May 2009 Financial News
Jamaican companies prosper despite the global recession
May 22, 2009
For the last six months, the country, indeed the world, has been regaled with the likely impact of a global recession similar to that which battered the American economy of the 1930s. As a result, we have seen job cuts, companies scaling back their operations and generally a contraction of business in anticipation of the worse to come.
Earlier this week, the Planning Institute of Jamaica (PIOJ) revealed that for the first quarter of this year, Gross Domestic Product (GDP) fell by 2.8 per cent and all industries in the local goods-producing sector, except agriculture, registered declines. The country's leading foreign exchange earners, namely tourism, mining and were remittances all victims of the global recession and all saw a downturn in receipts.
With a $70-billion hole in the budget, the country has been told that it has to tighten its belt, which means wage freezes and businesses downscaling their operations in an effort to preserve capital and cut operating costs. Yet a cursory look at the recent swathe of quarterly financial results paints a different picture. For the first quarter, companies have been posting handsome profits despite the global downturn, which must be a testament to the acumen and abilities of Jamaican management.
GraceKennedy is arguably Jamaica's best-run company and many credit Douglas Orane as perhaps the Caribbean's best CEO. For the first quarter ended March 31, 2009, GraceKennedy posted revenues of $14.6 billion as opposed to $13.7 billion for the same period in 2008, representing an increase of $910.4 million. The net profit attributable to owners of the company increased by $247.8 million over the corresponding period of 2008, moving from $636.7 million to $884.5 million, an increase of 39 per cent.
In the GraceKennedy Foods division, pre-tax profits exceeded those of the previous year by over 40 per cent and revenues were also above the similar period in 2008. GraceKennedy Investments, which houses its banking arm, saw its revenues go up 10 per cent above the prior year and pre-tax profits exceeded last year by over 20 per cent. Hardware & Lumber was the only division to report a decline, due in part to the contraction in the construction industry.
Not surprisingly, Orane has struck a salient note. He puts his group's performance down to its ability to operate more efficiently during a downturn with a lower cost structure. In other words, the move to lay off high numbers of staff, although seemingly draconian, is beginning to pay off.
But Orane has always kept an eye on productivity. When Unilever decided to sever its relationship with Grace, many saw it as a death blow to the group. Instead, it proved a fillip, spurring the company on to greater things and fostering creativity and productivity. The move spawned the likes of Tropical Rhythms and a slew of other GraceKennedy-produced products that helped to bolster the food division.
Commenting on this division's strategy for this year Orane said: "The aim is to hold our position in the various markets and launch a number of new products during the year."
For some time now both Prime Minister Bruce Golding and the minister of finance, Audley Shaw, have been calling on the country to become more productive, to grow its way out of its current predicament. Orane is doing just that.
The Maurice Facey-led Pan Jamaican Investment Trust also enjoyed a very good quarter despite tough operating conditions. For the three months ended March 31, 2009, it reported a net profit of $408.1 million, compared to $272.8 million for the same period in 2008, an increase of 49.6 per cent. Operating income for the first quarter came in at $478.9 million, an increase of $101 million, spelling a 26.7 per cent increase compared to the same period last year.
Admittedly, this was driven by foreign exchange gains of $137.8 million in interest and dividend income. In other words, the woeful state of the local currency against its US counterpart does indeed help some companies during these turbulent times. But that is not the full story of Pan Jamaican.
It has made a concerted effort to contain operating expenses and fortuitously benefited from a reduction in electricity costs of $5.3 million. Administrative overheads increased by 8.1 per cent, which is well below the level of inflation.
Pan Jamaican is well positioned in the property business, which is the jewel in its crown. The economic downturn has not adversely impacted occupancy levels and for the quarter under review, Pan Jamaican's property subsidiary, Jamaica Property Company, enjoyed an occupancy level of 98 per cent and contributed $146.4 million to the group's operating profit, spelling a 32.9 per cent increase over 2008's first quarter.
The chairman's report to stockholders is instructive. It reads: "Despite the continued global downturn, our investment management segment contributed $140.2 million
to group operating profit for the quarter, an increase of $37.7 million compared to last year's first quarter, due principally to the positive impact on reported earnings of exchange gains on our US dollar investments.
"Our share of results of associated companies represented by our 20.8 per cent investment in Hardware & Lumber and First Jamaica's 24.5 per cent investment in Sagicor Life Jamaica, improved by 58.6 per cent for the quarter to J$302.8 million."
Capital & Credit
Capital & Credit recorded a net profit of $80.78 million for its first quarter ended March 31, 2009. This profit was achieved despite the negative impact of the global downturn on its business in the quarter under review, in particular the decline in value of the Jamaica Eurobonds and the increase in interest rates on deposits and other funding instruments in the local economy.
Although the first-quarter '09 profit is below the achievement of $141.49 million in the corresponding period in 2008, last year's comparative result for the first quarter included a one-time gain of $42.79 million.
Stockholders Equity, as at March 31, amounted to $5 billion and represents an increase of 17 per cent when compared to the same period in 2008.
Chairman and group president Ryland Campbell said: "The group will continue to strengthen its capital base through capital growth, cost containment and earnings retention, even in the face of the global uncertainties and their impact on our regional and local economies."
"The four per cent increase in non-interest expenses, which excludes the Loan Loss Provision, is evidence of the group's commitment to cost containment and productive efficiency and remain areas of critical focus for the group."
After successive quarters of posting horrendous losses and undergoing the unpalatable consequences of a number of hurricanes, Jamaica Producers posted a profit of $45.4 million on gross operating revenue of $1.30 billion for the first quarter ended March 28, 2009. For the corresponding quarter last year, Jamaica Producers registered a loss of $312.6 million.
