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Fontana Waterloo excites the market - Pharmacy company leads gains on JSE year to date

Jamaica Gleaner 2019-10-09 06:39:00
Rudolph Brown The new Fontana Waterloo Square in Kingston.

Shares in Fontana Limited led market gains for the first nine months of the year, owing in part to the anticipation of its new flagship store, which is scheduled to open today, Wednesday.

The pharmacy company, which trades under the FTNA symbol, was one of six stocks on the Jamaica Stock Exchange, JSE, that made triple-digit gains. The FTNA stock has surged 350 per cent since January, valuing the company at $10.6 billion, compared to $2.3 billion at listing.

The surge in price means that investors are betting that the company will grow at a faster rate to justify the price hike.

“We will grow into our valuation, 100 per cent, yes we can,” said Fontana CEO Anne Chang in response to queries on whether the stock can support the valuation posed to her during the sneak- peek’ soft opening of Fontana Waterloo Square in Kingston on Monday.

It becomes Fontana’s sixth outlet nationwide and its second in Kingston, which is the only parish with two outlets.

Chang has no fears that Waterloo will cannibalise the business at Barbican, saying that the locations are far apart and that both will maintain loyal customers.

“Our growth in Kingston was limited due to parking at the Barbican location. So with the new location, we are no longer constrained,” Chang added.

Fontana was listed in January at $1.88 and closed at $8.51 on September 30. That pushed the price relative to its earnings, or PE, towards the 30-times region in a where many of its peers trade at around 20 times earnings. The challenge for Fontana’s management will be to grow its earnings to bring its PE back in line with its peers.

On Tuesday, the stock closed lower at $7.72 per share, valuing the company at $9.6 billion.

Investors have been anticipating the opening of Waterloo Square because of its revenue potential.

“In terms of physical appearances and branding, the new store is worth the wait, and it should be interesting to see the impact on its neighbours,” said Ryan Strachan, vice-president of investor relations at GK Capital, who was at the soft opening.

He reasoned that given the increased parking, multiple access points and pending conclusion of roadworks, the new facility could match the performance of the Barbican store, which contributes just over a quarter of Fontana’s total revenues.

Consequently, Strachan expects Fontana to produce annual revenue of $4.6 billion and profit after tax of $400 million to $460 million at year ending June 2020. That’s up from $3.7 billion in revenue and $306 million net profit reported by Fontana for year ending June 2019.

“This would translate to a forward price to earnings of 22 times at [Monday’s] price of $8.01, versus a trailing PE of roughly 32 times. That is quite competitive relative to the junior market overall PE and conservatively strikes me as a buy at current levels. It also strongly suggests that the market has priced in this anticipated growth at current levels,” Strachan stated.

With the exception of Fontana, large-cap stocks outpaced gains of small-cap companies during the three quarters that have rolled off in 2019. The main market’s triple-digit performers were, Jamaica Stock Exchange Limited, up 158 per cent; Sygnus Credit, up 117 per cent; Wisynco Group, up 115 per cent; and Wigton, up 100 per cent.

The top junior market performers were Fontana, up 350 per cent; The LAB, up 180 per cent; General Accident, 95 per cent; Elite Diagnostic, 82 per cent; and Blue Power Group, up 79 per cent.

Chrevaughn Legister, assistant asset manager at Proven Wealth, says the top-performing large-cap stocks benefited from announcements of mergers and acquisitions. For example, NCB Financial Group’s climb to 39.92 per cent gain year to date reflects its acquisition of a majority stake in regional insurance giant. Guardian Holdings Limited, she said, while JMMB Group’s 40 per cent rise reflects its pending acquisition of a 22 per cent stake in Sagicor Financial and Wisynco’s 115 per cent gain reflects its purchase of a 30 per cent stake in Jamaica Producers Group’s snack subsidiary, JP Snacks Caribbean.

At September 30, the JSE Main Market was up 36 per cent at 516,043 points, while the junior market was nine per cent year at 3,533 points.