Mar 2007 Financial News

GraceKennedy Releases Year End Results

Mar 01, 2007

Results for the Year Ended December 31, 2006
All figures are quoted in Jamaican Dollars unless otherwise stated

For the Year Ended December 31, 2006 GraceKennedy Limited (GKC) reported Earnings Per Share (EPS) of $5.61. This was down by 10.38 per cent or 65 cents on the previous financial year- FY2005. The fourth quarter continues to be the strongest performing quarter for this Group with Q4-2006 contributing 26.04 per cent to the total EPS. However, Q4-2006 on Q4- 2005, the EPS fell by 15.98 per cent or $0.31.

For the period under review, GKC achieved Revenues of $36.08 billion, an increase of $3.06 billion or 9.25 per cent on the corresponding period in 2005. Expenses also showed an increase, moving from $30.79 billion (FY2005) to $34.35 billion (FY2006) up by 11.55 per cent. Thus, Operating Income fell by a substantial 22.37 per cent from $2.24 billion to $1.74 billion.

Other Income for the 12 month period stood at $808.82 million and was up by 23.42 per cent on the previous year. Profit from Operations amounted to $2.55 billion and was down by 12 per cent on the previous year’s figure which stood at $2.90 billion.

The Group’s Finance Income was $401.71 million, down by 9.37 per cent on the previous year, while Finance Expenses was up by a significant 31.72 per cent from $347.61 million to $457.87 million. Share of Results from Associated Companies stood at $32.80 million and was also down considerably when compared to the figure of $64.21 million at the end of 2005.

Profit Before Taxation for the period under review was $2.52 billion and was down by 17.37 per cent or $530.70 million on the corresponding period last year. The Effective Tax Rate for the period was 25.90 per cent compared to a Tax Rate of 30.56 per cent for FY2005. Thus, Profit After Taxation stood at $1.87 billion a decrease of 11.82 per cent or $250.88 million on the last financial year.

The Chairman has noted that there have been significant reductions in the size of corporate offices due to the newly established corporate structure of the Group. This new corporate structure was established on December 1, 2006 and consists of the creation of two new business entities: GK Foods and GK Investments, instead of the previous four divisions. The reorganization costs totaled $100 million and have been expensed in the fourth quarter of fiscal 2006. The Group expects to benefit from significant savings from this reorganization in the calendar year 2007.

Additionally noted in the report to shareholders was the fact that an additional provision of $281 million was made in the Jamaican Remittance Business (GraceKennedy Remittance Services), during the fourth quarter. This was mainly due to doubtful receivables for which collection efforts are continuing. In an interview with the Jamaica Gleaner (article dated February 16, 2007), the Chairman, Mr. Douglas Orane, stated that these “doubtful receivables” occurred as a result of a technology glitch which occurred last year during upgrades to the Group’s money transfer platform. The provisions amounting to $461 million were booked in the final two quarters of fiscal 2006. Thus, $185 million was booked in Q3-2006 followed by the $281 million in the fourth quarter.

Also transpiring in this part of the business was the emergence of evidence of fraudulent activities, for which the Group has taken corrective steps to avoid a repeat of such occurrences. In his interview with the Jamaica Gleaner, Mr. Orane also stated that a smaller portion of the provision covered the losses derived from the fraudulent activity experienced by the Group.

GraceKennedy is currently trading at a price of TT$5.75. In light of the current results and the forward looking statements of the Chairman, we are forecasting an EPS for FY2007 of TT$0.60. At the current price and our forecasted EPS, this Jamaican Conglomerate is trading at a price to earnings multiple of approximately 10 times, which is attractive for a Group which traditionally trades between 10 to 15 times. Also, using a multiple of 12 times and based on our forecasted EPS of TT$0.60, we have estimated an expected 12 month return on this share of approximately 25 per cent or a target price of TT$7.20. Thus, with this fundamental analysis we recommend a BUY on this share.


Gia Singh
WISE Research Team