Jamaica Producers looks to an angel of mercy

Published: Friday May 9, 2008

Jamaica Producers had a very tough first quarter, reporting a loss of J$312.7 million on sales of J$3 billion. Taking the more conservative approach of excluding the stock units held by their Employee Stock Ownership Plan (ESOP), this translated into a loss per share of J$1.84 for the quarter ended March 22, 2008, or more than three times the loss of sixty cents per share of their corresponding first quarter of 2007.

The conservative break up value of conglomerate Jamaica Producers (JP) could be in the J$60 per share region based on the strength of its equity holdings in GraceKennedy, its United Kingdom juice operations and the value of lands held in Jamaica. President and Chief Executive Officer of Stocks & Securities Ltd (SSL), Mark Croskery explains:

"The value of the 187-million JP shares outstanding represents a conservative intrinsic value of J$62.48 per share, not inclusive of cash holdings or any other intangible value, nor its shipping and logistics division." He adds that, "The recent Lascelles de Mercado deal is a clear example of the value of specific Jamaican Companies (publicly listed on the JSE) and that with "Caribbeanization" and Globalisation that more and more external investors are looking at Jamaican companies and slowly but surely creating a very serious mergers and acquisition market in Jamaica and the Caribbean."

Croskery notes that despite the value that can be unlocked by JP's executives, over the last 52 weeks of trading, the market continues to price the stock in the J$25-$41 price range. He explains why. "What is clear is that there is significant value present but without significant changes, it will not be realised. The recent mammoth loses might bring about these changes."

In Jamaica Producer's Chairman's statement, Chairman Charles Johnston described 2008 as " undoubtedly one of the most challenging periods in the recent history of the Group."

According to Johnston, Jamaica Producer's first response appears to have been to accelerate its ongoing effort to reduce overheads, through "reduced headcount, frozen salaries, delayed salary increases throughout the group."

Unlocking value

Returning to the valuation of the conglomerate, Croskery points to important value drivers. First, JP owns 32 million units of Grace Shares. "Grace's results have rebounded very strongly during the course of last year. Also, the supply of this stock is very limited and many players are interested in buying. And with the Lascelles deal being done, funds will go into a blue chip of this nature naturally." Added to the mix, Croskery notes that, "Grace in itself could also be a takeover candidate." With that in mind, Croskery states, "Let us conservatively use a market price for the Grace shares of $90 per share to value these shares and so 32 million share are worth $2.88 billion."

Looking at the United Kingdom operations at Serious Food Co and Sunjuice, Croskery explains, "The revenue is US$60 million on an annual basis and we can conservatively value this at 0.75 times to sales multiple, even though it as currently a significant net loss business, but had a net profit margin of 2.50 per cent to 5 per cent two to three fiscal years ago.

And many business like this, sell for 2 times price/sales multiples in other countries." And so, Croskery values this business line at J$8.52 billion (using exchange rate of $71). And then there is the farm lands. He notes that, "Although valued significantly higher, we can place a value of US$4 million or J$284 million."

Taking the three segments discussed, Croskery notes that, "The above represents $11.684 Billion in potential value without even considering cash or other fixed income investments on the balance sheet."

JP/GK merger?

Although JP is a prime takeover/break up candidate, Croskery does not believe the buyer will be a local company. There had been talk that Grace would buy out the UK division of the firm but Grace executives were unavailable for comment up to press time. "We at SSL do not view Grace as a buyer of this business. Firstly, we would view this deal as being too big for them and they recently completed the WT Foods deal which was sizable also." Croskey sees the buyer as another juice manufacturer who could leverage the existing UK market that JP has developed.

He adds that, "When the argument comes that a business with negative earnings is not worth it, we don't buy into this as the ales are very significant as the net margins were very attractive up to 2twoyears ago."Nevertheless, Croskery says that he is advising his clients to hold the stock and to buy at $30 per share or below.

Turning to strategic alliances

According to Jamaica Producer's CEO Jeffrey Hall the group now intends to "develop strategic alliances with world class brands and supermarket retailers to drive growth in their fresh fruit and smoothie business particularly in Europe.

"This differs from the previous strategy of trying to create their own brand, as the focus will instead be to align with the successful brands of companies who bring marketing expertise.

JP's CEO added that while the group will still maintain its house brand to supply food service operations their greater focus will allow JP to keep costs low as to compete with the other low cost private labels for juice.JP is facing a particularly difficult situation because of the UK's very highly concentrated supermarket sector which has a high degree of market power relative to their privater label suppliers such as JP.

According to Hall, there has been a less than five per cent price increase in the retail selling price of food over the same 18-month period in the UK.Arguing that JP "can restore profitability by systematically adjusting prices or exiting unprofitable lines of business," Hall stresses his confidence that " we can drive growth in other markets in Europe and in our core juice and smoothie lines."

Bananas

In his Chairman's statement Johnston noted: "During the quarter, we had no revenues from banana exports or snack food production in Jamaica. Moreover, we had to scale back our shipping and freight forwarding activities that typically rely on the backhaul opportunities that are created by our banana export business."

Hurricane Dean drove the decline in revenues from the banana segment, which plunged 55.2 per cent to J$242 million from J$540 million the previous year. JP's banana farms were practically wiped out, and full production will not resume until the third quarter in 2008.


Source:
Dennise Williams and Keith Collister
The Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20080508T210000-0500_135420_OBS_JAMAICA_PRODUCERS_LOOKS_TO_AN_ANGEL_OF_MERCY_.asp