New Ratings: JMMB Rates Derrimon (DTL) A HOLD, Jamaica Producers (JP) as A SELL

Editor’s note: Due to a technical error, this alert was re-sent in error earlier this morning. Please accept our apologies. We intended to advise about the new appointments at NCBFG.

Just released research from the JMMB Group has rated Derrimon Trading Ltd (DTL) as a HOLD and Jamaica Producers Ltd (JP) as a SELL. This latest research from the Risk and Research department was released today February 22, 2017

The research made a few points:

For Derrimon Trading

Derrimon Trading Co Ltd

The company has been experiencing low margins due to competition among other market players. From this standpoint, the company has actively reviewed its distribution division portfolio with a view to cut low margin items in a bid to enhance profitability and efficiency.

Taking full control of CFF will allow DTL to chart the path of two companies and fully integrate these companies. This integration will allow DTL to benefit from the synergies. Net earnings are forecasted to reach $129.29M or EPS of $0.47 for 2017 financial year. Assuming a forward price-to-earnings (P/E) ratio of 14 times (3-year Average is 15.05 times, while trailing P/E is approx. 20 times), the targeted price of the stock at the end of the 2017 financial year is likely to reach $6.62.

From a price-to-book value standpoint, the current price-to-book value ratio of 20.61 times is above its 3-year average of 15 times. Assuming the stock trades close to its historic average at 14 times and a projected book value per share of $2.26,the likely target price for the 2017 financial year end is $4.53.

Based on the valuations above, Derrimon Trading Company Limited (DTL) is likely to trade within the range $4.81 to $6.62. The company will continue benefit from the tax break associated with listing on the Junior Stock Exchange. The company has embarked on its plans to improve capacity which has helped to put a strain on cash resources. From this perspective, the company is likely to be challenged to make dividend payments in the near term. Notwithstanding, the increase ownership in CFF and the strategic initiatives to improve efficiency could enhance the financial health of the company in the medium term. As a result the investment company recommended DTL as a MARKETWEIGHT / HOLD at this time.

As it relates to Jamaica Producers

Excluding the one-off gains on the recognition of KW as a subsidiary and the disposal of the share in Mavis Bank Coffee Factory as well as the restructuring costs stemming from JP Food & Drink, JP’s profits fell to approximately $490M for the nine month period. Assuming consistent growth levels in the final quarter produces a net profit of $687M, which is approximately 12% higher than our previous estimate of $613M for the 2016 financial year and translates to an EPS of $0.64.

Applying the 3-year average P/E ratio of 6.81x to the forward EPS of $0.64 yields a price of $4.36 while the forward BVPS of $9.10 and the 3-year average P/B ratio of 0.75x yields a price of $5.60. As such, our estimation of the fair value of KW’s shares is $5.6, which is 42% below the close price of $9.7 as at January 10, 2017.

We continue to recommend Jamaica Producers as SELL. Despite the upward revision of our fair price on improved year-to-date results, we maintain that the stock continues to trade wide of its intrinsic value and advise clients to crystallize some of their gains. Investors should be mindful that the nine months profits have been heavily influenced by one-off events and as such should not expect to see a repeat of this in the 2017 financial year.

 

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