Monday, November 24, 2008

Challenging times for GKC

Published: Monday November 24, 2008

GraceKennedy Limited

Jamaican conglomerate, GraceKennedy Limited (GKC), in its recently released third quarter financials reported weak results. For the period ended September 30 2008, the Group reported a relatively flat year on year diluted EPS of J$5.06, compared to J$5.09 at the close of September 2007.

Revenue for the nine-month period totaled J$40.2B, representing a 13.5 per cent increase from J$35.4B. The growth in Revenue was matched by a 14.2 per cent increase in Expenses to J$38B, with the Expense margin increasing by 0.5 per cent to 94.7 per cent . Cost containment proved to be an ongoing issue for the Group as the Expense margin of Q3 2008was 1.3 per cent higher than the comparable quarter of 2007. Other Income experienced growth of 9.2 per cent to J$582M. The net effect on Operating Profit was a mere 4.3 per cent improvement from J$2.6B to J$2.7B.

Interest Income from non-financial services grew by 15.3 per cent to J$312.5M, while Interest Expenses from non-financial services declined year on year by 17.7 per cent to J$423.1M.

Overall, GKC achieved a Profit before Taxation of J$2.7B, a 9.9 per cent improvement over the J$2.4B for the nine months of 2007. Net Profit totaled J$1.8B and represented a 6.8 per cent increase from J$1.7B. Minority Interest of J$152.6M, led to an insignificant 0.1 per cent increase in Profit Attributable to Shareholders.

The first nine months of the year presented a challenging operating environment for GraceKennedy. The following Exhibit 1 gives a clear graphical picture of how the Group's top line and bottom line growth has moved from September 2007 to September 2008.

The Insurance arm of the Group was the only sector to record declining Revenue growth year on year. However, the Money Services business was the sole segment to produce growth in earnings for the period under review.

The Food Trading sector remained the main Revenue generating segment but recorded a decline in Profit before Tax for the period of 1.7 per cent . Escalating costs continue to present a challenge as supplier prices increased in products manufactured in Jamaica. The downturn in the UK has also lowered sales levels in that region.

The chairman indicated that sales levels in the Grace owned brands have grown 12 per cent year to date when compared to the comparable period of 2007.

A few of the developments which have taken place within the Group include:

l The GK Foods division launched a number of new products under the Rio Pacific brand.

l Progress was also made into the Indian, Ghanaian, and South Korean markets.

l The Turks and Caicos subsidiary, First Global Insurance Brokers Limited purchased the insurance brokerage portfolio of United Reliance International Limited, the largest insurance broker in the Turks and Caicos Islands.

The Jamaican economic environment has gotten even more testing over the past few months. The economy continues to experience challenges from a macroeconomic point of view. The impact of the fallout of the international markets has definitely been felt by Jamaica. Domestic GDP growth projections for the fiscal year 2008/2009 have dwindled with the last projection by the Bank of Jamaica being between 1.2 per cent and 2.2 per cent from 2.5 per cent to 3.5 per cent . Inflation projections were also adjusted from 11.5 per cent to 14.5 per cent to a revised projection of 15 per cent to 17 per cent .

A depreciating currency has also been a key concern for the economy. The Bank of Jamaica has continued to take measures to assist in mopping up excess liquidity which could threaten the stability of the currency. International ratings agency, Standard & Poor's recently revised its outlook on Jamaica from B stable to B negative. Furthermore, Moody's Investors Service placed Jamaica's ratings on review for downgrade this month. Declining international commodity prices have also lowered earnings in areas such as bauxite exports, while remittances to Jamaica are anticipated to fall between 10 to 15 per cent by December 2008.

It is worth noting however that Jamaica being an importer of oil would reap the benefits of this commodity's falling price.

Shares of GKC are currently trading at a price of $5.30 and a forward P/E multiple of 9.1 times compared to a market multiple of below 10 times. Economic conditions continue to weaken in Jamaica, and the currency faces further devaluation pressures. Although GKC generates 25 per cent of revenue outside Jamaica, the global economic slowdown may affect these revenue streams, BOURSE revises its recommendation to a SELL.

Jamaica Money Market Brokers (JMMB)

On October 2008 Jamaica Money Market Brokers Limited (JMMB) made a significant adjustment to their operations with the sale of its 45 per cent stake in its Trinidad affiliate Caribbean Money Market Brokers (CMMB). This transaction reflected a gain of J$2.3B on their income statement for the half year ended 30 September 2008. As a result, for the period JMMB recorded an EPS of J$0.77 which represents 141 per cent increase over 2007.

It must be noted that in the second quarter of 2008 JMMB recorded a provision of J$1.9B for the impairment of bond holdings in the Group's investment portfolio as a result of its exposure to Lehman Brothers. Excluding this one-of item as well as the gains on sale of its shareholdings in CMMB, JMMB Profit before tax for the half year would have amounted to approximately J$620M a mere 18 per cent increase over 2007.

JMMB's main revenue source Net interest income grew to J$993.6M from J$686.9M a 44.6 per cent increase over 2007.

However, JMMB other three sources of revenue reflected varying results. Gains on securities trading fell approximately 43 per cent compared to same period last year, a reflection of the dampened regional and international markets. Fees and commission income were up a marginal 0.5 per cent while Foreign exchange margins from cambio trading increased 39 per cent.

Administrative expenses continue to be a challenge for JMMB in the current financial year. For the half year ended 30th September 2008, there was a 25 per cent increase in Administrative expenses compared to prior year. Of greater concern, expense margin as a percentage of Operating Revenue was 80 per cent for the period versus a 68 per cent margin in 2007. As a result, Operating Profit fell 35 per cent to JA$288M in 2008 compared to JA$443M in 2007.

The future success of JMMB lies on the Group's ability to generate alternative revenue streams. Management has indicated that they would be exploring several investment schemes which would serve as additional sources of revenue. These include the expansion of the commercial bank IBL, the build out of JMMB Dominicana as well as entering into commercial banking in Jamaica.

BOURSE revises its recommendation to a SELL on this stock.

Source: Trinidad Express Newspapers

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