1. Publication: Jamaica Observer; Date: Aug 6, 2008; Section: Business Observer; Page: 14B
GraceKennedy weathers the storm
COMPANIES with the size and reputation of GraceKennedy (GK) often carry the burdensome task of wowing investors. Though everyone
expects the world from GK, and investors are hanging their heads low due to second quarter and six month earnings, the truth is that the
results are not that bad. We have to give credit where credit is due and there is no denying that GK has proven to be resilient through
turbulent times. We must not understate the effect of rising global inflation on these halfyear results. Consumer confidence worldwide has
fallen due to heightened anxiety of a US recession.
GK has already expanded to the US and the UK where many are reducing spending in anticipation of harder times. These expansion projects
may further hurt year end results if not well received on the global markets. Yes, the six-month results are flat— but that is actually a good
achievement. However, expenses saw a similar increase of 19.33 per cent to J$25.8b from J$21.6b. As a result, gross profits advanced by
15.98 per cent to J$1.5b from J$1.3b.
GK managed to push interest income in a positive direction while lowering interest expenses. Interest income increased modestly by 7.73
per cent to J$203m from J$188mm while interest expenses fell by 13.67 per cent to J$289m from J$334m.
Net profit humbly rose by 13.38 per cent to J$1.271b from J$1.121b and Earnings per Share (EPS) grew 4.15 per cent to J$3.51 from
J$3.37. Investors consider a gain of J$0.14 per share to be inadequate and the complaints are echoing throughout the industry.
The balance sheet saw total assets grow by 11 per cent to J$80b from 75.9b the year before supported mainly by the significant rise in cash
and cash equivalents by 41 per cent to J$5.3b from J$3.7b. This year over year (yoy) increase is due to the one off gain from the Western
Union sale.
We cannot ignore that GK is a company of excellent value (the company has a strong book value per share and has experienced consistent
earnings growth) and its products are a permanent fixture on shelves in Jamaican households. However, with three out of its five sectors saw
a decline in profits before tax, it is no mystery why investors are concerned. The banking and investments sector, along with money services
were the only two divisions that saw moderate increases in profits.
GK Investments and GK Money Services continue to headline earnings. GK investments brought in J$489.9m in profit before tax, which is
26.2 per cent of the company’s total profits before tax. Similarly, the Money Services division, which was the lead performer in terms of
profits before tax, contributed J$513.2m, or 27.5 per cent of GK’s profits before tax. Surprisingly, remittance volumes to Jamaica have grown
yoy despite economic hardships.
However, the same cannot be said for the food trading sector which saw profits before tax decline 14.9 per cent. GK proudly launched its line
of porridges in the US market and Grace Tropical Rhythms and Grace Snacks in the UK. Though this sector brought in the most external sales
(J$16.3b) of the five sectors, it still had a weak performance overall.
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2. As the local food trading division usually sees profits climb 8–10 per cent, we cannot help but assume that this decline in profits can be
blamed on GK’s international operations. We have seen it happen before when local companies venture into the international playing field
and drown (coming from emerging markets or more specifically the Caribbean companies find difficulty competing in the developed markets
over the medium term). A prime example is Guardian Holdings Ltd which bought a UK-based insurance company and incurred significant
operating losses.
The Retail and Trading sector performed even worse than the food trading division and was a huge disappointment. Profits before tax fell
22.44 per cent to J$95.8m from J$123.5m. The Company reported that this was due to a drop in consumer spending and sky rocketing costs.
Overall, GK is facing a number of challenges, but we cannot overlook its value (think Lascelles purchase). At current trading levels of
J$85.02, the stock has a price to earnings ratio (P/E) of 12.06 times. Using the twelve-month trailing EPS of J$7.05 (assuming we were to
use core operations and exclude the one-off gain from the Western Union sale). GK’s book value per share (BV/Share) is J$63.82 and is
trading at a price to book value (P/BV) of 1.33 times. Given current performance, investors should look to BUY GK if it trades at J$80.00 or
below.
Raul Haynes is a research analyst at
Stocks and Securities Ltd.
rhaynes@gostocksandsecurities.com
performance considering the current economic environment.
First and foremost, GK’s revenues increased by 19.14 per cent to J$27.3b from 22.9b. That in itself is a major
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