By now we have all digested the events of June 8: the Comey testimony and the embarrassing setback for Theresa May’s Government. The fall from grace for these two so-called leaders of the Free World continues.  

Oddly enough, global stock markets soared unimpeded by the woes of either Trump or May but the pound sterling plunged in reaction to news of a hung parliament in Britain before the market rallied in the early sessions Friday with some indices even hitting new highs.

Back home, there were two investment stories worthy of the front pages: Trinidad and Tobago NGL Limited’s additional public offering (APO) and the government’s latest TT$1.5 billion bond issue. 

The TTNGL APO represents a further divestment of government’s equity stake in Phoenix Park Gas Processors Limited (PPGPL) making for a 52.9 to 47.1 percent equity split between the government—via its holding company, the National Gas Company (NGC)—and other mostly individual investors. 

The bond issue, in the main, is government’s attempt to meet public expenditures. In the context of the local capital market, the state—not the systemically important financial institutions—continues to be the main driver of this type of activity. 

Prior to 2016, a lack of government bond issues resulted in limited capital market opportunities and drove excess liquidity across the sector.  

Institutional funds were homeless and we’ve still not recovered from the fall in interest rates. Now that we’re in a recession, any upward movement in rates will threaten the pace of macroeconomic recovery and an increase in the price of credit is generally undesirable in a weak economic environment.

As far as the APO goes, the first point that should be made is that, for the public at large, it’s an opportunity to benefit from Trinidad and Tobago’s gas business, one of the key contributors to the economy. It’s a chance to capitalise on the recovery of an oil and gas sector that has been depressed for some time. 

Yes, you should act on this. Too often, would-be investors opt to buy stocks when the party has already started or worse, when it’s about to end. 

But before I comment on the potential performance of the investment, let’s look at TTNGL’s financial performance. 

TTNGL Statement of Financial Position as at 31 December 2016
2016 2015 2014 2013
$000 $000 $000 $000
Non-current assets
Investment in joint venture 2,985,162 2,827,778 2,730,904 -
Current assets
Due from parent company - 415,836 167,586 -
Dividend receivable 13,155 25,036 24,798 -
Deferred tax asset - - - 12
Cash and cash equivalent 366,080 - - -
Total current assets 379,235 440,872 192,384 12
Total assets 3,364,397 3,268,650 2,923,288 12
Shareholders’ equity and liabilities
Share capital 2,772,120 2,772,120 3,870,000 -
Translation reserve 146,005 (19,194) (51,125) -
Retained earnings/(accumulated deficit) 442,529 495,161 (896,149) (37)
Total shareholders’ equity 3,360,654 3,248,087 2,922,726 (37)
Current liabilities
Due to parent company/related party 3,332 1,104 502 -
Dividends payable - 19,350 - -
Trade and other payables 175 58 35 49
Income tax payable 236 51 25 -
Total liabilities 3,743 20,563 562 49
Total equities and liabilities 3,364,397 3,268,650 2,923,288 12
* Financial period 2013 runs from 13 September 2013 to 31 December 2013
SOURCE: TTNGL Prospectus 2017

TTNGL is a holding company NGC set up to own PPGPL shares so we are, in fact, taking an indirect look at PPGPL’s performance. The company has a strong asset base at TT$3.364 billion, up from  TT$3.268 billion, led by an increased cash position of TT$366 million.

Shareholder equity increased via retained earnings and translation reserves which are usually gains associated with foreign exchange movements as well as changes in asset values.

It stands to reason that a strong income statement performance followed driven by profits associated with equity accounting or the ability to record the profits of another company as its own once its shareholding in that company is in excess of 20 percent. In the income statement below, the line item “Share of Profit from Investment in Joint Venture” is, in this case, PPGPL.

Here’s how I see it: With a share price of TT$21.00 this is an attractive investment. Dividends will be distributed in US dollars so investors will also benefit from any potential movement in the exchange rate in the event the TT dollar depreciates at future dividend distributions. 

TTNGL Income Statement as at 31 December 2016
2016 2015 2014 2013
$000 $000 $000 $000
Share of profit from investment in joint venture 163,955 136,279 345,288 -
Interest income 219 - - -
Total Income 164,174 136,279 345,288 -
Impairment reversal/(loss) 17,831 235,195 (1,097,880) -
Legal and professional fees (704) (55) (35) (10)
Other expenses (956) (282) (144) (39)
Profit before taxation 180,345 371,137 (752,771) (49)
Income tax expenses (777) (305) (348) 12
Profit after taxation for the year 179,568 370,832 (753,119) (37)
Other comprehensive income:
Items that will not be reclassified subsequently to profit or loss
Exchange translation differences, net of tax 165,199 31,931 (51,125) -
Other comprehensive income for the year 165,199 31,931 (51,125) -
Total comprehensive profit for the year 344,767 402,763 (804,244) -
* Financial period 2013 runs from 13 September 2013 to 31 December 2013
SOURCE: TTNGL Prospectus 2017

A Comment on the Local Stock Market

Investments in stocks are usually aimed at experiencing capital appreciation and dividend income, usually in that order. However, in light of the relatively low volumes associated with TTSE stock activity, the dividend play in this instance may actually take first priority. How I see it, unless new institutional demand and improved efficiency flow back into our stock market, upside potential may be limited and gradual. 

Though this isn’t a crisis we’ve seen in our market unfairly low upward movement in companies’ share prices in response to strong results and positive company news.

It has little to do with company performance but with relative under-participation and development of our stock exchange due, largely, to our age and much-needed improvement in our regulatory oversight and framework.

Since 2005, others have suggested that our local stock market activity has fallen materially owing to several pension plans and insurance companies having had to shed stocks to regain regulatory compliance, driven by the enforcement of what has been commonly referred to as the “80/20 rule” in our local context. 

Back then, these companies found themselves over a 20 percent regulatory limit for holdings in local equities as a percentage of their overall investment portfolios and it was mostly because of capital appreciation of several stocks over the years. 

This excess institutional supply wasn’t a welcome development in our local stock market and it led to a collapse in prices and a scenario that arguably has not reversed itself since. Even today, individual and new institutional investor participation have not been able to absorb or meet this excess supply.

As a small consolation, this scenario is not singular to any particular stock. I’m merely giving you this background so you have some insight to guide you and help manage upside expectations. Just remember, compared with the rest of the world, our market is still quite young.