Shane Ingram, Contributor
Ingram
GRACEKENNEDY (GK) REVISED its five to 15 per cent growth expectations for 2006 to between minus five per cent and plus five per cent against a backdrop of a 13.7 per cent drop in profits for the first quarter (Q1) for 2006. Sluggish earnings from financial services and reduced profits from food trading and retail and trading were the major forces behind the results posted for the opening quarter of FY 06.
Profits of $476.8 million were achieved on $8.8 billion in revenues. While revenues were eight per cent above numbers recorded at March 2005, direct expenses grew at a faster rate (9.5 per cent) to reach $8.3 billion, which triggered a nine per cent decline in operating profits to $664.9 million. Simultaneously, GK booked net finance expense of $12 million, compared to $23.3 million in net finance income at the same interval last year. This was primarily as a result of lower investment yields as well as IFRS re-classification of some finance-related flows. Associated companies also contributed less this period $38.1 million, down from $53.8 million compared to the same interval last year, due mainly to different timing of income from dairy-related companies this quarter. These negative forces helped to pull pre-tax profits from $807.6 million to $691.0 million.
Revenues in the Financial Services Division (FSD) jumped 28.4 per cent but the compression in interest margins restricted profit growth to 3.37 per cent. Revenues in FSD benefited from significant growth in investment holdings as well as additional income from premiums related to the acquired Dyoll portfolio. While revenues from Food Trading Division (FTD) remained relatively stable at $3.7 billion, profits contracted from $160.1 million to $19 million amid softening consumer demand and resultant pressures on margins. Note, however, that profits from FTD for 2005 were inflated by $108 million in one-off gains following H&L's rights issue.
SALES FLATTENED
Simultaneously, sales in the Retail and Trading Division (RTD) flattened amid the cement crisis that tempered demand for related hardware and household products. Consequently, profits shifted to $8.8 million, from $62.4 million at the same time last year. On the other hand, profits from information services improved from $118.5 million to $130.8 million as this area continues to benefit from robust inflows of remittances as well as GK's efforts to widen its reach across the Caribbean region.
Despite slowing profits, the balance sheet improved with a 14.06 per cent rise in equity and 20.6 per cent jump in total assets. These movements brought down annualised return on equity and return on assets to 12.2 per cent and 3.1 per cent, respectively. Meanwhile, the Group remained adequately liquid and capitalised as highlighted in the current ratio of 1.12 and debt/equity of 9.37 per cent.
REDOUBLED EFFORTS
With such challenging conditions, Grace has redoubled efforts to develop its people, move closer to the final consumer, grow international business, and achieve operational excellence. Consequently, the company is going through a process where it is 'configuring for growth' through several initiatives across its various units. For example, the pending introduction of an Electronic Data Interchange (EDI) protocol in financial services promises to cut transaction expenses, increase efficiency and improve customer care. Financial management costs in the food trading are also projected to contract by $300,000 per annum once a new central accounting system is implemented. GK also hopes to implement a central procurement system that boasts an estimated contribution of US$1 million in freed-up working capital. Whereas retail and trading is set to undergo significant reorganisation within the wholesale division, information services
should benefit from plans to enter new Caribbean markets and strengthen the IT support structure. Investors should also look for further rationalisation activities along lines similar to the sale of Medecus and the consolidation of Hi-Lo entities.
In the meantime, GK will continue to defend its market segments through the introduction of new products and services both in Jamaica and the international market. Accordingly, it will be entering the Canadian market with its coconut water and a range of seasonings,
along with the introduction Tropical Rhythms in Ghana. Overall, Food Trading is expected to profit from Grace's strong brand appeal and vast distribution. 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.
Ultimately, 2006 has already been and will likely continue to be tough for local companies. Aggregate disposable income is weak, which will temper demand. While GK focuses on improving efficiency, the benefits of the initiatives outlined above are unlikely to have an impact on profits for the immediate quarters. Consequently, assuming earnings per share (EPS) tends to the mean projection of $6.35 at year end, and current investor sentiments persist throughout the year, shares in GK will be challenged to sustain prices above $63.0 toward the release of the year end results. However, it appears that the market has over discounted for future earnings, which has created a buying opportunity for long term investors.
RECOMMENDATIONS
We hold favourable long-term outlook for BNSJ, GK, NCBJ, First Jamaica Investment, Carreras, and DB&G. For further information on these and other stocks, contact us at 1-888-CALL DBG or visit www.mydbg.com and click our stockbrokerage division for detailed analyses.
Taken from the Financial Gleaner
