By David Fox

A bleak picture of the economic outlook for Bermuda has been painted through the third-quarter results of Bermuda exempt investment holding company, Bermuda First Investment Company Ltd.

Their results reflect the grim financial reality in the performance of key Bermuda companies and a concern that “economic recovery will be long and slow unless significant decisions are made to encourage business investment in Bermuda and there is an increase in resident numbers”.

Bermuda First, listed on the Bermuda Stock Exchange, makes money trading in Bermuda stocks. Yet the performance of these equities has been recently affected by market conditions, together with structural and regulatory issues.

The result for First Bermuda is several million dollars in unrealised losses for the nine months to March 31.

They reported revenue for the nine months of $2.6 million and profit of $1.4 million (prior to an unrealised loss on the company’s investments of approximately $7.4 million).

The Bermuda Stock Exchange-(BSX) listed company, which owns a number of significant investments in BSX-listed companies, also reported a realised gain on investments of $0.3 million and stated the market value of their total investments at the end of March of approximately $36.5 million.

For the third quarter, the company reported revenue of $1 million and profit of $0.4 million (before an unrealised loss on its investments of approximately $3.1 million, relating to the movement in the value of the company’s investments between January 1, 2014 and March 31, 2014).

Total expenses were $0.4 million with $0.3 million relating to accrued interest expense on the company’s unsecured 2019 loan notes. The company’s undiluted loss per share was $1.30.

Commenting on the financial results, BFIC chairman J Michael Collier said: “During the quarter the company sold its small investment in the Bank of Butterfield which yielded a profit of $0.3 million.

“The fall in the share prices of both KeyTech (Ltd) and Ascendant (Group Ltd) has negatively impacted the company’s investment portfolio. We continue to believe these companies remain significantly undervalued but an increase in their share prices will only occur once the local economy improves and resident numbers increase.“

At the end of March, the company’s investments had a total value of $36.5 million and the company had cash of $0.7 million. The company had shareholders’ funds as at December 31, 2013 of $15 million, bank debt of $5 million and unsecured long term seven year loan notes that it issued to its founder shareholders in October 2012 of $17.1 million.

The company statement said that it was anticipated that KeyTech’s results for the year ended March 31, 2014 will be released in June.

It said: “KeyTech’s share price decreased by approximately six percent in the three months ended March 31, 2014 and the share price has continued to decline since the quarter end.

“We believe this is a consequence of the struggling Bermuda economy, increased regulatory scrutiny and with the belief that as earnings are under pressure KeyTech would reduce its dividend.

“On March 27, 2014, KeyTech announced that it was reducing its dividend by 25 percent to $0.36 a share. We understand the rationale behind this decision and believe that by reallocating the cash saved into the company’s operations (it) will enable the company to focus on its core growth areas.

“We continue to believe that KeyTech is significantly undervalued. However, we are conscious that with the macroeconomic situation in Bermuda showing no immediate signs of improvement and with KeyTech under pressure from both the regulator and increased competition, its financial and share price performance is likely to be affected in the short term.

“Ascendant released its results for the year ended December 31, 2013 on April 14, 2014.

“Consolidated earnings were $4.9 million (2012: $11.5 million), earnings per share were $0.39 (2012: $1.07).

“Ascendant’s book value per share declined by 1.8 percent to $30.62 (2012: $31.18).

“The continuing economic situation in Bermuda combined with costs incurred to maintain ageing equipment, pension expense and rising healthcare costs had significant adverse effect on revenues at BELCO. In addition, metering issues discovered during the year had a negative effect on revenues. The decline in Bermuda Gas’ sales and earnings (decreased by $877 thousand) was attributed to the weak local economy. AG Holdings reported improved earnings (net earnings of $3.1 million), primarily due to a strong performance from Air Care Limited.

“Belco’s net income decreased to $5.6 million (2012: $13.2 million). Sales of electricity net of fuel adjustment for 2013 totalled $143.3 million, a decrease of $2.1 million from 2012. Its kWh sales declined 19.6 million kWh or 3.2 percent compared to 2012. Since the peak in 2009, electricity sales have declined 10.6 percent.

“The decrease in fuel costs was largely offset by a number of one-off expenses including pension costs increasing by $2.1 million, funding for future healthcare costs increasing by $1.1 million and costs to maintain BELCO’s ageing equipment.

“The results were disappointing but not wholly unexpected. BELCO is faced with a declining population and ageing equipment. We would expect earnings to remain depressed for the foreseeable future and ultimately there will not be change in Ascendant’s outlook until BELCO and the Bermuda Government come to an agreement over Bermuda’s energy resource moving forward and the economy improves.

“However, given the significant discount to book value Ascendant still remains an interesting investment opportunity.

“Argus Group Holdings Ltd is due to announce its results for the year ended March 31, 2014 in July. We would anticipate that the results will demonstrate the company’s continued recovery from its struggles over the last few years. With the strong performance of fixed income investments in 2014 we would expect the company’s investment performance to rebound from the losses in the first half of the year. Argus appears to be on firmer footing and therefore we believe the company will be looking at opportunities to grow the core business potentially outside of Bermuda given that the Bermuda market is unlikely to grow significantly in the medium term.

“The company’s other investments include small holdings in BF & M Limited, West Hamilton Holdings Limited, Bermuda Aviation Services Limited and Watlington Waterworks Ltd.

“Whilst there have been small indications that the Bermuda economy has plateaued we continue to believe that the recovery will be long and slow unless significant decisions are made to encourage business investment in Bermuda and there is an increase in resident numbers.

“The share prices of our core investments, Ascendant and KeyTech, continue to highlight the difficult conditions they face but we remain of the opinion that they are undervalued and still represent an attractive investment in the long term.”