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PROVEN INVESTMENTS RIGHTS ISSUE
Recommendation
Participate
Overview
Proven Investments Limited is seeking to raise
additional equity financing of approximately US$20Mn
by way of a renounceable rights issue. A rights issue is
an offering which gives existing shareholders the right
to buy additional shares directly from the company in
proportion to their existing holdings, within a fixed
time period. In a rights offering, the subscription price
at which each share may be purchased is usually at a
discount to the current market price. In the case of
Proven, shareholders will be able to purchase the
shares at US$0.16 cents per share which is a discount
relative to the current market price of US$0.18.
Participants in the rights issue have the option of
subscribing in either JMD (at J$18.50) or USD and
may also elect to receive dividend payments in either
JMD or USD. Given the dual currency option of the
issue, PIL will seek to list the shares on both the JSE
main USD denominated index and the main JMD
denominated index.
With the company in acquisition mode, it is expected
that the proceeds from the rights issue will be used to
fund new ventures as well as to increase its capital
base.
Each shareholder will be entitled to one ordinary share
for every three ordinary shares held. The rights are
renounceable, which means that if a shareholder
chooses not to take up the offering, it can be taken up
by an investor of their choosing or by the general
public. Rights Issues have being Proven’s preferred
method of raising capital, having raised US$9.6Mn
from a rights issue in August 2010 and US$10Mn in
May 2014.
Issuer
Proven Investments Limited
Issue
1 Share for every 3 ordinary
share held by shareholders in
the capital of the company as at
the record date
Offer Price
No. of
Offered
Ordinary
shares
Amount to
be Raised
US$0.16/J$18.50
122,896,618
US$19,663,458.88
Opening
Date
March 24, 2015
Closing Date
April 2, 2015
**March 16 2015
The fair value estimate of the stock is important in
determining whether or not investors should
participate. Our fair value estimates for Proven were
derived using the Dividend Discount Model (DDM) and
the Relative Value Approach. The DDM yields a fair
value estimate of $0.1765, while the P/E Multiple
yields a price of $0.1335. Averaging these two prices
yields a fair value estimate of US$0.1550. As such, the
offer of $0.16 is within our fair value estimate. While
the offer is fairly priced, holders of the stock will
realize an immediate capital gain if market conditions
and multiples remain the same. The current market
price of the stock, at US$0.18, is 12.5% above the
offer price. Capital gains aside, returns on the stock
are augmented by its attractive tax free dividend. The
dividend yield of approximately 6% is more attractive
relative to US dollar denominated repos. However in a
worst case scenario, the price of the stock could
Prepared by NCB Capital Market Research Team:
Annya Walker, Research Manager e-mail: walkerad@jncb.com Tel: 935 2716
Simone Hudson, Senior Research Analyst e-mail: hudsonsg@jncb.com Tel: 935 2585
Shellon Williams, Research Analyst e-mail:williamssp@jncb.com Tel: 935 2749
Shaneka Wynter, Research Analyst e-mail:wyntersy@jncb.com Tel: 935 2763
1
decline towards our fair value estimate, which is also
the 52 week low. However losses would be partially
mitigated by the stock’s attractive dividend yield.
Additionally the expected foreign exchange gains of
between 4% and 6% should also augment returns if
participants subscribe in USD.
We are also recommending participation in the rights
issue on the basis that investments in USD
denominated assets, such as PROVEN ordinary shares,
provide a hedge against the depreciation of the local
currency, and is also good way to hedge the value of
ones’ portfolio.
The option to subscribe in JMD also provides a good
opportunity for participation of institutional investors
such as pension funds and other fund managers,
which have to adhere to regulations which limit their
percentage holdings in USD denominated assets.
The Corporate Structure (See Appendix)
As an International Business Company (IBC), Proven is
not regulated by the Financial Services Commission
(FSC). PIL’s business model was the first of its kind in
Jamaica and is based primarily on holding tradable
securities for investment purposes. However PIL has
also sought to pursue private equity opportunities as
they arise. To date PIL has closed six private equity
transactions,
Proven
Wealth
Limited,
Asset
Management Company Limited, PWL Transitions
Limited, Access Financial Services, Knutsford Express
Services and Proven Reit Limited. Proven Wealth
Limited is regulated by the FSC.
