of production elsewhere,” he added.He said that while the objectives may not be achieved overnight, the country has to sustain its commitment to that path, “and not lose heart or be overwhelmed in the immediate, painful difficulties which we face”.Dr Phillips was speaking at a press briefing at his ministry, Heroes’ Circle, on Jamaica’s performance in the first quarterly test under the new Extended Fund Facility agreement with the IMF.He said that he believes investor confidence in the EFF agreement is rebuilding, and that this was evident from recently concluded discussions with the holders of Government of Jamaica bonds in both North America and Europe.“I can say we are seeing the slow but steady and significant rebuilding of this confidence, certainly in the international community,” he said.“There are many who did not believe that we would have concluded a programme and indeed they were pleasantly surprised,” the minister said.“I am satisfied with Jamaica’s fulfilment of the prior conditions, and I think we need to emphasise that they were not easily achieved. They were achieved with the sacrifice and contributions of stockholders from all sectors of the country,” he added.Phillips also said he believed that the successful conclusion of the first review under the new programme will add to the level of confidence, but that it would require “sustained implementation” over future quarters, in order to sustain the build-up in confidence.He said that it would also require a more comprehensive communications effort, internationally and domestically, to promote the rationale behind the programme and, at the same time, take advantage of what has already been completed.He pointed out that while the programme is being administered by the Government, it will require the full realisation of its objectives and the participation of the other stakeholders, mainly the investor community.PHILLIPS … we are seeing the slow but steady rebuilding of confidence

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Phillips warns investors not to rely on gov’t paper

Bonds for equity investors

The fixed income asset class has a fairly widespread reputation for being conservative and less rewarding than other asset classes. Fixed income instruments usually rank above equity in the capital structure of a corporation, and as such, have a higher claim on a company’s assets in the event of bankruptcy.

As such, fixed income assets usually have lower yields since there is slightly less risk. However, many different types of fixed income instruments have been created and issued which can appeal to traditional equity investors who crave higher returns but slightly less risk.This week, we take a closer look at hybrids — fixed income instruments with features of both debt and equity. These instruments are most commonly issued by large financial institutions across the globe, and they form part of their tier 1 or tier 2 capital base. The capital base of a financial institution, from an accounting standpoint, is classified as equity. However, this “equity” ranks above common or even preferred equity.Let’s take a look at the features that hybrids share with debt and equity. For example, they pay a fixed or floating coupon at pre-established intervals. However, the issuer usually maintains the right to suspend this payment. Similarly, hybrids can have a maturity date, but this date is usually very far into the future, for example, 30 or 40 years. Maturity dates far out into the future and the ability to suspend interest or principal payments are some of the common “equity like” features of hybrids. Hybrids also have another very important feature; they usually contain an embedded conversion option, which allows the issuer to convert the principal of your investment into common equity in very specific circumstances. These circumstances usually describe severe financial difficulty which threatens their ability to meet their minimum capital requirements. To compensate investors for these risks, the issuing institutions usually pay a relatively attractive coupon rate.These types of instruments also display more price volatility than other plain vanilla bonds, and can provide more opportunity for capital gain. Capital gain is an important source of return for the active equity investor. Bonds can also provide generous returns through price appreciation. The price of a bond can rise and fall, just like a stock. However, the issuer has effectively guaranteed you repayment at 100 cents on the dollar. However, during the life of the fixed income instrument, many factors can cause the price to rise or fall. Much like equities, these notes are affected by the company’s financial or strategic market position, general news, and changes in the macro or micro economic landscape. It is also important to note that bonds are not only for low interest rate environments. Fixed income instruments can be structured to take advantage of rising interest rate volatility and higher interest rates. In sum, the fixed income asset class is versatile and can still provide very attractive returns for relatively lower levels of risk than equities.Another important premise here is that investors do not have to compromise the creditworthiness of their investments in order to attain higher returns. There are many different types of structures that can be tailored to the different risk appetites investors. These types of instruments allow an investor to preserve the high credit quality of their investments, by taking on other risks that do not threaten the principal of their investment.Marian Ross is Assistant Vice President – Business Development with Sterling Asset Management Ltd. Sterling provides medium to long term financial advice and instruments in US and other world market currencies to the corporate, individual and institutional investor.Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.com.jm

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Bonds for equity investors