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Prestige and GCK review

This week, we at Bourse take a look at the local trading company Prestige Holdings Limited (PHL) and Jamaican conglomerate GraceKennedy Limited (GKC), conducting a review of their 2013 annual performance and outlook.

GraceKennedy Limited (GKC)
A review of the financials…
For the year ended December 2013, GKC reported a 7.3 per cent decrease in diluted Earnings per share (EPS) to J$9.65 from J$10.41 in the corresponding period of 2012. The Group declared its first interim dividend for 2014 of J$0.70, payable on 30 April 2014.
Revenues grew 9.7 per cent to J$67.3B from J$61.3B with improvements in all divisions. The food division maintained its position as the largest contributor to revenue increasing by 10.9 per cent year-on-year to J$44.9B, benefitting from its diversification and expansion strategy into new geographic markets. Meanwhile, expenses rose by 9.7 per cent to J$63.9B from J$58.2B. Other Income of J$1.7B grew by J$674M more than that of 2012.
Profit from operations surged 20.4 per cent to J$5.1B, with a subsequent increase in the Operating Profit Margin from 6.8 per cent to 7.5 per cent.
For the financial year ending December 2013, Profit before tax (PBT) jumped 23.7 per cent to J$5.1B whilst net profit remained relatively flat compared to 2012. This was due to a one-off change in the company’s deferred income tax in 2012. Taxes jumped 305 per cent to J$1.2B from J$316M for the period. This jump in taxes was due to changes in the corporate income tax rates for 2012 and 2013 whereby the effective tax rate jumped to 25.2 per cent in 2013 from a restated 7.7 per cent in 2012.
A closer look at GKC’s five operating segments showed increases in PBT across all core operating segments, with the exception of the Insurance divisions. The Insurance division declined in PBT with a 69.6 per cent reduction and was the lowest contributor to overall PBT (2.4 per cent of total PBT). A special exercise conducted at Jamaica International Insurance Company (JIIC) also led to an extraordinary adjustment to the tune of J$350M which led to this division’s reduction in PBT.
The Food Trading division, whilst being the largest contributor to revenue (67 per cent) was the second highest contributor to PBT accounting for 22.6 per cent of the Group’s J$5.1B for FY2013. This increase is a result of the growth in market share of its diverse export markets.
For 2013, GKC saw positive revenue growth in its international markets when compared to 2012. The European market, the Group’s second largest geographical revenue generator which accounts for 16.6 per cent of total revenue, grew by 19.6 per cent. Africa’s revenue grew a whopping 91.3 per cent but still represented 0.1 per cent of total revenue, the same as 2012. GKC’s strategy to expand into the African market seems to be gaining traction as revenue growth continues to be aggressive in this region. In February 2014, GKC opened GK Ghana Limited in its move toward becoming its own distributor rather than selling through a third party in the African country.
Revenue derived from Jamaica still commanded 64 per cent of total revenue and grew 6 per cent for the year.

The Bourse View…
At a price of $3.69, GKC is trading at a trailing P/E of 6.2 times, lower than its 5-year average of 7 times. Its dividend yield stands at 3.6 per cent (Exhibit 1), currently the highest in the conglomerate sector.
On a price to book basis, GKC’s ratio of 0.62 is below 1 and less than its competitors (AMCL at 2.37 and NML at 1.71). This price to book ratio represents a discount to the book value of TT$6 suggesting that the stock is currently undervalued.

Strategic Initiatives and Direction
In March 2014, the Grace Group signaled that acquisitions will be an important part of the food and financial conglomerate’s growth strategy. A strong capital base of J$34B and a J$9B cash position enhances the group acquisition prospects.
With a debt to equity ratio of 35 per cent, the company’s low leverage supports their strategy to invest in businesses for future growth.
GKC share buy-back program is reported to continue up to October 2014 as the stock is still viewed as undervalued by the Group’s executives at just under J$60 per share (approx. TT$3.69) as listed on the Jamaican stock exchange. GKC plans to buy back up to 8.4M shares and have already purchased 1.66M shares from November to December 31, 2013. Effective Friday 14th March, 2014, 2M ordinary shares were removed from GKC issued share capital leaving just over 333M shares in issuance.
BOURSE maintains a BUY rating in the medium to long-term for GKC.

Prestige Holdings Limited
For the audited financial year ended November 30th 2013, Prestige Holdings Limited (PHL) recorded a decrease in diluted Earnings per share (EPS) to $0.618 relative to an EPS of $0.672 for FY2012. Included in the 2013 figures was a $7.9M in loss from discontinued operations, related to the closure of Prestige Restaurant Services in Barbados. The Group’s EPS from continuing operations for FY2013 was $0.721, down from $0.725 reported in the prior year. As a result of this, PHL’s 2013 P/E increased to 15.22 from the reported 13.76 in the previous financial year (Exhibit 2).
Revenue for 2013 grew by 6.8 per cent, moving from $844.8M to $902.2M year-on-year (Exhibit 3) however, cost of sales increased 8 per cent to $576.3M. The Group’s operating expenses also increased 7.5 per cent to $191.4M. Overall, Operating Profit increased 3.4 per cent to $76.4M while the Operating profit margin declined from 8.7 per cent to 8.4 per cent. This decline in the Operating Profit Margin was a result of an increase in operating expenses, mainly inventory handling as well as advertising costs. The rise in the cost of sales coupled with an increase in operating expenses and the discontinued Barbados operations resulted in an 11.2 per cent decrease of Gross Profit from $40.9M in 2012 to $36.4M at Y.E. 2013.
As the Group moves ahead, operations both regionally and locally may influence how it performs in terms of both revenue growth and profitability. Since the acquisition of Subway on 1st December, 2011, three new Subway restaurants were built, one of which occurred in 2013, bringing the total number of restaurants to forty three. It is expected that this brand will continue to grow in sales and profitability at a rate of 5 per cent per year.
Given the weaknesses in the Jamaican and Barbados economy, it can be anticipated that the T&T operations will continue to outperform its regional counterparts and be the revenue driver for the company. However, the difficult labour market as well as food cost inflation remains major challenges to the industry. PHL’s emphasis on maintaining sales and managing expenses are paramount in ensuring that the Group meets its targets, especially in the countries outside of Trinidad and Tobago.
At the current price of $9.29, the stock is trading at a trailing P/E multiple of 12.88 times, a premium to its 5-year average P/E multiple of 12.6 times. The dividend yield is 2.9 per cent. BOURSE recommends a HOLD on this stock.
For more information, investors can call Bourse at 628-9100 or visit us at any one of our offices. Further information is also available on Bourse’s website at www.bourseinvestment.com and Bourse Securities Limited Facebook page.
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