The assets and operations of PIL are managed by
Proven Management Limited (PML) which acts as the
investment manager.
PIL’s performance is hinged on three strategies: carry
trade, portfolio positioning and private equity. Carry
Trade in its simplest form can be thought of as
sourcing low cost funding, and then using these funds
to purchase higher yielding investments. The carry
trade strategy involves the investment of funds raised
through the issuance of short to medium term debt
instruments in a diversified portfolio of securities. This
strategy, given the longer duration of liabilities,
provides greater stability in PIL’s fund raising relative
to the repo-based model employed by most local
securities dealers
Portfolio Positioning PIL currently generates most of
its revenues from actively analyzing regional and
global markets, in an attempt to identify attractive
investment opportunities
Private Equity-PIL also actively seeks lucrative private
equity investments which have led to the acquisition of
a 100% stake in Guardian Asset Management Jamaica
Limited (later rebranded as PROVEN Wealth Limited
(PWL)) and Asset Management Company Limited
(AMCL). PWL, a securities dealer, is regulated by the
FSC and engages in the management of client
portfolios while AMCL, the owner of the ‘Easy Own’
brand, is a hire purchase financing company.
PIL signed an agreement in April 2014 to acquire
100% of the shareholdings of First Global Services
Limited (FGFS). Following the acquisition, FGFS was
later rebranded to PWL Transitions Limited (PWLTL).
The core business of PWLTL is that of securities
dealing, asset management, corporate finance advice
and pension fund management.
PIL also has an 85% stake in Proven REIT Limited
(PRL), a company established to facilitate real estate
related investments. Proven Kingsway Limited is a
wholly owned subsidiary of PRL, and is the vehicle
through which the sole property owned by PIL was
purchased in February 2012. The Kingsway
development began in March 2014 and is expected to
be completed in April 2015 and will feature a total of
31 apartment units
The most recent equity investment of PIL was the
acquisition of a 49% stake in micro-lender Access
Financial Services which took place in December 2014
for J$1.2Bn.
Prepared by NCB Capital Market Research Team:
Annya Walker, Research Manager e-mail: walkerad@jncb.com Tel: 935 2716
Simone Hudson, Senior Research Analyst e-mail: hudsonsg@jncb.com Tel: 935 2585
Shellon Williams, Research Analyst e-mail:williamssp@jncb.com Tel: 935 2749
Shaneka Wynter, Research Analyst e-mail:wyntersy@jncb.com Tel: 935 2763
2
Purpose of Offer
The net proceeds from the offer will be used by the
company to bolster its capital base. In addition, the
company intends to use the capital raised to pursue
expansion and acquisition opportunities.
The positive movements in the bond market benefitted
PROVEN’s portfolio positioning strategy. US corporate
bonds accounted for 18% of PIL’s investment portfolio.
The strategy also benefitted from the rallying of emerging
market bond prices. As a result, gains on securities
trading amounted to US$2.72Mn compared to US$1.99Mn
a year earlier.
Financial Performance-Nine Months to Dec 2014
Breakdown of PIL’s Investment Portfolio
For the nine month period ended December 2014,
PROVEN
reported
earnings
of
US$4.68Mn
(EPS:US$0.0127) which represented a 67.6% increase
relative to the US$2.79Mn reported in the corresponding
prior year period. The increase in earnings largely
reflected extraordinary gains arising from the acquisition
of FGFS. If we were exclude extraordinary gains and
losses, PIL would have reported a 7.6% increase in
earnings over the nine month period.
PWLTL contributed US$2.50Mn to earnings for the
seven months since the acquisition date.
