Market capitalization
surges to TT$8B since January

by Adrian Manmohan, Investment Analyst, West Indies Stockbrokers Limited (WISE)

Our review covers a very hectic first half-year in which there were unprecedented highs. Trading on the secondary market reached an all time high. However, it was the primary market and company news which provided the most excitement. The Composite Index moved from 150.2176 at the end of 1995, to 162.5878 at the end of June 1996, an increase of 8.24%. This is the highest the Index has reached in its history.

This performance is commendable especially coming after a 69.55% increase in 1995. Overall, sixteen stocks advanced and six declined, not a market-wide 'bull,' but steady increases in a few selected stocks. There were 88,462,621 stocks changing hands in the first half, with a value of $373,569,513.15. The market capitalization increased from $6,556,149,281 at the end of 1995 to $8,506,984,471 at the end of June 1996, an increase of 29.75%.

In the primary market, the Royal Bank rights issue dominated activity. The rights issue raised $235 million to finance the bank's 1995/96 investment programme. The rights were allocated on the basis of two new shares for every seven stocks held at a price of $9.25 per share. It was the largest issue in the history of the Trinidad and Tobago Stock Exchange. It was an outstanding success with an acceptance rate of 92.98%. There were applications for 17,760,754 excess shares with only 1,788,379 being available. Stockholders who applied for excess shares were allotted approximately 10% of the amount they applied for. There were just over 1.8 million rights traded between a price of $1.20 and $1.48.

Company news in the first half was dominated by Republic Bank's strategic investments, Neal and Massy's big loss, TCL's takeover of Readymix and Guardian Life's corporate restructuring. Republic Bank made a second attempt at taking over Bank of Commerce (BOC). The move came two years and one week after its first bid was scuttled by its stockholders at an Extraordinary Meeting. Republic failed in its bid to acquire the bank outright but now controls between 67% and 70% of the outstanding capital of BOC. This does not allow it to merge the operations of the two entities which would have provided the greatest synergies. However, it can report BOC as a subsidiary. It has set up a merger committee between the banks to explore the benefits of the synergies presented by an eventual merger of the two operations.

Trinidad Cement Ltd (TCL), which at the end of 1995 held 39.30% of the outstanding capital of Readymix (WI) Ltd, made a bid at $1.35 to acquire the rest of Readymix's stocks it did not own. TCL received acceptances for 3,163,733 stock units which together with the 4,713,817 stock units acquired in December of 1995 brought its holding to 65.65% and gave TCL effective control of Readymix. It can now account for Readymix as a subsidiary.

Neal and Massy Holdings, whose profits have been constantly undermined in the past three years by trade liberalization, its exposure in Jamaica and anaemic management, made a special provision of $100 million for asset write-off, further business disposals and other restructuring costs. This brought losses attributable to stockholders to $95.674 million. This was an unprecedented move in Trinidad and Tobago and by far the largest loss ever by a listed company. Management has said that they have learnt from the mistakes of the past and are committed to correcting them. They have started by disbanding the executive board and continuing the winding down or selling off of certain operations.

Guardian Life of the Caribbean Limited carried out a restructuring exercise in which it formed a holding company, Guardian Holdings Limited. Guardian Life and the group's other interests became subsidiaries of the holding company. Stockholders of Guardian Life exchanged their stocks on a one for one basis for stocks in Guardian Holdings Limited. Guardian Life was suspended from trading on May 31, 1996 and Guardian Holdings Limited was listed on June 18, 1996.

In economic news, the new administration presented its first national budget, which allayed the fears of many. The budget was lucid and had something for everyone. The highlights of the budget was the reduction in taxes, the reduction in tax incentives, a projected surplus of $284 million and a 4.1% growth in GDP. The year began with tremendous pressure on the TT dollar. The uncertainty which prevailed since the new Government took office in November put pressure on the exchange rate. This was compounded by high cyclical demand. The Central Bank instituted a tight money policy by increasing the reserves which banks were required to hold with the Central Bank by $500 million. The Central Bank injected US$18 into the system in order to satisfy demand. This was done in order to protect the exchange rate.

In the first quarter of 1996, the economy actually grew by 0.7%. The exchange rate remained stable. The fiscal performance was very strong with a surplus of $220.4 million. The petroleum sector grew by 4.1%, while the petrochemical sector grew by 3.8% based on increased production of nitrogenous fertilizers. The output of the non-petroleum sector fell marginally by 0.4%. Inflation as at the end of May was a low 2.7% (year on year). Net foreign reserves increased by US$5.8 million to $487.7 million, prime interest rate currently stands at 15.5%.

Our outlook for the second half of 1996 is for slow steady growth. The petroleum sector remains the backbone of the economy. In the first half, output rose by 1.6% to 133,000 barrels per day (bpd) and prices rose by 10%. In the second half, the industry should have fully shaken of the effects of the strike in the third quarter of 1995. Also Petrotrin' refurbished refinery would be back on full throttle. Activity in the construction sector has slowed down as the new administration refines its focus. Next year we expect this sector to pick up. The Government has just signed two loan agreements with the Inter-American Development Bank for improvement in health care and transportation infrastructure. This would translate into more construction activity in 1997. There is also the start of construction of the Liquid Natural Gas (LNG) plant, Farmland MissChem's ammonia plant, ISPAT's new DRI plant and Cleveland Cliff's iron carbide plant.

In the first half of the year individual corporation's economic fundamentals had different effects on leading stocks. For instance, Republic's gain could be traced to its excellent 1995 performance, when its profits rose by 71%. The prospects are very good that Republic would continue to perform well in the immediate future. Readymix had the largest decline because TCL's bid price was $1.35 and also because of its poor 1995 performance. We expect this pattern to continue in the second half of 1996. That is, there would be no market momentum but individual company momentum.

At the beginning of 1996, our picks for the year were Republic Bank, Royal Bank, Scotiabank and TCL with Caribbean Communications Network (CCN) and Ansa McAl being the dark horses. Our predictions have held out for the most part and we stand by them for the rest of the year. We believe that between now and December you should watch these stocks and maybe add Guardian Holdings.

A story which is still breaking at press time and has potential to be the biggest story for the decade is the latest Republic Bank/CLICO impasse. CLICO has petitioned for an extra-ordinary general meeting in order to change the board of directors of the bank. This has led to a sell off of over 1,551,436 Republic stock units between July 3, 1996 and July 17, 1996. The Minister of Finance has met with the two sides with the view of mediating a settlement. It is difficult at this time to guess the outcome of this latest battle.

We expect the second half of year to be just as hectic as the first half. The Republic Bank/CLICO impasse would dominate the news. We are looking forward to half years results from companies with a December year end. We anticipate good results from most of these companies especially Ansa McAl and CCN. The market would also be looking at TCL, Readymix, National Flour Mills, Angostura and Lever Brothers (WI) Ltd. Later in the year the banks would be releasing their final results. We expect another record-breaking year for Republic, Royal and Scotia.

We expect Agostini's to have a very good year following up on the excellent performance in 1995. We await anxiously final results from Neal and Massy to monitor the progress of the rationalization and the outcome of the $100 million provision.

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