Wed | Jan 22, 2020

JMMB lowers rating on Caribbean Cement

Published:Friday | January 10, 2020 | 8:44 AM
In this July 18, 2019 file photo, the cover of Caribbean Cement Company’s annual report is displayed as a shareholder prepares to leaf through its contents at the cement maker’s annual general meeting in Kingston.

JMMB Securities Limited lowered its rating on shares of Caribbean Cement Company, CCC, and also set a new target price of $67.05.

That’s more than 15 per cent lower than its average price in January but higher than JMMB’s previous target set last February at $41.81.

“We are downgrading CCC’s stock from marketweight to strongly underperform at this point, given that it currently trades at a premium to our price target,” said the broker in its latest equity research note.

The broker arrived at its new target based on assessing CCC on the cash it would likely generate – price to earnings before interest tax depreciation and amortisation, or EBITDA; and also projected profit – price to earnings per share over fiscal year 2020.

The broker expects a weak December fourth quarter for the cement maker due to currency movements and taxes, particularly when compared with year earlier levels, which contained windfalls.

“This could trigger a decline in investor sentiment towards CCC in the near term. However, our medium-term to long-term outlook remains neutral,” JMMB said.

Last February, JMMB made a conservative assessment in its previous target at $41.81 but conceded that it could hit $79 in a best-case scenario. Within three months of issuing the research, the stock traded in the 1980s and actually hit an all-time high of $100 during intraday trading on May 2 of last year.

Additionally, the broker’s assessment comes amid increased activity in the stock, which climbed 10 per cent between November 6 and January 6.

The JMMB assessment follows CCC’s weak third quarter ending September 2019, which the cement company blamed on unusually heavy rains plus a large one-off tax bill. Earnings for the quarter amounted to nine cents, share, compared to 36 cents per share in the 2018 period.

The heavy rains would have affected purchases as builders would avoid mixing cement in rainy weather, according to the president of the Incorporated Masterbuilders Association of Jamaica, Lenworth Kelly, when quizzed by the Financial Gleaner at the time on the dip in CCC operational activity. He reasoned that one would expect demand to increase in the December quarter to make up for reduced demand in the September quarter.

Caribbean Cement’s sales revenue slipped in the September quarter to $4.38 billion, from $4.46 billion in the year-prior period. Profit before tax dipped 55 per cent to $238 million from $531 million in the same period. Profit after tax was down 75 per cent to $76.8 million from $305.1 million a year earlier.

Over nine months, profit at the cement plant continued to outpace the previous year at $1.57 billion or $1.85 per share, up from $1.31 billion or $1.54 per share.

JMMB said the CCC stock has increased at a constant annual growth rate of 104.80 per cent over a five-year period, or significantly higher than the 49.34 per cent growth of the main market over the same period.

The cement company’s market capitalisation now stands at $67 billion, which is around eight times its book value of $7.9 billion.

steven.jackson@gleanerjm.com