U.S. corporate bonds posted positive total returns in
2014, boosted by falling yields on intermediate- and longterm Treasuries and the comparatively higher coupons
corporates offer. A wide range of factors came together
to fuel the bond market's strong performance primarily in
the second and third quarters of 2014. Economic data
continued to point to an environment of steady growth,
positive enough to support the performance of corporate
and high yield bonds. Historically, an improving economy
has been supportive for corporate bonds, pushing prices
higher relative to Treasuries. Concerns about the
likelihood of the US Federal Reserve increasing short term
rates was not enough to trump bond prices as the market
came to the realization that the Fed was in no hurry to
increase rates.
Adding to the positive performance of US bonds was
geopolitical iinstability , which further boosted Treasuries
by encouraging a flight to quality.
Prepared by NCB Capital Market Research Team:
We are of the opinion that gains from fixed income
trading could fall this year as the outlook for the bond
market for 2015 indicates limited upside potential. PIL
will likely have to diversify its portfolio across fixed
income sectors and non-bond sources of income in
order to improve return potential. Considering that the
US equities market has been showing resilience, there
will have to be some portfolio repositioning in order to
shore up trading gains. Given the less optimistic
outlook for fixed income trading it is less likely that PIL
will be able to execute on a growth strategy by way of
capital gains from assets. The company may have to
rely more heavily on generating interest income.
Other non-interest bearing line items such as fees &
commission had meaningful impact, growing to
US$1.46Mn from US$33,398 as a result of the
acquisition of FGFS and its pension portfolio. During
the nine month period, gains on foreign currency
positions decreased by 63% to US$0.33Mn. With the
majority of non-interesting items registering growth,
3
Annya Walker, Research Manager e-mail: walkerad@jncb.com Tel: 935 2716
Simone Hudson, Senior Research Analyst e-mail: hudsonsg@jncb.com Tel: 935 2585
Shellon Williams, Research Analyst e-mail:williamssp@jncb.com Tel: 935 2749
Shaneka Wynter, Research Analyst e-mail:wyntersy@jncb.com Tel: 935 2763
this allowed for a 46.0% increase in non-interest
income to US$5.26Mn.
Good interest spread management through its carry
trade strategy allowed for growth in net interest
income by 49.7% to US$4.04Mn.
Vital Statistics
Year end
31-Mar
Stock code
PIL
Participate in Rights
Issue
US$0.21/US$0.16
Recommendation
52-wk high/low
Operating expenses rose significantly (83.1%) to
US$6.14Mn as a result of the amalgamation of PWLTL
and higher dividends on Manager’s preference shares1
during Q3 2014. The Manager’s Preference shares also
carry the right to a dividend equal to 25% of PIL’s
profits earned in excess of the hurdle rate, payable
quarterly. The hurdle rate is a percentage return on
PIL’s average equity in each financial year, set
annually at the 12 Month LIBOR rate prevailing at the
beginning of the financial year plus 200 bps, with a
permanent ceiling of 6% and a floor of 5% for PIL’s
first two years of operation. As a result the group’s
efficiency ratio deteriorated to 66% from 53% in the
corresponding prior year period.
Balance Sheet
Total assets amounted to US$347.00Mn as at
December 2014, up from US$146.4Mn as a result of
the acquisition and the consolidation of PWLTL and
additional investments in associate companies-Access
Financial Services and Knutsford Express Limited. The
increase in total liabilities (+ 137%) to US$304.47Mn
also bore the effect of repurchase agreements from
PWLTL.
At the end of December 2014 shareholder’s equity
stood at US$42.4Mn (BVPS:$0.11505).
The projected BVPS following the rights issue is
US$0.1263.
