As the election campaigns start to heat up, we are mainly seeing mudslinging, accusations and other variations of gutter sport. Hopefully, by early August, we will see the publications of manifestos and, perhaps, have some edifying contributions.
Eventually, the leaders of the main parties, who will emerge from a national poll, will be allowed to think on their feet via at least one national debate and attempt to articulate a responsible way forward as we learn to face the more stringent realities of the next few years or so.
Are there any clear stock market winners?
Politics aside, from a business perspective, all media companies will enjoy a strong boost to their advertising revenues, as the vying entities must employ both the traditional (print) and electronic fora to both guide and entertain the masses.
With a 12-week campaign, at least seven or eight of those should be extremely intense. Among the listed companies, both One Caribbean Media and Guardian Media will reap the benefits of the electioneering activities when they report their third quarter results.
In addition, companies such as Carib Brewery, a subsidiary of ANSA McAL Ltd and Angostura will surely benefit; after all, no public meeting would be complete without a supply of beverages. Fast food purveyor, Prestige Holdings Ltd, should also be among the winners from this version of "feeding the masses."
While Flavorite Foods Ltd should also reap some rewards, that company is in the final stages of being privatised; consequently, whatever gains that may accrue to it would mostly benefit the new owners, Stone Street Capital Ltd.
We are still seeing evidence of strong vehicle sales. Are consumers factoring in changes in motor vehicle taxes or, perhaps, significant reductions in the petrol subsidies? Can we anticipate an increase in vehicle repossessions in the next 18 to 24 months, as consumers strain to pay both vehicle loans and higher maintenance costs? Not to mention property taxes and other forms of "economic corrections" that would impact on next year's household budgets?
For the time being, both the Massy and Ansa Automotive Groups would enjoy the benefits of this mini-boom in auto sales. In Massy's case, any slowdown in local auto sales might be counteracted by improvements in some overseas markets, such as Columbia.
Pending Clico-related matters
The recent exit of four directors (two based on dubious rationale and two voluntarily) from the board of Clico does not augur well for the acceleration of the sale of assets and related matters.
The end of March announcement that, as part of the settlement of its debt to the government, Clico's shares in three entities: Angostura Holdings Ltd (32.5 per cent), CL World Brands Ltd (42 per cent) and Home Construction Ltd (43 per cent) would be transferred to the government.
Based on Clico's 2013 audited accounts, the stated values of these companies were: $835.139 million for AHL; $747.427 million for CLWBL and $380.975 million for HCL.
These transfers are pending independent valuations of those assets. Of the three companies, only Angostura is publicly listed; consequently, AHL's value shown above reflects the market price of $12.47 as at December 31, 2013, which can be viewed as a "reference or starting point" for the conduct of its valuation.
Interestingly, AHL held its 2013 AGM on May 19, 2014. However, even though it still has some flexibility, it has not yet set a date for convening its 2014 AGM. There may be at least two reasons for this delay.
The first is the valuation and transfer of Clico's 66,971,877 block of shares (32.5 per cent) in AHL. A second possible reason is the delay in AHL receiving the outstanding sum of $984.611 million from CL Financial Ltd.
Another complication is that Rumpro Company Ltd, a subsidiary of CL World Brands, owns 92,551,212 shares (44.96 per cent) of AHL. Government's acquisition of Clico's shares in AHL and of 42 per cent of CL World Brands could effectively make it the new owners of more than 75 per cent of AHL.
When this new ownership structure is in place, we might see the settlement of CL Financial's debt to AHL. At a later date, will the government consider arranging a partial divestment of about one-third of its holdings in AHL to help raise additional funds while still maintaining majority control?
The sale of Clico's traditional insurance portfolio, along with supporting assets, is also yet to be finalised. Among the various local contenders are Sagicor and TATIL Life Assurance; otherwise, a sale to a foreign entity could hugely expand the competitive environment while boosting foreign exchange inflows.