What has contributed to this turn around?
The group has trimmed its operations and is no longer in the business of exporting bananas. It shed around 450 jobs and took the decision to divest itself of Serious Food Limited and split the group into three divisions, namely: "JP Tropical Division, JP Europe and the Corporate Division.
Sagicor Life Jamaica
Sagicor Life Jamaica's net profits attributable to stockholders for the quarter under review amounted to $1.44 billion, an increase of 90 per cent over the same period last year, benefiting from an unusual decrease in insurance and annuity liabilities of $585 million due to continuing high interest rates. Without this item, Sagicor Life Jamaica would have reported a more modest increase of 14 per cent compared to last year's first quarter.
Last year, Lawrence Duprey's Angostura acquired Lascelles DeMercado in what was touted as the Caribbean's largest acquisition deal. This year, Duprey's Clico (Angostura's parent) has hit the skids but this has had little impact on the Jamaican conglomerate. For the second quarter ended March 31, 2009, Lascelles' net current assets were $11.8 billion, as opposed to $9 billion for the same period last year. For the three months ended March 31, 2009, it posted a net profit of $945 million on operating revenue of $6.4 billion, a far rosier picture than the corresponding quarter last year which saw the group register a net profit of just $241.5 million on operating revenue of $5.67 billion.
The picture is patently clear. Despite the global financial crisis, a downturn in the local economy, flat consumer spending, rising interest rates, a weakened currency and escalating inflation, many of Jamaica's leading companies are prospering. So what accounts for this anomaly?
It could be the case that many of these companies are not profiting from their core operations but are taking advantage of the high interest rate regime, and are therefore getting a bump from their investments portfolio. While the country winces from the devaluation of the Jamaican dollar against the US greenback, it has provided a boon to many listed companies, spelling exchange gain on net foreign cash balances.
"To the untrained eye, many of Jamaica's leading companies seem to have struck gold," said Anthony Minvielle of Barclays Capital. "Come to think of it, the economy is tanking, the country may well have to go cap in hand to the IMF, but yet companies are making a killing. There's something wrong with that picture."
There is something to be said for this global recession forcing companies to become leaner and more efficient. Doing more with less and re-evaluating their business proposition, which in the main translates favourably on the balance sheet and profit and loss account. The crisis may well have presented many local companies with the opportunity to shed dead weight, become more competitive and test its ability to respond to downturns both locally and internationally.
Many international companies have not fared as well this quarter as Jamaican companies have.
For the first quarter ended March 31, 2009, General Electric's earnings from continuing operations were US$2.8 billion, down 35 per cent from US$4.4 billion in the first quarter of 2008. EPS from continuing operations was US$0.26 down 40 per cent from last year. Segment profit fell 27 per cent in the quarter, as strong 19 per cent growth at Energy Infrastructure was more than offset by a 58 per cent decline at Capital Finance and a 45 per cent decrease at NBC Universal.
Revenues fell nine per cent to US$38.4 billion. GE Capital Services revenues fell 20 per cent over last year to US$14.4 billion. Cash generated from GE operating activities in the first-quarter of 2009 totalled US$2.8 billion, down 42 per cent from last year, primarily reflecting the lack of a General Electric Capital Services dividend payment in 2009.
GE chairman and CEO Jeff Immelt commented: "In a recessionary environment impacting every segment of the economy, we delivered first-quarter business results consistent with our GE Capital investor meeting on March 19 and the framework provided last December, which included a smaller but still-profitable GE Capital and 0-5 per cent earnings growth in our industrial segments. Amid a continued weak economy, we're performing well and our backlog remains strong.
"We are aggressively managing our cost structure to respond to challenging global economic conditions. For 2009 we will reduce our costs by more than US$5 billion. We've reduced head count and are managing company operations more efficiently, leading to improved operating leverage in our infrastructure businesses."
Marks & Spencer
In the UK, Marks & Spencer has slashed the dividend paid to its shareholders by a third after its profits fell by around Â£400 million. For the financial year, sales fell by six per cent. According to Steve Doughty of the Daily Mail, heavy discounting and price cuts on food have hit profits, which fell by 40 per cent to Â£604.4 million.
Marks & Spencer's executive chairman Sir Stuart Rose said: "Profits are down, and I regret that, but this is the most turbulent time we have seen for probably 50 years. The dividend reduction is a result of the uncertain economic outlook and in order to provide a stronger foundation for moving forward."
The retailer plans to cut 1,230 jobs and close 26 stores as well as reduce its head count at its head office. Marks & Spencer has announced a major review of its operations, including a drive to sell more goods via the Internet and to open more stores overseas, particularly in India, China and eastern Europe. Sales through its foreign stores rose 26 per cent last year.
In Japan, motor car giant Honda reported a net loss for the fiscal fourth quarter ended March 31, 2009 totalling JPY186.1 billion (US$1.89 billion), a decrease of JPY 211.5 billion from the same period in 2008. Consolidated operating loss for the quarter totalled JPY283.0 billion (US2.88 billion), a decrease of JPY451.8 billion, due primarily to decreased revenue, the increase in fixed costs per unit as a result of reduced production, increased raw material costs, the negative impact of currency effects caused by the appreciation of the Japanese yen and expenses related to withdrawal from some racing activities and cancellations of development of new models more than offsetting continuing cost-reduction efforts and decreased R&D expenses.
Consolidated loss before income taxes, minority interest and equity in income of affiliates for the quarter totalled JPY309.5 billion (US$3.15 billion), a decrease of JPY456.4 billion from the same period in 2008.
Article by: By Al Edwards
Source: Jamaica Observer
Friday, May 22, 2009