Current Price
US$0.18
Trailing EPS
1.60cents (US$0.016)
Trailing P/E
Trailing P/E @ IPO
Price
Forward Price
Current Book Value
Current Price to
Book Ratio
IPO price to book
value
Book Value Post
Rights Issue
11.25X
10.00X
US$
US$0.11505
1.56X
1.39X
US$0.1263
Projections & Valuations
Based on PIL’s nine months performance to December
2014, we are of the opinion that earnings will close
the year at US$5.51Mn (EPS:$0,0150), up 45.9% over
the prior year, primarily as a result of consolidation
with PWLTL (formerly FGFS). PIL’s carry trade strategy
is expected to be of great focus in 2015 relative to
portfolio positioning as market opportunities such as
the rallying of GOJ and US corporate bond prices seen
in 2014 are not likely to recur with such significance
this year. With interest rates in the US likely to
increase this year we are of the opinion that US
corporate bonds prices will suffer some falloff, limiting
securities trading gains. Emerging market bonds could
also see some price falloff given the expected increase
in interest rates in the US as funds flow towards safer
assets. As it relates to GOJ global bonds, we are of the
view that the positive outlook of the sovereign has
been fully priced-in, and prices should stabilize which
should limit the upside potential on these bonds.
1
MPS Holdings Limited (“MPS”),an investment holding company incorporated
in St.Lucia as an IBC, with the same shareholders as PML, holds the 10,000
Manager’s Preference Shares in PIL which carry the rights..
Prepared by NCB Capital Market Research Team:
Annya Walker, Research Manager e-mail: walkerad@jncb.com Tel: 935 2716
Simone Hudson, Senior Research Analyst e-mail: hudsonsg@jncb.com Tel: 935 2585
Shellon Williams, Research Analyst e-mail:williamssp@jncb.com Tel: 935 2749
Shaneka Wynter, Research Analyst e-mail:wyntersy@jncb.com Tel: 935 2763
4
The company is also expected to continue to pursue
its private equity strategy. This will result in some
volatility in earnings but bodes well for inorganic
growth. The recent acquisition of 49.27% stake in the
fast growing micro lender, Access Financial (AFS)
provides an opportunity to benefit from the growth
potential and further upside expected of AFS. PIL
recently sold the loan portfolio of Asset Management
Company Ltd (AMCL) to AFS.
Assumptions
Variables
Dividend
Payout
Risk
Free
Rate
Comments
50%
12.17%
Growth
7.55%
Justified
P/E
11.916X
FY 2015
0.0150
Core
EPS
FY2015
FY 2016
0.0112
0.0116
Stated
Dividend
policy
according to prospectus
Yield on the GOJ 2039s and a
5% equity risk premium
Projected ROE times 55%
retention ratio according to
stated dividend policy
Derived
from
the
aforementioned variables
As per projections
As per projections
Fair Value Estimates
The fair value estimates for Proven were derived using
the Dividend Discount Model (DDM) and Relative
Value Approach. The DDM yields a fair value estimate
of $0.1765, while the P/E Multiple yields a price of
$0.1335. Averaging these two prices yields a fair value
estimate of US$0.1550. As such, the offer of $0.16 is
within our fair value estimate.
Dividend Discount Model
Year
1
2
3
Dividends
0.00897
0.00639
0.00740
0.01003
0.01239
Discounted
CFS
0.00800
0.00508
0.00524
0.00634
0.00697
TV
4
5
0.2294
0.144882
Value per
Share
0.1765
While the offer is fairly priced, holders of the stock
will realize an immediate capital gain if market
conditions and multiples remain the same as the
current market price of the stock, at US$0.18, is
12.5% above the offer price. Capital gains aside,
returns on the stock are augmented by its attractive
dividend yield. Considering that PROVEN is a St.
Lucian IBC, dividends are remitted tax free. With
immediate capital gains of 12.5% and approximate
dividend yield of 6%, the stock’s estimated total return
is 18.5%, which we consider our base case estimate.
If we assume a worst case scenario that the market
price of the stock declines to our fair value estimate of
US$0.1550, this would result in a total loss of -5.1%,
after accounting for capital losses of 11.1% and a
dividend yield of 6%.
Within the context of a depreciating local currency,
which we project will lose 4% to 6% of its value this
year, holding equities denominated in US$ will help to
boost the return on your portfolio.
As it relates to the JMD subscription, this provides a
good opportunity for participation of institutional
investors such as pension funds and other fund
managers, which have to adhere to regulations which
limit their percentage holdings in USD denominated
assets.
