Felix Pereira
Published:
Thursday, August 25, 2016
Higher investment income boosted half-year profits at Guardian Holdings Ltd (GHL) while May 2016 purchase of a 29.99 per cent stake in GHL by NCBJ was the highlight of
We will now review GHL’s performance for the half-year ended June 2016.
Changes in financial position
Total assets grew by 5.4 per cent to $23.37 billion from $22.18 billion as at December 2015.
Financial assets rose to $14.2 billion from $13.8 billion or by 3.3 per cent. This change reflected a shift from short-term instruments to long-term commitments with higher yields.
However, loans and receivables advanced by 13 per cent to $2.06 billion from $1.82 billion. In addition, reinsurance assets climbed by 34 per cent to $942.4 million from $702.5 million.
Cash and cash equivalents advanced to $1.99 billion from $1.85 billion. This increase was largely helped by its improved operating activities, which contributed $288 million, while its’ investing and financing activities consumed $35 million and $76 million respectively.
Total liabilities rose by 5.5 per cent to $20.49 billion from $19.43 billion.
Insurance contracts closed at $14.1 billion, reflecting an increase of 6.7 per cent from the December 2015 level of $13.2 billion. Meanwhile, investment contract liabilities improved from $1.7 billion to $1.76 billion, reflecting an increase of 3.6 per cent. Finally, other liabilities rose to $956 million from $853.4 million, or by 12 per cent.
Equity gains
Total equity increased from $2.75 billion to $2.88 billion, of which $22.7 million related to non- controlling interests. Consequently, shareholders’ equity improved to $2.86 billion from $2.73 billion.
The major positive change was reflected under comprehensive income of $225.4 million while dividends to shareholders of $98.8 million reduced the ending balance.
With 231,899,986 shares outstanding, each share had a book value of $12.32 (December 2015: $11.77).
Income and profits
Gross written premiums declined to $2.74 billion from the re-stated 2015 half-year $2.90 billion. This reflected reductions in both the property and casualty (P&C) sector and under the life, health and pensions (LHP) category. Weaker economic activity and a more competitive environment contributed to these declines.
The decline in net written premiums was less severe as these figures ended at $1.882 billion versus 2015’s $1.899 billion; this change resulted from higher premiums ceded to reinsurers.
Even so, resulting from unusually high fire and motor claims in the second quarter, the underwriting profit moved from $297.3 million down to $259.3 million.
On the other hand, net income from investing recorded a strong 32.6 per cent improvement to $470.5 million from $354.8 million. Mainly, this reflected higher income from new long-term investments. Also helping this result was higher foreign exchange and trading income.
Helped by the Dutch-based brokerage companies, brokerage income rose to $9.9 million from $2.6 million.
These changes resulted in net income from all activities registering at $739.6 million; this reflected an increase of 13 per cent over the $654.7 million recorded for 2015’s half-year.
Operating expenses rose by 5.3 per cent to $454 million from $431.1 million. In contrast, finance charges fell to $65.3 million from $69.6 million.
These changes resulted in an operating profit of $220.3 million; this reflects an improvement of 43 per cent over the comparative 2015 result of $154 million.
The contribution from its associated companies slipped to $5.7 million from $7.1 million. This resulted in a pre-tax profit of $226 million (2015: $161.1 million).
Even as the effective tax rate climbed to 29.8 per cent from 25.8 per cent, the after-tax profit registered at $158.7 million from $119.5 million.
After allowing for participating policyholders, discontinued operations and minority interests, the profit attributable to shareholders came in at $161 million versus $126 million; this reflects a 28.6 per cent improvement.
These results translated into 2016 diluted EPS of $0.70 compared with $0.54 for 2015.
Segment performance
At almost $1.5 billion, the LHP segment generated about 80 per cent of net written premiums. Even so, its underwriting result in 2016 reflects only about 26 per cent of the total. This segment experienced a decline of $22.1 million from the 2015 result, which translated into a contraction of almost 25 per cent.
In contrast, the P&C division ceded almost two-thirds of its gross premiums; consequently, its net written premiums represent about 20 per cent of the total.
Although this division’s profit declined by $18.6 million, in percentage terms, it represented only a nine per cent fall.
Although the investment result is concentrated under the LHP segment, both P&C and asset management divisions benefitted from a significant portion of this income stream.
