Is The “Undervalued” GraceKennedy Group an Acquisition Target? Part 1/4
Analysts and Investors have been suggesting for some time now that the Jamaican international conglomerate GraceKennedy Limited is heavily undervalued, and the disparity in market cap valuation with the likes of the three separately listed Lasco companies as a Group, could be the clearest indication.
The GraceKennedy Group which trades on both the main market of the Jamaica and Trinidad stock exchanges is (April 2017) trending between JA$43.25 to JA$44.70. The current market value of shares outstanding is JA$43.3B based on shares outstanding of 995 million units.
GraceKennedy’s stock price recorded a 48.8% increase on the Jamaica Stock Exchange (JSE) during 2016, closing at $27.08 on
December 31, 2015 (share price adjusted for 3-for-1 stock split which took place in 2016) and closing at $40.29 on December 31, 2016.
The Group also increased its dividend payment during the period by 22.9% with a dividend pay-out of over $1 billion.
In 2016, GraceKennedy shareholders voted in favour of a 3-for-1 stock split which took place on August 11, 2016. The main objective of the stock split was to allow the stock to be more accessible to investors and so lead to increased liquidity in the trading of the stock. It was also intended to widen the Company’s ownership base as more persons would be able to invest in the Company’s stock. The greater activity in the trading of the stock should allow the stock price to move towards its true value.
The stock, as at December 31, 2016, traded at a price earnings multiple of 9.97 times on the JSE, an increase over the 2015 multiple of 9.73 times. The stock, as at December 31, 2016, traded at 95% of its book value per share of $42.39, compared with a price to book ratio of 71% in 2015.
Although operating and trading as three separate companies on the Junior Market of Jamaica Stock Exchange the three Lasco companies covering finance, manufacturing and distribution, now have a combined market capitalization of close to JA$50 Billion making the Lascelles Chin controlled business group higher in market cap value than the GraceKennedy group at JA$43 Billion.
So does this make the GraceKennedy Group an acquisition target?
Sushil Jain who is a highly respected Jamaican financial analyst and business commentator thinks disparity in the share prices of the combined Lasco Group and GraceKennedy shares can be attributed to several factors.
1. An important one being the investors’ perception of the growth prospects of the respective companies.
2. Further Lasco is listed on the Junior Market while Grace is listed on the Main Market. The companies listed on the Junior Market are selling at higher P/E Ratios.
“I will not jump to the conclusion that this makes the GraceKennedy share heavily undervalued” Said Jain. “On the other hand, some people can say that this makes the Lasco shares overvalued. Can the price of one company’s shares set a standard for the prices of the shares of other companies?”
GraceKennedy Group led by Group CEO Don Wehby grew 2016 annual earnings by 39 per cent to $4.5 billion with earnings per share (EPS) of $4.03, up from $2.78 a year earlier. This, on the backs of a 10.7 per cent rise in revenue during the financial year, to $88 billion.
While GK Foods continues to deliver higher sales, $69.07 billion in 2016 compared to $62 billion the year before, the best margins by segment continue to come from the company’s money services division within the GK Financial Group.
GK Foods the food-trading segment earned $1.33 billion in profit before tax on the $68.8 billion in revenues. Whereas the GK Financial Group segment earned $378 million on revenues of $5.58 billion; insurance earned $789.2 million on revenues of $6.03 billion; and the money services arm earned $3.07 billion on revenues of $7.8 billion for year ending December 2016. BM
Next Potential Bidders 2/4