Jamaican Teas to create and list new firm in profit push
Jamaican Teas Limited heads into its shareholders meeting later this month upbeat about a concerted move towards greater profitability that will include spinning off its housing development operation and a modest $190-million investment portfolio into a separate publicly traded real estate and investment company to be listed within the next year.
Chief Executive Officer John Mahfood told the Financial Gleaner that he hopes his company's acquisition of the 42.9 per cent stake in neighbouring KIW land and warehouse buildings will help create the vehicle for structuring the new property and investment company, which will hunt capital on the junior market, where parent company Jamaican Teas has been raising cash and benefiting from tax breaks for the past seven years.
This proposal is to be discussed with the KIW board. Jamaican Teas closed the $57-million deal for acquisition of KIW from the Jamaican Government in March.
Mahfood is confident that splitting off the investments and the property development activities carried out under H. Mahfood & Sons Limited, from the manufacturing concern, which mainly produces a variety of teas for the export and local markets, will create greater focus for each area.
On the property side, cash injection from new shareholders will provide the capital needed to scale up the scope and pace of housing construction from the current one project per year to multiple developments a year.
Still in the process of closing out its St Thomas residential project by June this year, the Jamaican Teas development arm has announced that it will be embarking on its planned $200-million development in the upscale Manor Park area of upper St Andrew starting August.
"We are hoping for about a 20 per cent return," Mahfood said of the investment to put up what will now be 18 luxury super studios, which are expected to sell for about $15 million. Geared towards investors and first-time homeowners in the professional class, the Manor Park project is pricier than the 72 two-bedroom Orchid Estate units in St Thomas, which entered the market at roughly $8.5 million.
Other property developments are lined up for the future, Mahfood said. Refocusing property development and rentals, including from a multimillion-dollar upgrade of the KIW facility, should boost the income contribution of this business segment from the seven per cent reflected in Jamaican Teas' year end financials to September 2016.
Having shed two loss-making supermarkets in Montego Bay and Savanna-la-Mar, the company's only remaining food store, JRG Shoppers Delite Enterprise at Chancery Street in Kingston, will continue to operate as its retail subsidiary.
Mahfood notes that his previous experience managing diversified portfolios within entities such as GraceKennedy and T. Geddes Grant has influenced the current make-up of the company's business with its various revenue streams. This is the general business model that has been pursued since he and his father bought the then nearly 30 year-old Tetley Limited operation of T. Geddes Grant in 1995 and rebranded it to Jamaican Teas Limited on listing on the junior market of the Jamaica Stock Exchange in July 2010.
On the back of a 64 per cent net profit growth of $46 million to $118 in 2016, the streamlining of revenue centres are among the latest in a series of moves designed to sustain profitability which has not always benefitted from increased sales and revenues in years before 2015.
Management action to improve the firm's cash position and shareholder value have included a stock split in April 2016 that grew the number of stockholders from 350 to around 600. Another stock split is on the cards for approval by shareholders, and the company also announced its intention to raise some $300 million in a rights issue reportedly to pay down expensive bank loans, including from Bank of Nova Scotia and Sagicor Bank.
The directors of Jamaican Teas will want to convince shareholders at its annual general meeting, come April 12, that steps are being taken to continue strengthening the company's bottom line and create greater stockholder value.
"With the divestment of the loss-making supermarkets and great focus on the manufacturing business, we expect to see much-improved results in 2017 and beyond," Mahfood remarked.
He is already reading positive investor response to operational changes in the recent stock price performance. The share traded as high as $10 in recent months and closed at $7.72 on Tuesday.
Operating costs out-stripping growth in revenues had been cited by analysts as a concern in the early years, but the Jamaican Teas CEO is quick to point to significantly enhanced operational efficiency now.
Factory upgrades and a $17-million investment in solar energy, that now saves $5 million a year on electricity, have been among the steps taken to boost efficiency. While this is so, it has been acknowledged that marketing costs in the expensive foreign media are making a bigger call on Jamaican Teas' cash.
Advertising and promotions costs rose to near $44 million in 2016 from $33.6 million the year before on overall operations and to about $42 million from just over $30 million for the tea-making company as Jamaican Teas seeks to build brand value in its vital overseas markets
However, it is the state of the Jamaican economy that is said to be still particularly harsh on businesses expecting to turn profits from local sales.
"Domestic sales have not grown or even kept pace with inflation. What saved us is really the focus on exports," Mahfood explained, with 55 per cent of sales coming from exports, particularly to the Caribbean and North America.
Export sales will be further strengthened by the presence since March this year of five of Jamaican Teas' proprietary Caribbean Dreams-branded tea products in 450 of the Kroger supermarket chain's 2,400 stores in the United States. This is in addition to the Publix and Walmart stores already carrying several of the Jamaican products.
The entrepreneur also fingered high indirect taxes and a lack of stimulation of the economy by successive governments as obstacles facing business. "I foresee that the situation of a very stagnant economy will be here for the next five years. Our focus is to remain competitive in terms of production and grow our export business so that we are not stagnant," he said.
He offered that Government should be spending more time on economic fixes, such as a significantly greater spend on housing construction to put people to work and cutting red tape in the industry, rather than creating "super committees that are going to look at new areas of business and to bring in foreign investors".