Jul 2006 Financial News

WCO Releases Half Year Results

Jul 20, 2006

West Indian Tobacco Company Limited’s (WCO) efforts to expand its cigarette manufacturing capacity and increase output has clearly brought success to the Company as it continues to report impressive growth. WCO’s Earnings Per Share (EPS) grew remarkably by 33.09 per cent from 63.86 cents for HY 2005 to 84.99 cents for HY 2006. This is actually the largest growth the Company has had in its first half in the last five years.

The successful bottom line was driven by WCO’s core operations which saw an increase in Turnover of 12.28 per cent to $303.688 million. The increase was on account of improved performance in the domestic market as well as the expansion in Caricom exports. This followed from the transfer of manufacturing from Carreras Group Limited (WCO’s associate company in Jamaica).

A small increase in Excise Duties of 4.68 per cent lead to an increase in Net Turnover of 15.65 per cent to $216.618 million. The low increase in Excise Duties was likely due to economies gained from the expansion of WCO’s export markets. In comparison to Net Turnover, Cost of Sales increased by a smaller margin of 6.90 per cent which lead to growth in Gross Profit of 19.83 per cent to $151.988 million. The Company’s Gross Profit Margin grew from 67.72 per cent (HY 2005) to 70.16 per cent (HY 2006).

The major drivers of expenditure were Distribution Costs which rose 30.05 per cent to $3.648 million and Other Operating Expenses which rose 16.89 per cent to $28.144 million. Administrative Expenses rose minimally 0.63 per cent. The increase in Operating Costs did not harm Operating Profit as it grew 26.13 per cent to $96.992 million. This resulted in an increase in WCO’s Operating Profit Margin from 41.06 per cent (HY 2005) to 44.74 per cent (HY 2006).

During the year, Interest Income rose 246.15 per cent to $0.630 million while Interest Expense rose 646.63 per cent to $1.329 million. The hefty increase in Interest Expense is likely due in part to costs arising out of Short-term borrowings of $30.000 million. This was undertaken during 2005 to fund its expansion drive. The increase in Interest Expense however had a minimal effect on profit as Profit Before Taxation rose 25.22 per cent to $96.293 million.

The Effective Tax Rate fell from 30.04 per cent in 2005 to 25.65 per cent in 2006 no doubt aided by the reduction in the Corporate Tax Rate from 30 per cent to 25 per cent. Profit After Taxation ultimately rose 33.08 per cent to $71.597 million while the Company’s Net Profit Margin rose from 28.72 per cent in 2005 to 33.05 per cent in 2006.

Given the strength of the economy together with increasing profitability margins the outlook for this Company is positive. Over the past five years WCO’s trend has generally been to produce marginally smaller earnings in the second half in comparison to the first. However, given the strong economy together with the current high degree of consumerism there may be the possibility that the second half of this year could be better than the first. Hence, we are forecasting year end EPS of $1.72 ($0.87 in the second half). This represents a year on year growth rate of approximately to 25 per cent.

Over the last year, WCO has traded as high as $24.00 and as low as $18.28. While the Composite Index has continued on its downward trend for the first half of the year, WCO’s price has seen minimal fluctuation, trading between $23.00 and $24.00. At the forecasted earnings of $1.72 and the current price of $23.00, WCO is currently trading at a price/earnings ratio of 13.37 times earnings. Given that this share usually trades between 14 to 17 times earnings this share is fundamentally a BUY.


Sreshtha Tewari
WISE Research Team