Shane Ingram, Contributor
INGRAM AND BYLES
THE UPTICK in stock prices remained unbroken this week as retail and institutional investors continued to reposition their portfolios for the new year; market volumes have also strengthened in response to these activities.
As the year comes to a close it is likely that further appreciation will take place as institutions, in particular, try to shore-up returns on their equity portfolios toward the end of December, which is also the end of a quarter and the year.
While brokers remain optimistic of sustained growth in equities in the new year, analysts have taken keen note of movements in money market rates stemming from the extremely tight conditions. Thus, if BOJ continues to intervene and GOJ remains in the market, liquidity could remain tight and thereby limit funds available to purchase stocks.
COMPANY SPOTLIGHT: PAN CARIBBEAN FINANCIAL SERVICES
For the nine months ended September 30, 2005, Pan Caribbean Financial Services Limited (PCFS) reported $819.55 million in net profits or 36.4 per cent more than the comparative period of last year. However, this upturn in cumulative profits masked the challenging period endured by PCFS in the third quarter. Although net interest margin strengthened from 27.45 per cent to 28.84 per cent in Q3, net interest income contracted 12.6 per cent to $318 million on account of the tight interest rate environment and shrinking earning assets. Similarly, non-interest income flows from securities trading dipped 8.41 per cent to $138.35 million. Thus, net revenue decreased by $58.5 million to $456.4 million for the quarter.
Even as growth in operating expenses was commendably contained to 2.14 per cent above the comparable outturn for 2005, pre-tax profits still fell 17.3 per cent to $291.2 million in the period. Net profits were further depressed by a relatively higher effective tax rate. Thus, PCFS posted $222.7 million in net profits for the third quarter, down 23.9 per cent when compared against the same period of 2004. Consequently, EPS for the quarter was measured at $0.41 unfavourably matched against $0.58 cents per share a year earlier.
The balance sheet mirrored similar changes as total assets declined by $1.4 billion to $39.4 billion since year-end while total equity grew $600 million over the same period on account of the high profit retention. This translated into twelve-month ROE and ROA of 16.74 per cent and 2.69 per cent, respectively.
Like its industry peers, PCFS will be hard-pressed to grow profits in the low interest rate environment and muted growth in security prices in recent times. In response, however, PCFS has indicated an intention to expand its credit assets by 15 per cent over the next four quarters. Notwithstanding, this strategy is not unlike most other financial institutions and so PCFS should therefore experience competition in this area. Moreover, PCFS needs to reduce its dependence on interest differential income in this low rate environment.
Of course, PCFS does boast the highest level of operating efficiency in its peer group and will therefore look to leverage this position in order to extract higher levels of profits from its revenues streams. Meanwhile, it is anticipated PCFS will benefit from the possibilities which lie ahead when its stockbrokerage goes retail and its proposed four (4) new products/services are introduced. In addition, PCFS should benefit from its relationship with LOJ. These factors point to a possibility of achieving its targeted 12 per cent increase in investment assets. Assuming net interest margins remain above 25 per cent and the efficiency ratio remains at an average of 30 per cent then earnings over the next four quarters could approach $1.3 billion, or $2.35 per share given no change in the number of shares outstanding. Assuming a PE of 12X, the share price is projected to be $28.28 by the end of September 2006. All the best for the Holidays Friends!
RECOMMENDATIONS
Investors are advised to continue using stocks as long-term vehicles for wealth creation. We continue to hold favourable long-term outlooks for NCBJ, JPG, CWJA, PJAM, Carreras, BNS, and RJR. Short term gains could surface from CRTS, KW, Seprod, D&G, and Goodyear. Please contact DB&G's Stockbrokerage department at 1-888-CALL DBG for further information on these and other stocks or visit for detailed analyses.
Disclaimer: All information contained in this article has been obtained from sources that DB&G believes to be accurate and reliable. All opinions and estimates constitute the Author's judgement as of the date of the article. No warranty as to the accuracy, timeliness or completeness of this article and as to the opinions based thereon is given or made by DB&G.