Geographically, Trinidad and other Caribbean revenues accounted for 53 per cent of the total while Jamaican-sourced revenues represented 18 per cent and the Dutch Caribbean territories contributed 27 per cent to the total. These percentages were little changed from that earned in the previous half-year.
Share price movements
Last December, at the time of the first announcement concerning NCBJ’s intention to acquire a 29.99 per cent stake in GHL, its price was $12.92.
Following that announcement, which was then short on details, GHL’s share rose slowly and closed 2015 at $13.25.
By February 11, 2016, the price seemed to have peaked, when it closed at $14.30. In the absence of any further announcement from either NCBJ or GHL, the price drifted down, closing on April 21, 2016 at $12.90.
The release of GHL’s half-year results, which included a dividend increase from $0.19 to $0.21, on August 8, 2016, seemed to have injected some life into its share price. On that day, the price jumped from $12.52 to $13.50 and has continued to move up slowly since then.
While the core businesses may have real challenges, we also need to factor the income needs of its largest single shareholder, NCBJ. Consequently, we could reasonably project that the full year’s dividend could be $0.65. At last week’s closing price of $13.57 (ex-dividend), the yield would then be 4.79 per cent.
Relating that dividend projection to NCBJ’s purchase price of $21.61, we derive a yield of 3.01 per cent.
Alliance with NCBJ
On May 13, 2016, it was disclosed that NCBJ had completed the acquisition of a 29.99 per cent of GHL when it bought 69,547,241 shares at $21.61each. No doubt, that price was based on some analysis and advice that it deemed to be reliable and trustworthy and is consistent with its long-term strategy.
Subsequently, we learnt that the entity in which the shares are actually vested was the recently registered, NCB Financial Group Ltd (NCBFG), which has one shareholder, AIC (Barbados) Ltd; in turn, AICBL is controlled by Michael Lee-Chin, who also controls NCBJ.
Stepping back for a minute, we recall that last year JMMB restructured itself and then emerged as a subsidiary of JMMB Group Ltd, which replaced JMMB as the listed company on the Jamaican and T&T exchanges. In other words, JMMB opted to become a holding company, which apparently makes it easier for regulators to monitor and police the subsidiary companies.
It seems likely that this kind of transformation is being contemplated by the Lee-Chin/NCBJ entities.
Consequently, at some future date, it is possible that NCBFG will replace NCBJ as the parent company and also become the listed entity on the two exchanges.
We also recall that NCBJ owns 26.3 per cent of JMMB Group in an escrow account. In the interest of greater competition in Jamaica, would this new investment in GHL now encourage the Jamaican regulators to insist on NCBJ disposing of its JMMB Group holding? If implemented, those funds could help reduce NCBJ’s debt that it incurred to make the GHL acquisition.
Recently, we have seen the exit of two Trinidad-based directors and the appointment of three NCBJ directors to GHL’s board. Also, we know that the combination of NCBJ (29.99 per cent) and Tenetic/Ahamad/Lok Jack interests (21.84 per cent) results in the combined entities having almost 52 per cent of the voting shares in GHL; consequently, for the time being, there may be no rush for NCBJ interests to seek full control of the company.
In the case of NCBJ, shareholders have the temporary burden of the purchase of a large block of GHL at a price that represented a more than 66 per cent premium over the then-current price of around $13.00; that was the price at which the put-through transactions were executed on the TTSE. Of course, the justification for that generous price should evolve over time.
What synergies can be achieved between the two groups?
Perhaps, GHL’s general insurance interests may be amalgamated with similar companies that NCBJ owns in Jamaica? On the other side, there could be a consolidation and/or cross-selling of the investment products that each company offers? These and similar initiatives would evolve over time.
In the interim and barring any major upheavals, it seems sensible for stockholders to continue to hold on to their GHL shares; doing so should see them enjoy modest and sustained capital appreciation accompanied by regular increases in dividends. Perhaps, current shareholders should stop “dumping” their shares at these “give-away” prices?
Of course, when the time is right, the NCBJ Group may decide to complete the acquisition; probably at a very handsome premium above the current price. That eventuality should see both Tenetic and NCBJ interests’ benefit; the former being relieved to effect inter-generational liquidity and transfers while the latter comes closer to its pan-Caribbean dream.
Finally, would the outcome have been simpler, fairer and more transparent if NCBFG had made a bid for 100 per cent of GHL using a combination of cash and shares?
Next week, we look at the half-year results of Sagicor Real Estate X Fund Ltd.
Business Guardian