First quarter profit drops by more than 50%
Sterling Investments continues to feel the pinch from the sluggish bond and equities market with profit for the first quarter, ended March 31, 2023, cut in half.
Profit for the period amounted to J$15.9 million down from the J$36.2 million recorded for the same period last year. This reflects a decline in unrealized gains on equity investments at fair value (the direct result of market price declines) and an increase in interest expense (the direct result of the increases in the Federal Reserve’s benchmark interest rates).
However, the management is anticipating that the unrealized gains will increase, as inflation and interest rates decline. Similarly, interest expense is likely to be near its peak and should decline at the end of the current hiking cycle.
The management is confident that shareholders will benefit in the medium and long term from the high-quality US$ assets in the portfolio and the steady stream of US$ dividend income it produces.
Like profit, revenues slumped moving from J$36.6 million in the first quarter of 2022 to J$29.9 million for the quarter under review. One contributor to this was a decline in total interest income.
Total interest income declined 9.25 per cent from J$39.6 million in the first quarter of 2022 to J$36 million in the first quarter of 2023. This was the result of the maturity of a bond within the portfolio which was not replaced.
Management intentionally refrained from purchasing new assets and instead opted to be patient and remain liquid with the goal of purchasing assets at higher yields in the future. It is anticipated that as the company purchases higher-yielding securities in the coming year, interest income should increase.
In sync with management’s outlook, asset prices are lower and interest rates are higher. While these events have had a broadly negative impact on Sterling Investments’ current performance, it provides a wealth of buying opportunities for the company and is likely to create value in the medium term, as it will be able to reinvest its funds in higher-yielding instruments.
Market prices of stocks and bonds were broadly lower in March 2023 than they were in March 2022. As a result, the value of Sterling Investments’ total asset base was also lower at March 31, 2023, than it was on the same date in 2022.
Total assets as at March 31, 2023, stood at J$1.7 billion, down from J$2.1 billion as at March 31, 2022, which reflected the broad-based, systemic downward market movements occurring in the global capital markets. The decline has presented a wide array of attractive buying opportunities for the company.
However, management is patiently assessing the macro-economic data, credit spreads and liquidity conditions, to appropriately deploy the company’s capital. Total liabilities declined by 23 per cent to J$514 million as at March 31, 2023, largely the result of declines in margin loans and other payables.
Total equity declined to J$1.2 billion, also a result of the lower market prices for the assets in the investment portfolio relative to March 2022. The management largely views the depressed asset prices as temporary and a consequence of the natural part of the economic cycle that the world is now experiencing.