Mar 2006 Financial News

Carib Cement share price plunging

Mar 22, 2006

The share price of Caribbean Cement has plunged by more than half over the past three weeks, following revelation that the firm had sold defective cement on the local market and now possibly faces liability claims that could run into the hundreds of millions of dollars.

The downward spiral in the price also reflects nervousness on the part of shareholders that the company's market will be eroded by the decision of the government to remove - although temporarily - the protection the company now enjoys from imported cement.

Carib Cement's stock price started the year at $9.50 on the local exchange and declined by a marginal 6.4 per cent over the first two months of 2006, a reduction that was in line with the bear market at the JSE. The stock closed at $8.89 on February 28, 2006.

But it went into a nosedive after commerce and technology minister Phillip Paulwell made public, at the beginning of March this year, his intention to review the cement monopoly.
Carib Cement was effectively given a monopoly over the local market with the increase in November 2004, of the duty on imported cement, from 15 to 40 per cent.

Yesterday, the stock price closed at $4.16 - representing a 53.2 per cent decline on the value at the end of February.
One stock analyst told the Business Observer yesterday that shareholders were unloading shares because of a perception that the company would face difficulty repaying its expansion loan, among other things, in light of its reduced market share.

"There is a lot of institutional and retail selling," said the analyst, Vernon James, manager of Dehring Bunting and Golding (DB&G). "The company is going through a difficult period," he added. "Investors expected market share - 100 per cent - to help repay its (expansion) loan, but the company will probably have difficulty making those payments now and may not get that level of protection again."

The result of this nervousness has been an increase in the level of trading in the stock that has taken place so far this month.

In January and February, an average of 71,253 Carib Cement shares changed hands on each trading day, making a total of 2.92 million shares over the two months.

In contrast, since March 2 - the first trading day in March - 551,306 shares were traded on average each day, making for a total of 7.72 million shares traded up to yesterday.
Indeed, for this highly indebted company, a lot is at stake. The loan referred to by James is for US$105 million, secured by Carib Cement's parent, Trinidad Cement Limited (TCL) in July last year.

The loan from the International Finance Corporation (IFC) will allow TCL to pump US$85 million into the Jamaican subsidiary for its expansion, in a deal that calls for Carib Cement to fund the other US$20 million from internally generated cash.

The pivotal phase of the expansion of Carib Cement's Rockfort plant in Kingston is scheduled to start next month, with the construction of the foundation for a new kiln and cement mill.

At the end of the expansion programme in mid-2008, the local cement manufacturer will double its output capacity to just under two million tonnes a year.

Yesterday, JMMB senior equities trader, Donnette Falconer Johnson agreed that the cement manufacturer would likely face difficulty repaying its loan. Johnson is worried that the price of the stock would remain depressed for some time, based on her projection of poor profit performance by the company.

"We expect the price to be depressed for a while," said Johnson. "It will take a while to recoup the expansion cost which will impact the bottom line over the next few quarters.
At this point the stock looks like a long-term buy - two to three years, buying at this price."

At $4.16 Carib Cement share price is trading at a price earnings multiple of 4.97 or less than half of the average PE ratio for manufacturing companies (10.59) listed on the JSE.
In the first instance, the company faces losses with Paulwell's order for it to recall all cement produced between February 19 and 25.

Based on Business Observer calculations, this could involve up to 18,500 tonnes of cement.
The firm sold 664,631 tonnes of cement in the nine months ending September 30, 2005. This translates to approximately 74,000 tonnes of cement produced each month, or 18,500 tonnes of cement a week.
Paulwell announced the recall of the cement last Wednesday, when he instructed the Bureau of Standards to expand its investigation into the quality of the cement being produced, following the failure of samples to meet its compulsory standards.
He promised that there would be full compensation to contractors who ended up using faulty cement.

But already, several major players in the construction industry are suggesting that the compensation would have to go much deeper than replacing the bad cement they had bought. Some say they have incurred tens of million in cost from demolition and time-related expenses.

DB&G's James says that this possibility was a factor among investors who were becoming wary of possible legal action against Carib Cement.

"The understanding is that apart from losing the protection, the liabilities from people with claims are growing against the Carib Cement," noted James. "There is a fear that the company will be exposed to a fair amount of legal action."

Carib Cement announced in a press release on Monday that it would "suspend the manufacture and distribution of cement over the period Monday, March 20 to Friday, March 24, 2006, at which time the company will provide further notification to the public regarding deliveries."

Continued the release: "The suspension of deliveries is a precautionary measure that is being taken by the company to ensure that the highest quality product reaches the market."
In a new development that could further hurt Carib Cement, the Trade Board, which is overseeing the issuing of licences for duty waivers, recommended to Cabinet the waiving of the 25.83 per cent safeguard measure from over 200,000 tonnes of cement - representing just over 20 per cent of current projected cement demand in 2006.

Caribbean Cement projects that 960,000 tonnes of cement will be needed this year alone.

Arc Systems, one of two major suppliers that was squeezed out of the cement importing business when the duty was raised, pushing prices to a uncompetitive level, accounts for a large portion of the applications.

"We have been inundated with calls regarding cement," said Arc's vice-president of sales and marketing, Richard Reid.
"We are awaiting notification from the Trade Board for waiving the duty on an emergency supply of cement from South America."

Added Reid: "When we get approval we expect to get 25,000 tonnes of cement within two to three weeks and another 25,000 tonnes in two weeks after that."

Reid told this newspaper that his company had applied for waiving the duty on importing 115,000 tonnes of cement from South America, so far, and had plans to go to its main supplier in the Middle East by mid-June.

Camil Thame
The Jamaica Observer
Wednesday, 22nd March, 2006.