Brokers see upside to TJH stock after listing

Brokerage firms rate the TransJamaican Highway, TJH, initial public offering of shares as a buy, with expectations that the stock price will rise in the short term.

That’s despite disclosures in the IPO prospectus indicating the toll operator was projecting pre-tax losses.

Most brokers see the potential short-term gain, that is, the stock’s upside potential, ranging between 10 and 20 per cent above the $1.41 IPO price; and that any larger rise in the stock price would likely happen several quarters after listing.

The outliers see a fall in the price on the low end and up to 29 per cent gain on the high end.

The firms revealing short-term target prices for TransJamaican include:

Sagicor Investments: $1.36 to $1.53

Stocks & Securities: $1.56

Proven Wealth: $1.55 to $1.82

Scotia Investments: $1.69

NCB Capital: $1.71

Barita Investments: $1.74

JMMB Securities: $1.79

GK Capital: $1.79

VM Wealth: $1.82

The brokerages conducted their valuations using a mix of past and future projections. They also utilised multiple methods to evaluate fair value, with the higher targets using the discounted cash flow method over the price-to-earnings, P/E, method or price-to-book value method.

Those relying on the discounted cash flow defended its use, saying investors need to adjust for factors such as inflation, currency movements and, importantly, the estimated one-off pre-tax loss projected in its prospectus for December 2019.

“Adjusting for these one-offs, we calculated a net profit of US$6.2 million,” said JMMB Securities, which noted that it used the discount cash flow model to determine the TransJamaican’s fair value price, because it believed it “to be the most appropriate model for infrastructure investments”.

JMMB Securities revealed a target price of $1.79, which represents a potential upside of 27 per cent.

“We believe the offer is suitable for income-seeking investors with a long-term horizon,” said JMMB.

Sagicor Investments views TJH as being fairly valued between $1.36 and $1.53, but argued that there’s greater value in the stock over the medium term.

“The IPO pricing is within the fair value range. This suggests that investors could consider investing in this value stock, which should provide an attractive rate of return over the medium term,” added Sagicor.

On the high-end valuation, VM Wealth acknowledged that the earnings carved by TransJamaican out of annual revenue of some US$53 million are less than desirable, but was still bullish on the company’s prospects.

“Despite having relatively low levels of earnings, we do not expect this to have an adverse effect on the company’s liquidity or ability to pay consistent dividends, as the company’s cash flow generation is strong and expected to increase over time as the company pays down its debt,” said VM Wealth.

The brokerage said its price target of $1.82 or US$0.013 “implies that the offer is coming in below its fair value”. That equates to a potential 29 per cent upside.

Proven Wealth says its analysis of the base-case to best-case scenarios sees the stock climbing to $1.55 and $1.82, respectively.

“The free cash flow-to-equity was used to calculate the fair value due to the cash payments to shareholders over the life of the concession,” said Proven. The toll road concession held by TransJamaican for the East-West Highway extends to year 2036, with the option of renewal.

Proven also expects the refinancing of US$225 million of TransJamaican debt, a transaction that is expected to finalised this month, will free up cash flow for the company.

Scotia Investments computed a fair value at $1.69 in the short term, with higher appreciation of 62 per cent projected over a one-year period, “given the relatively attractive potential upside as well as the long-term income opportunity,” the brokerage said.

Scotia Investments conducted a one-year forward EBITDA valuation which derived a target price of US$0.016 or $2.28.

Lead arranger and co-broker of the TransJamaican IPO, NCB Capital Markets, estimated the company’s value at $1.71 per share.

“Taking into consideration all the aforementioned assumptions, we arrived at an average fair value estimate of US$0.012 per share, which offers an upside of 21.4 per cent to potential shareholders,” NCB Cap said.

TransJamaican aims to raise as much as $14 billion in its IPO, which comes to market February 17 to March 9.

The toll road company was taken over by the Jamaican Government from French operator Bouygues Travaux Publics and its partners, as part of its privatisation programme for state assets.

National Road Operating & Constructing Company Limited, which assumed control of the toll road concessionaire, plans to use the IPO proceeds to repay debt used to purchase TransJamaican from its foreign shareholders.

TransJamaican holds total assets of US$293 million, while its book value, net of debt, was estimated at US$59 million up to December 2019.

steven.jackson@gleanerjm.com