By Durrant Pate
Five companies trading on the Jamaica Stock Exchange (JSE) are set to lose their special 10-year tax waiver, which comes to an end in December.
They are Blue Power Group, Jamaican Teas Limited, Lasco Distributors, Lasco Financial Services, and Lasco Manufacturing. Having listed on the junior market in 2010, these companies would exhaust their 10-year waiver in the coming weeks.
As the first company to be on the junior market when it was launched in 1999, and therefore the first to get the tax waiver, Access Financial Services has already begun paying the full corporate income tax rate, as its 10-year waiver ended earlier this year. Since its inception on April 01, 2009, more than 40 companies have been listed on the junior market with the 10-year tax waiver being the key incentive encouraging companies to list.
In listing on the junior market companies receive an exemption from paying corporate income tax (ordinarily taxed at a rate of 33.3 per cent for regulated entities and 25 per cent for unregulated entities) in the first five years after admission to the junior market. In the subsequent five-year period, these companies are exempt from paying 50 per cent of such tax.
The reprieve on corporate taxes provides businesses with an opportunity to reduce their total expenses, increase profitability, and utilise the excess returns to reinvest in the growth and development of their operations. It is also an opportunity for investors to buy shares and thereby benefit from the growth of these junior listed companies.
As the tax incentive comes to an end for these six companies, questions have been mounting over whether they can survive without the tax benefit, especially in a post COVID-19 environment where businesses are reporting a decline in profits as well as revenues and sales plummeting.
NCB Capital Markets assessment
NCB Capital Markets (NCBCM) conducted an assessment of the growth rate some of these junior listed companies were able to achieve during the period of tax reprieve. The assessment showed that Blue Power Group, Jamaican Teas Limited, Lasco Distributors, Lasco Financial Services, and Lasco Manufacturing and Access Financial Services saw significant increases in net income during the 10-year tax reprieve.
Based on the assessment, the company with the strongest growth was Lasco Financial Services, which experienced its net profit growing by a compound annual rate of 44.3 per cent, moving from $10.36 million in 2010 to $281.75 million in 2019. Lasco Manufacturing was next, up 28.9 per cent, followed by Jamaican Teas at 23.8 per cent, Lasco Distributors with 22.3 per cent and Access Financial at an even 14 per cent. Blue Power was next, up 13.8 per cent.
Benefitting from growth rates
According to NCBCM, “the growth rates over the period highlight that these companies would have benefited from the tax break, some more than others.”
The data showed that some companies have utilised the period of growth to take advantage of acquisition opportunities. Access Financial was cited as the standard bearer in this area.
The company’s latest acquisition was Embassy Loans in 2018. With this acquisition and those prior, Access was able to expand its loan book and contributed to increased revenue in 2020.
Access acquired Damark Limited in 2016 and Microcredit in 2017, which NCBCM argues proves that the 10-year period allows small companies to achieve scalability.
“Other businesses such as Lasco Manufacturing & Lasco Distributors would have also utilised the opportunity to expand their operations, as both entities expanded their plant facilities to increase production and strengthen efficiency,” stated the assessment done by NCBCM.
At the same time, these junior listed companies have delivered solid returns to investors, with the junior market index growing at a compound annual rate of 27.4 per cent since 2010.
Losing tax break could be pressuring
However, the graduation of these entities from the tax benefits of the junior market will put downward pressure on their profitability, especially at a time when the economic effects of COVID-19 have been stressing revenue generation and increasing the expenses for some entities. NCBCM is emphasizing the benefits of accountability from being listed on the junior market.
According to NCBCM, “the improvement in corporate governance and transparency from the accountability requirements of the JSE improves their chances of receiving financing from financial institutions as well as the capital markets”. These accountability requirements, argues NCBCM, puts them in a good position to obtain financing for liquidity support if needed and access to capital for additional expansion plans.
Also they have seen their brand equity increase significantly from the publicity they have received since listing on the junior stock market.