Investment Analysis | Supreme Ventures Ltd.
Over the past four years, it is our opinion that SVL has been one of the pillar companies of the Jamaican Stock Market. During that time the company has grown from strength to strength:
- Posting record breaking financial performances on multiple occasions.
- Expanding the scale and scope of the company through merger and acquisition activities.
- Geographically diversifying the company’s footprint by expanding into, what is expected to be one of the fastest growing economies in the Caribbean/Latin American region, Guyana
- Consistently distributing upwards of 80% of its profits to shareholders as dividends.
The company accomplished these milestones while remaining relatively unleveraged. However, despite the company’s exemplary performance specifically over the past four (4) financial years, SVL may be squaring up to one of its most testing years of operation in 2020, and potentially beyond, in the wake of the Coronavirus pandemic.
We anticipate that the company could face headwinds stemming from the economic fallout from the virus. This will be most evident in the company’s (Horse) Racing sector and the sports betting sector, both of which effectively has been mostly inactive since March, and almost the entirety of the second quarter of the year. However, some reprieve may be on the horizon for the Sports betting segment with many prominent sporting leagues across the globe, such as The Premiere League, La Liga, the Bundesliga, etc., already making announcement for the continuation of their respective sporting leagues in June and July. Other prominent sporting leagues, such as the NBA and the NFL, while not yet having made concrete announcements, are thought to be on the cusp of announcing the continuation of their leagues by many reputable sports journalists who cover the respective leagues. However, even with the continuation, it is somewhat unclear if the betting public will continue to be interested with the respective leagues continuing off season. Additionally, the (Horse) Racing segment may also resume shortly, as SVL has announced recently that it is finalising a proposal to the Government seeking approval for the resumption of operations at Caymanas Tracks.
In addition to the aforementioned headwinds, it is our opinion that the company’s primary segment’s, the lotteries segment, operations are likely to be negatively impacted by Government mandated curfews and lockdowns, which curtailed operating hours in the second quarter of the year. It is our expectation that these courses of action would have likely reduced the amount of patronage the company would have received in the period. We anticipate that this expected outcome will be mirrored in SVL’s pin code (phone credit) segment as well. Furthermore, continuation of such measures, though not assumed in our valuation forecasts, could further impair the company’s operations going forward. Additionally, the psychological impact stemming from the Coronavirus outbreak could also push some customers to reassess their expenditure priorities on a temporarily or even permanent basis. This reassessment could see funds budgeted for SVLs games giving way to other expenditures.
However, it is our opinion that this is likely to be uncommon as vices, such a smoking, the consumption of alcohol and gambling, tend to retain their share of customer’s wallet even in the face of economic downturn. This is partially owing to the addictive nature of the vices. However, consumer’s expenditure on vices could be curtailed due to a spike in the rate of unemployment which we anticipate will rise stemming from various sectors in the economy being shut down or slowed down significantly. Paramount among these sectors are the tourism industry, leisure industry, and restaurant industry. Overall, if we were to paint the future outlook of the world economy with a reasonably optimistic brush, we would anticipate that the path to economic recovery would be a slow one. Therefore the headwinds presented by unemployment are unlikely to be quickly abated. Additionally, should the threat of increased competition materialize (see competitive analysis), the company’s future earnings could also be negatively impacted. However, this matter is currently before the courts for litigation, therefore it is uncertain if this threat will materialize.
Consequently, the short term outlook of SVL is somewhat opaque, but in our opinion skewed to the downside. This outlook is reflected in our baseline forecast of SVL’s performance in FY 2020, when we anticipate the company’s net income is likely to contract by 21.27%, to J$1.95B, relative to the company’s performance in FY 2019. Utilizing this information we estimated SVL’s fair value at J$13.97 per share. This is suggests that at closing price of J$15.02 on June 4, 2020, the SVL shares are trading at a 7.48% premium to our computed fair value. Therefore, due to the expected short term headwinds associated with the company and it presently being unclear when or if these headwinds will abate, we are recommending the shares of SVL at this time as a HOLD. However, despite the short term headwinds which in our opinion the company will undoubtedly encounter, we also believe that there are positive takeaways on which a patient, risk tolerant investor could form an investment thesis on. It is our opinion that, all other things being equal, SVL’s recent expansion into what is expected to be the fastest growing economy in Latin America and the Caribbean, Guyana, should have positive long term implications for the company subsequent to the Coronavirus pandemic. Additionally, SVL has long been heralded as one of the Jamaica Stock Exchange’s (JSE’s) strongest most consistent dividend payers.
When compared to some of the JSE’s largest companies which also share SVL’s dividend pedigree, SVL still stands near the summit, paying out, on average, approximately 105% of its net income to shareholders as dividends between 2016 and 2019. SVL’s average payout ratio was only surpassed by Carreras Limited, which paid out on average approximately 115% of net income to shareholders as dividends. Therefore, investors seeking income who are comfortable taking on the market risk of equity likely to result from the downside risks previously highlighted, could look towards SVL as an investment. However, they should be mindful that dividends are not guaranteed, and the distribution of them may be considered speculative in light of the current economic climate.
|Closing Price 05/06/2020||J$15.02|
|Estimated Fair Value||J$13.97|
|Potential Capital Return||-6.99%|
|Estimated Dividend Yield @ Current Price||4.32%|
|Potential 12M Total Return||-2.67%|