Prepared by NCB Capital Market Research Team:
Annya Walker, Research Manager e-mail: walkerad@jncb.com Tel: 935 2716
Simone Hudson, Senior Research Analyst e-mail: hudsonsg@jncb.com Tel: 935 2585
Shellon Williams, Research Analyst e-mail:williamssp@jncb.com Tel: 935 2749
Shaneka Wynter, Research Analyst e-mail:wyntersy@jncb.com Tel: 935 2763
5
Appendix
PIL’s Corporate Structure
PROVEN Management
Limited (PML)
(Investment Manager)
Prepared by NCB Capital Market Research Team:
Annya Walker, Research Manager e-mail: walkerad@jncb.com Tel: 935 2716
Simone Hudson, Senior Research Analyst e-mail: hudsonsg@jncb.com Tel: 935 2585
Shellon Williams, Research Analyst e-mail:williamssp@jncb.com Tel: 935 2749
Shaneka Wynter, Research Analyst e-mail:wyntersy@jncb.com Tel: 935 2763
6
Disclosures
NCB CAPITAL Markets
Third Floor, “The Atrium”
32 Trafalgar Road
Kingston 10
Phone: 876-960-7108
Toll Free: 1-888-3342953
Fax: 876-920-4313
Company Identification:
NCB Capital Markets Ltd (formerly Edward Gayle and Co.) established in 1968 is Jamaica’s oldest stockbrokers. The company became a part of the NCB Group
in 1994 and a fully owned subsidiary in October 2002. In December 2002, the then Edward Gayle and Co. was merged with another NCB subsidiary, NCB
Investments. The products distributed by this combined subsidiary cover the traditional money market product offerings (J$ and US$ Repos), primary dealer
services, stock brokerage and investment advisory services. Edward Gayle was renamed NCB Capital Markets Ltd. in October 2003.
Important Disclosures
The views expressed in this report are the views of NCB Capital Markets Ltd at the date of this report.
Disclaimer:
This report is for distribution to the clients of NCB Capital Markets Ltd. It does not take into account the specific investment objectives, financial situation or
particular needs of any specific recipient. It is published only for informational purposes. No guarantee is provided in relation to the accuracy and completeness of
the information contained herein, nor is it intended to be a complete statement or summary of securities, markets or developments referred to in this report. The
report should not be regarded by recipients as a substitute for the exercise of their own judgment.
In accordance with Section 39 (I) of the Securities Act of 1993, NCB Capital Markets Limited hereby states that it is a subsidiary of the NCB Jamaica Ltd. and to
that extent may be regarded as interested in the acquisition or disposal of the shares of NCB Jamaica Ltd. However, the company acts in a proper and professional
manner in making any recommendations regarding shares listed on the Jamaica Stock Exchange. Share prices may fluctuate and past performance is not
necessarily a guarantee of future returns.
Ratings Definitions:
BUY: We believe the stock is attractively valued. The company has sound or improving fundamentals that should allow it to outperform the broader market. We
anticipate the stock will outperform the market over the next 12 months. The risk factors to achieving price targets are minimal.
HOLD: We believe the stock is fairly valued at the current price. The company may have issues affecting fundamentals that could take some time to resolve.
Alternatively, company fundamentals may be sound, but this is fully reflected in the current stock price. The risk factors to achieving price targets are moderate.
Some volatility is expected. Do not accumulate additional shares.
SELL: (1.) We believe the stock is overpriced relative to the soundness of the company’s fundamentals and long-term prospects. The company has significantly
weak fundamentals or a flawed business model. (2.) The stock is fully priced at current market price; investors should seek to take profits at this time.
Prepared by NCB Capital Market Research Team:
Annya Walker, Research Manager e-mail: walkerad@jncb.com Tel: 935 2716
Simone Hudson, Senior Research Analyst e-mail: hudsonsg@jncb.com Tel: 935 2585
Shellon Williams, Research Analyst e-mail:williamssp@jncb.com Tel: 935 2749
Shaneka Wynter, Research Analyst e-mail:wyntersy@jncb.com Tel: 935 2763
7