Initial Public Offering | TransJamaican Highway Ltd.
TJH presents potential investors with the unique opportunity to invest in Jamaican infrastructure which plays the pivotal role of, in some cases, expediting the commute from the parishes of Clarendon and St. Catherine into the Kingston/St. Andrew corporate area. TJH owes its success to:
- Increased Utilization of its roadways which has been supported by:
- Growing populations and housing developments in rural parishes expanding the number commuters to Kingston/St. Andrew from those parishes.
- Increased motorization.
- Increasing tariff (i.e. toll) rates which hedge against the eroding force of inflation and the depreciation of the local currency relative to the United States Dollar.
We view favourable the fact that the underlying infrastructure through which the company earns revenue is already constructed, operational (i.e. brownfield development) and generating returns. This somewhat inoculates investors from start-up risk and execution risk associated with preconstruction projects and consequently helps to reduce the risks investors would undertake if they opt to invest in TJH. Additionally, we view favourably the defensive nature of TJH’s operation. That is to say, during periods of economic downturn, the company is relatively less susceptible to its economic performance lagging. Consequently, the addition of this stock to an investor’s stock portfolio could help to reduce the beta (i.e. risk, or correlation to the overall market) associated with their stock portfolio. That is not to say that the company’s operations are immune to cyclical declines, as during the Global Finaincal Crisis between 2008 and 2010, the company’s performance did decline.
No equity investment is devoid of risks. Should the company be listed on the Jamaica stock exchange, it exposes investors in the stock of the company to market risks, which may, nonetheless, result in the price of the security fluctuating. This risk is unavoidable. Additionally, though (in our opinion at this time) minute, there still lies the risk of competition and non-renewal of the concession agreement. Competition, in the form of the newly renovated Nelson Mandela Highway, has curtailed utilization of TJH Portmore causeway. Through the concession agreement somewhat insulates the operator from these threats, there are exceptions such as the aforementioned example. Additionally, it is our opinion that the current concession agreement is a pivotal asset for TJH. A failure to renew the agreement on equal or more favourable terms as are in place now could potentially stymie the company’s operations. We are also wary of the concentration of the company’s revenue and income stemming from the Portmore leg of the highway. Should there be any adverse development in the roadway or the community, the company’s performance could suffer.
It is also or opinion that as the company stands now (i.e. none of the potential pipeline projects were modelled into our fair value estimate), TJH at a price of US$0.01 or J$1.41 is being offered to the public at a 21.85% discount relative to our computed fair value of US$0.0128 or J$1.80. This implies that at the IPO price, the shares in the company has potential upside of approximately 28%. Additionally, should the company follow through on any of the plans outlined in its pipeline, they are expected to be accretive to shareholder’s value.
Nonetheless, we do not expect the TJH’s share value to rapidly appreciate in a rationale market. This is because it is our expectation that the company’s strategy will lend itself to delivering returns over the long term as opposed to immediately or in the near term. Consequently, we harbour expectations for limited/slow capital appreciation. This, however, is somewhat compensated for by an expectation that TJH may, based on TJH’s indications in the prospectus, implement a generous dividend policy. The dividend policy is likely to be supported by an expectation of:
- Continued economic growth in the country
- Increased housing developments in rural parishes
- Increased motorization of the public
- Continued honouring of the concession agreement which inoculated TJH from most competitive threats and guarantees TJH the right to increase the toll tariff on an annual basis.
- Kingston & St. Andrew remaining the economic hub of Jamaica inspiring sustainable commute from rural parishes for work and commerce.
Therefore, it is our opinion that this investment is suitable for long-term-patient investors with a focus on income, relative to capital gains, seeking to diversify and potentially lower the risk profile of their stock portfolio.
|Offer Price||US$0.01 or J$1.41|
|Estimated Fair Value||US$0.0128 or J$1.80|