Shane Ingram, Contributor
Left: Shane Ingram. Right: Douglas Orane, GraceKennedy board chairman and chief executive officer. - IAN ALLEN/STAFFPHOTOGRAPHER
GRACEKENNEDY expects profit growth to range between five per cent and 15 per cent for the year to 2006, which at the current P/E ratio, suggests that shares in GK could be challenged to sustain a share price above $80.3 for the period to December 2006.
The modest and rather wide profit outlook comes on the back of the company's weak operating performance during FY 2005 that saw profits decline 4.4 per cent. GK originally projected to grow between five per cent and 10 per cent for the year but on December 21, 2005 revised its profit estimate to between -5 per cent and five per cent against a backdrop of softening earnings from most divisions. Revenues moved ahead by 7.6 per cent to $33.0 billion for the year
driven primarily by food trading and financial services. However, the reduced profitability experienced by GK was highlighted in the contraction in operating margins to a three year low of 8.16 per cent.
Financial services provided 53 per cent of group pre-tax profits for the year but grew only nine per cent to $1.41 billion due to tightening interest spreads in the banking subsidiaries, start-up costs associated with its new insurance business (June 2005), and marketing costs incurred during the launch of four new mutual funds in Trinidad in May 2005. Simultaneously, retail and trading suffered a 53 per cent drop in profits to $148.5 million amid weak local demand, high operating costs and inventory build-up arising from the heavy rains experienced in May and June.
Revenues from food trading shifted up 15 per cent to $13.11 billion in response to product introductions, yet profits increased only $76.2 million or less than the $108 million exceptional gains booked by the division from the dilution of the Group's interest in H&L. While revenues from information services thrived on strong transaction volumes during 2005, profits declined 13 per cent to $598.4 million due to significant reductions in fees charged to consumers necessitated by the increasingly competitive local remittance business.
Despite slowing profits, the balance sheet showed respective increases of 14.3 per cent and 15.5 per cent in equity and assets for the year. These movements brought ROE and ROA to 14.51 per cent and 3.6 per cent, respectively- unfortunately, five year lows in both instances. Meanwhile, the Group remained adequately liquid and capitalised as highlighted in the current ratio of 1.15 and debt/equity of 10.3 per cent.
The financial services division is expected to continue to be the Group's 'main breadwinner' given the capital injection promised by the pending listing of First Global. Financial services should also benefit from the acquisition of Dyoll's local general insurance portfolio, the recently opened Medecus Health Insurance as well as EC Global Insurance Company Ltd (St Lucia). Its new mutual funds in Trinidad in May 2005 are also anticipated to strengthen fee-based income streams.
Information services is likely to benefit from the robust inflow of remittance to Jamaica as well as the Group's efforts to reposition Western Union and broaden the reach of Bill Express across the Caribbean. However, the division must hurdle the challenge of the competitive environment as well as intensified local regulatory requirements to combat money laundering. While the trading environment remains tight and competitive, H&L should have a better year given normalisation in local agriculture and construction industries. Likewise, food trading is expected to profit from Grace's strong brand appeal, vast distribution, and its recently launched products. Although the recovery rate in this division has been historically low, the company's modernisation and upgrading plans could yield some of the expected benefits in the near term.
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We hold favourable outlook for CWJA, NCBJ, PJAM, DB&G, and BNSJ. Seprod, CRTS, and JBG could also perform well over the short-term. Please contact DB&G's Stockbrokerage department at 1-888-CALL DBG for further information on these and other stocks or visit for detailed analyses.
Uptick in stock prices continues?
Stock prices sustained their positive momentum this week as the political uncertainties dissipated subsequent to the selection of a new PNP president and Prime Minister-designate on February 25, 2006. Volumes also continued to strengthen in the week, but newcomer Supreme Ventures found the going tough as it lost 15 per cent of its value on its first day of trading on the JSE.
Disclaimer: All information contained in this article has been obtained from sources that DB&G believes to be accurate and reliable. All opinions and estimates constitute the Author's judgment as of the date of the article. No warranty as to the accuracy, timeliness or completeness of this article and as to the opinions based thereon is given or made by DB&G. DB&G and/or its employees or directors and/or any associated person may have an interest in, or interest in the acquisition or disposal of, the securities or class of securities mentioned herein. Call 1-888- CALL DBG if in doubt about the content of this article. Decisions based on information contained in this article are your sole responsibility.
