May 2006 Financial News

Corporate Jamaica feels the squeeze

May 24, 2006

Fifteen of the 21 publicly-traded companies that have so far released unaudited results for 2006, have either posted loss, or reported a reduction in profit from the comparative period last year.

Analysts cite a convergence of negative factors that they hold responsible for the disappointing out-turn. These include:

. the cement crisis that has enveloped the construction sector since February;

. lower disposable income among consumers;

. higher operating costs;

. and in the case of financial companies, a tightening of the generous interest margins they once enjoyed.

Generally, the soft performance has been the most fundamental contributory factor to the bearish mood on Jamaica's stock market.

The ongoing cement crisis is seen by some analysts as one of the most dramatic factors in the lacklustre performance of some companies.

Mark Croskery, fixed income and equity trader at NCB Capital Markets, argues that the shortage of the crucial construction product has not only affected companies operating directly in that sector, but those in the retailer business that are directly affected by lower spending power among consumers.

"Construction businesses are hurting because of the cement crisis, but the retail companies and other sectors such as manufacturing are going to suffer," said Croskery. "You can see that we traded one million on the stock market today (Monday). The stock exchange doesn't even remember when we traded such a little amount. The market is weak and the earnings were more bad than good."

Keisa Ansine, senior market analyst at Jamaica Money Market Brokers (JMMB), identified four companies that she said "were directly affected by the cement shortage". These are: Berger Paints, Hardware & Lumber, Kingston Wharves and Grace.

Berger is among three companies that have reported loss so far this year. The others are the Gleaner and MoBay Ice.

There is also suspicion in the market that the company in the direct line of fire - Carib Cement - will post poor results for the first two quarters of this year. The cement producer is yet to submit to the JSE its full-year results for 2005, and is late in publishing its first quarter results for the three months to March 31, 2006.

Douglas Orane, executive chairman of GraceKennedy, where 2006 first quarter net profit declined by 15 per cent to $484 million, in a profit guidance to investors last month, cautioned that Jamaica's "challenging economic environment" would impact the performance of the conglomerate this year. Profit, he said, could vary from positive to negative five per cent on last year's out-turn.

Profit at Grace's food trading and retail divisions declined during the first quarter "due primarily to a softening in overall consumer demand in the market place and the consequential pressure on margins," and the "disruption in the production of cement impacting negatively on performance," according to Orane.

Hardware and Lumber, a subsidiary of Grace which is independently listed on the JSE, is among the 12 companies that have reported a decline in profit this year - in this case, from $23 million in the first three months of 2005, to $3 million.

"The impact (of the cement crisis) to the business has been tremendous, with the direct effect on sales of construction and related material and the indirect effect on the disposable income of consumers due to the layoffs in the sector," said the company in its shareholder notification.

H&L expects the situation to reverse itself by the end of June, when imported cement is expected to begin arriving in the local market.

Berger Paints also attributes its loss of $1.5 million - which represents a reversal of the $11 million net profit made in the March quarter of 2005 - to "the problems associated with cement in the marketplace with sales volume ending 11 per cent below the previous year".

In fact, Berger's performance plays out the worst expectation of many financial analysts: that the shortage of cement would lead to a reduction in the sale of complementary products - like steel, lumber and paints.

Said Berger in its report to shareholders: "Cement not being available, forced the temporary closure of many construction sites, thus deferring the completion of many projects which in turn reduced the need for paint as it did for many other hardware items. We expect normal levels of profitability to return as cement becomes more available in the marketplace."

The explanation given by Kingston Wharves (KWL) for the 18 per cent decline in its net profit was "lower tonnage which we attributed to the state of the domestic economy".

KWL reported that tonnage handled across all nine berths was down nine per cent to 452,439 tonnes. This translated into a two per cent decline in revenue to $479 million for the quarter.

But JMMB's Ansine believes that the slump in profit at companies is reflecting not primarily weak revenue streams, but cost rigidities that, she says, senior executives must begin to address.

"It is just a part of the picture," says Ansine. "Most of the companies have been able to make higher revenue. It is just the cost structure that has impeded the growth in profit."

Of the 21 companies that have so far released unaudited 2006 numbers, 13 posted revenue growth. However five - Red Stripe (D&G), Dehring, Bunting and Golding (DB&G), Gleaner, GraceKennedy and Goodyear - reported profit decline.

Red Stripe's export volume grew by 27 per cent, with most of the growth generated in the export markets.

But the 11 per cent increase in revenues (net of special consumption tax, which was $2.1 billion for the quarter), was unable to offset the increase in costs.

The Gleaner's revenue was also up - by five per cent to $772 million. But its total costs increased by 14 per cent to $770 million, resulting in a $8.3 million deficit.

In the case of Goodyear, the revenue growth of 14 per cent - which took its income to $325 million - was outpaced by its cost, which soared 22 per cent to $308 million. The revenue growth was generated at Goodyear's eastern Caribbean operations, while the increase in costs was attributable entirely to Jamaica. In fact, the cost for operating outside of Jamaica actually fell. Profit of $12.8 million for the three months ended March 31, 2006, compared with $23 million during the corresponding period the year before.

For the quarter, financial companies were faced with different dynamics.

Shane Ingram, financial analyst at Dehring, Bunting & Golding, says that "the tight trading conditions, especially with low interest rates" slowed the profit growth among financial firms.

