Feb 2011 Financial News

GK targets double return

Feb 16, 2011

GRACEKENNEDY Group is on a drive to double its return on equity (ROE) within 10 years -- a proposition that would translate to $5.3 billion in net profit if it were achieved today.

The conglomerate on Friday posted $2.25 billion in net profit for 2010, which represented a 12.6 per cent decline from the prior year, but GraceKennedy's group CEO Don Wehby said on Monday that the aim is to "increase the return on equity" to 20 per cent under his company's 2020 campaign map.

With its capital base of $27.8 billion (2009:$24.8 billion), 2010's net profit translated to a 8.9 per cent ROE, which was down from the year prior when it was 11.8 per cent.

The plan at hand involves heavy investment in information technology, already underway, building new branches for its supermarket chain and its banking services, reaping the benefits of operational efficiencies derived from its recently commissioned distribution hub and significatly, by Wehby's reckoning, driving growth in regional and international markets.

"Growth for GraceKennedy will come from growth in international food segment," Wehby said at Monday's investors' briefing. One such instance was demonstrated in a recent tour of Asia, where executives were approached to consider distributing products from Sri Lanka to the UK.

Wehby said research showed that there were 300,000 to 400,000 Sri Lankans living there while the possibility presented tremendous opportunity.

GK Foods CEO, Erwin Burton said that the "UK operations showed improvement from August and in the last quater of 2010 made a small profit".

"Emphasis will now be to grow revenue base through adding new products and primarily exporting to new markets (particularly in Europe)," he added. Regionally, GK has already exported pepper mash to to St Lucia, Belize and Trinidad, which added to the products already in those markets.

Importantly, GK's major challenge is the rising cost of food but those circumstances, by Burton's assertions, "provide opportunity in our ability to buy right".

Overall, the group saw its revenues decline by 3.6 per cent to $55.3 billion, but revenues for GK Foods increased through growth of the Grace-owned brands worldwide -- Burton said that brand growth was aproximately 10 per cent.

GraceKennedy's food trading segment revenue was flat at $34.6 billion while pre-tax profit was lowered from $723.8 milllion to $487.8 million, primarily due to finance expenses rising from $159.8 million to $434.2 million as a result of finance costs associated with the new distribution centre coming into the profit and loss.

On the other hand, efficienies already derived from the distribution centre include a reduction in demurrage cost from US$20,000 a month to US$12,000, improved outbound delivery capacity from 33,500 picked cases per day to 45,000, and improved order pick rate from 830 cases per man day to 1,667. Importantly operating cost per case has dropped from $1.13 to 93 cents.

Even then, the 2020 plan outlines plans to grow business by building portfolio in the region and internationally, growing domestic financial resources and spending on IT, which includes a US$6 million upgrade to First Global's IT platform expected to be completed by 2011/2012.

Overall, capital expendiure has been significant -- $1.2 billion in 2010 -- while executives have pointed to maintain spending levels above 2009 with a focus on IT.

Nevertheless, the group plans to expand its supermarket chain -- now totaling 15 stores operating under the HiLo brand -- by one store a year, while First Global has plans to expand its branch network.

GK F CEO, Courtney Campbell said that First Global Bank "now fully recovered from the problems of 2009" is focused now on growing its loan portfolio, especially business loans. At the same time, its insurance company, JIIC, which was impacted by the JDX, saw a reduction in its claims ratio while First Global Financial Services (FGFS) has started to shift from its repo business model to portfolio management and advisory services.

The JDX meant lower revenues for GraceKennedy's banking and investment division -- revenue dropped from $8.2 billion to $6 billion -- but, with the recovery from losses incurred due to trading irregularity detected in 2009, pre-tax profit jumped from $104.9 million in 2009 to $545.3 million last year.

On the other hand, the insurance division, which saw its revenue grow from $4.3 billion to $5.1 billion, saw its profit drop from $471.7 million to $236 million. Money services also saw a dip in priofits from $1.4 billion to $1.19 bilion, although in US dollar terms the amount of reduction was far less dramatic considering that there was a more-than-four per cent revaluation of the dollar during 2010.

The group's retail and trading division impacted by slow demand saw revenue drop from $6.55 billlion to $5.73 billion but pre-tax profit improved from a $82.8 million loss incurred in 2009 to a $103.6 million profit, largely refleting runaround in Hardware and Lumber (see related story on page 14).

Although the group has set its sights on significant returns down the road, GK executives hold the company provides a good investment to shareholders today.

On one hand, the book value of the conglomerate is $81 a share, even while the stock which traded at between $42 to $69 over the last 52 weeks, closed yesterday on the Jamaica Stock Exchange (JSE) at $52.

Another factor is the change in dividend policy, which saw the company increase the minimum payments to 14 per cent of net profit, up from 10 per cent.


Source:
BY CAMILO THAME
Jamaica Observer
Wednesday February 16, 2011

http://www.jamaicaobserver.com/business/GK-targets-double-return_8377656#ixzz1EcB2Myhg
Wednesday, February 16, 2011