We also have the pending sale of Methanol Holdings International; in its 2013 accounts, Clico valued its 56.53 per cent stake at $2.26 billion. Some of those proceeds are earmarked for distribution to STIP holders.
As reported in another newspaper, there is the pending matter of the classification of Investment Note Certificates (INC), which was issued by Clico Investment Bank. Under what circumstances are they considered securities or deposits? A clear-cut answer would hugely impact, positively or negatively, the National Insurance Board to the extent of about $700 million and the National Gas Company to an amount in excess of $1 billion.
Aside from Clico related matters, the local business community continues to be adversely impacted by inconsistent access to foreign exchange and the risk that some of its government receivables would be shifted to the next fiscal year.
Are there any lessons to learn from the IPO market?
An initial public offering (IPO) can take two forms. One version is the sale by an existing shareholder of part of its stake in the company; this is being done in the case of Phoenix Park Gas Processors Ltd, via a new company, Trinidad and Tobago NGL Ltd.
In the other version, we have an entity seeking to raise additional funds, either to make an acquisition or to settle debts. An example of this can be found in the Stallion Property Trust.
One of the fundamental skills for achieving a successful IPO is that the issuer must be able to accurately gauge the condition of the market and price the security "correctly."
If the price of the security is too high, then the chances for success are low and the issuer is faced with several options:
1. Reduce the price.
2. Withdraw the offering or
3. arrange with a "backstop investor" (usually, an institution) to take up a large portion of the shares.
On the other hand, if the price is too low, then the issuer misses out on an opportunity to either make an additional profit (from the sale of existing shares) or raise extra funds for his new or proposed ventures.
In our local, very conservative market, success is usually defined in two ways; first, it must leave room for investors to enjoy some price appreciation in the secondary market and second, it should offer a reasonable dividend yield.
As the ultimate owner, the government has apparently made a strategic and practical decision to price the Phoenix Park shares (which price will be revealed soon) below its purchase price.
This decision was based on two factors: 1) the market for the company's main products has changed drastically and 2) the government's "immediate need" for funds to help balance its current budget; consequently, postponing the offer date introduces an even greater price (and, possibly, political) risk.
Let us now look briefly at the Stallion Property Trust IPO, which subscription deadline was extended to last Friday. The two fixed income portions of the offering were reasonably priced and they should not have had a problem to sell those units.
On the other hand, the equity portion was not particularly attractive.
First, its projected dividend yield was a meagre 1.5 per cent (dividend of $0.30 divided by price of $20). Also, the dividend was not projected to increase until 2020 (after five years), assuming all other variables were met. (Note: The dividend of $0.30 was derived by dividing the payment of $10.146 million by the number of shares that would be outstanding after the issue, that is, 33.82 million stock units.)
Taken together, these projections ltd new investors' expectation of enjoying any short-term price appreciation.
The prospectus, at page 40, did caution that prospective investors in the common units are designed for investors with "a strong risk appetite who can withstand capital depreciation."
An investor who still wants to participate in the property market can reap a good return from the existing mutual fund, Praetorian Property Fund. How is this possible?
We do know that the life of the Praetorian Fund was extended by one year to November 2015. Over the past several months, the fund has been selling its properties and, in other cases, upgrading others to make them more saleable. There is a reasonable expectation that the fund will eventually sell everything and return the net proceeds to shareholders; if not in 2015, then sometime in 2016.
What does this mean for a potential property stock market investor?
Subject to supply, an investor can probably buy a PPMF share for less than $3.40. (The most recent price was $3.10.) Reasonably, one can expect to receive anywhere from say $4.50 to $4.75 when all its assets are sold and the fund terminates. (The March 2015 net asset value was given as $4.82, which was an improvement from last September's $4.79.)
This return could be as soon as November 2015 or as late as November 2016. This calculated risk almost "guarantees" that the investor will receive a reasonable return on his money in a relatively short time.
With those funds in hand, the investor can then decide to buy Stallion shares on the secondary market, probably very close to the recent offering price.