JMMB & CCMB: Value going forward

By Alana Romans

Sunday, August 19, 2012

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OVER a number of years, I have seen many deals take place in the local equities market and I can say without question that the shareholders of Capital & Credit have made a profit on the deal with Jamaica Money Market Brokers (JMMB). There has been a great deal of talk by shareholders of (CCMB) and many of the talk surrounds past share prices. What needs to be understood is that the equities market is a forward looking mechanism. The market is also concerned with what will happen in the future. And so it is not about the price paid but the value to be gained from the transaction that counts.



The payment per CCFG share was as follows:



1. J$3.19 in cash



2. J$1.36 by the issue of new ordinary stock units in JMMB.



This is a very simple point — there is significant value upliftment in the deal. If JMMB is able to improve the financial performance of the combined companies and by extension drive an increase in the share price, CCMB shareholders will benefit from further capital appreciation.



Now, let us run the numbers. Prior to the announcement of the JMMB offer, CCMB shares exhibited a downward trend, moving from a price of over $30 in early 2005 (closing as high as $34.60 in February 2005) to just below $3.00 in January of 2011. By August 9, 2011, the day prior to the public announcement of JMMB’s intention to purchase 100 per cent of CCFG’s share price closed the trading day at $3.64.



Again, I remind readers that the stock market is also concerned with the potential for the company’s growth over time. And given the trend of the CCMB share price, one interpretation could be that investors were of the view that something was fundamentally wrong with the company. This explanation may be considered more plausible as at that time the company had amassed a huge non-performing loan portfolio. As at December 31, 2010, the aggregate amount of non-performing loans on which interest has not been accrued was $2.9 billion a significant increase from the prior year’s $704.3 million and approximately 45.6 per cent of the group’s total loan book of $6.5 billion. The aggregate amount of nonperforming loans have since increased and amounted to $3.2 billion at the end of December 2011 while total loans for the group amounted to $6.3 billion.



Now consider what happened after the JMMB takeover announcement. The stock price has seen upward movement between August 2011 and June 2012, closing the May 25 (the opening day of the offer) at $4.52.



And what you find is that CCMB shareholders have booked a profit due to the market’s assessment that the combined entities will create value. That is the key consideration. An investor is a forward-looking person who keeps an eye on where value is created and how it can be extracted. That is why we consider this to be a good deal.



Alana Romans is the Manager, Research & Special Projects at Mayberry Investments Limited. She can be contacted at Alana.romans@mayberryinv.com

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