"For what I call the hybrid banks - PCFS, JMMB, DB&G, CCMB - we found that interest margins were flat again," said Ingram in explaining the numbers to the Business Observer on Monday. "Their other income streams from actively trading stocks and bonds were also flat, as a result of the markets being depressed during the quarter."

Of the six financial institutions that have so far released their numbers - DB&G, Pan Caribbean Financial Services (PCFS), Jamaica Money Market Brokers (JMMB), Capital and Credit Merchant Bank (CCMB), National Commercial Bank (NCB) and Mayberry Investments - only two - NCB and JMMB - had profit growth.

JMMB's profit of $388 million for the quarter to March 31, 2006, represented a 10 per cent increase over the comparative 2005 quarter. Total revenue increased by 54 per cent to $2.3 billion, largely driven by higher interest income. Its share of profits from investments in the eastern Caribbean also increased from $57 million to $79 million.

NCB's net profit jumped by 111 per cent to $1.2 billion. The commercial bank's total income increased by eight per cent to $4.26 billion, but it was the 15 per cent reduction in costs that allowed it to post that level of gain.

"NCB's performance was well, but it was inflated somewhat by the Dyoll effect," cautioned Ingram. "But even when you take that out, they made over a billion dollars, which was above the first quarter results and an improvement over the previous year. They are improving efficiency and expanding loans rapidly."

In the March quarter of 2005, NCB made a $535.8-million provision for the impairment of its investment in the Dyoll Group, which collapsed earlier in the year when its main subsidiary, Dyoll Insurance, could not meet its liabilities to policyholders following Hurricane Ivan in Cayman.

NCB's Croskery sees loan growth as compensating for the reduction in interest margins faced by financial institutions.

"We saw financial (companies) moving towards fee income when the bases of interest rates went down and the interest spreads tightened, over the past year to two," he said. "The repo book, which securities companies have made the bulk of their money from in the past, is now giving flat returns, the local stock market has been declining, or has been flat since early 2005, so you don't have the tremendous mark to market gains that you saw in 2004 and 2005. The bond market for the last quarter has also been on the decline, so all your segments that would have seen gains have really come to a slowdown."

Croskery argues that companies that are able to structure mergers and acquisitions as well as grow loan portfolios "with interest rates so low, are going to be the companies that are able to push forward".

NCB grew its loan portfolio from $35.7 billion to $38.4 billion between September 30, 2005 and March 31, 2006, which helped to increase loan revenue from $1.5 billion to $1.9 billion.

But the experience at DB&G was different. Here, net profit declined by two per cent to $335.7 million during the quarter despite the growth in the bank's loan portfolio from $1.7 billion to $2.7 billion year over year.

Capital and Credit, which has been pursuing a "strategy of building its non-proprietary income streams", as the company puts it, added $0.4 billion to its loans, taking the portfolio to $2.8 billion by the end of March 2006.

Pan Caribbean, which recently got approval to start a commercial bank, grew its loan portfolio from $3.8 billion to $4.7 billion year over year.

Except for GraceKennedy, the conglomerates listed on the exchange and which have posted their results for 2006, had a strong March quarter.

"The conglomerates did well during the first quarter," noted Croskery. "Lascelles had a loss on the rum division ($7 million) during the quarter, which was a bit of a disappointment, but the Carreras dividend really pushed up its profit."

Carreras paid $2.7 billion in dividends to shareholders during the March quarter, so Lascelles, which made $603 million net profit - 419 per cent over the comparative quarter in 2005 - was paid $460 million, reflecting its 17 per cent stake in the cigarette marketing and distribution firm.

But Jamaica Producers (JP), which reversed a $42-million loss in the three months to March 31, 2005, to a net profit of $148 million, fell slightly short of Croskery's expectation.

"It had a nice rebound in profits," he argued. "Business shrank in the UK, so it was good but it could have been better."

In its note to shareholders, Producers said that its "fresh and processed foods division had a decline in profit (3.3 per cent to $113 million) primarily due to margin pressure in our juice and smoothie business and start up cost in our new chilled dessert business".

The conglomerate said its banana farms and Jamaican ripening business "contributed to the first quarter turnaround as our farms substantially completed their recovery from last year's hurricanes."

The outlook for the banana division, however, looks negative as the company says it sees "signs of pressure arising from significant price competition among the leading UK supermarkets... Banana prices were reduced at the retail level near end-of-quarter and likely to impact distribution and production margins later this year," said the company.

Ingram sees Life of Jamaica (LOJ), Pan Jamaican Investment (Pan Jam) and First Jamaica Investments (FJI) as being the winners during the quarter.

"LOJ, Pan Jam and First Jamaica group were the winners," he told the Business Observer. "All increased earnings from their core operation, and LOJ consolidated its activities in the prior year."

FJI is a wholly-owned subsidiary of Pan Jam, so earnings from its property portfolio and share of profits of LOJ are shown on both accounts. Property income increased from $139 million in the three months to March 31, 2005, to $170 million during the review quarter. Share of profits from associated companies increased from $113 million to $133 million.

LOJ, 25 per cent of which is owned by Pan Jam, increased its net profit by 40 per cent to $633 million for the quarter, largely driven by a 49 per cent increase in revenue - across all income streams - to $3.49 billion .

Said Ingram: "Overall, even though these companies came out with good results, if there is not positive all-around performance, then you find that the good results are drowned by the bad ones, and some companies are the benchmark for what is going to happen in the overall market."

Camilo Thame
The Jamaica Observer
Wednesday, 24th May, 2006.
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