Carreras, the dominant cigarette distributor in Jamaica. is reporting lower profit from operations for the September quarter as it did for the June quarter as revenues fell from the 2012 levels even as the company had a price increase earlier this year.
Revenues plummeted by 25 percent for the six months period declining from $5.76 million to $4.4 million and by 16 percent in the second quarter from $2.67 billion in September 2012 quarter to just $2.24 billion; this is a big improvement from the 30 percent decline in the first quarter. The reality is that with a price hike of 17 percent in March, a sharp decline in volume is expected. This has always been the case in the past so there are no reason to think that it would be otherwise this time around. The situation is made worse by the stock piling of cigarettes by the trade in anticipation of the price hike.
Profit after tax was identical in both the June and September quarters at $485 million each; the profit for the six months fell 33 percent excluding the pension refund of approximately $2.5 billion net of tax in 2012. The interesting development is that gross margin improved to more than 100 percent from 90 in the similar period in 2012 and 86.5 for all of the 2013 fiscal year.
The smoking ban which was announced on June 25, immediately impacted the stock price influencing the pull down from $56 to $52.50 on the next day. Although the price recovered to the $55 level shortly thereafter, it slowly drifted to $50 by the end of July, prior to the results being released for the June quarter. The fall in profit seems to have pushed the stock price down to $35 to better equate the value with the lower profit and dividend payment. At the $35 level, it is gaining some support.
The price increase earlier this year had a negative impact on the company’s consumers took a big bite out of sales, far greater than any impact the smoking ban may be having. Sales enjoyed a big jump in the last half of 2012 up to the March this year suggesting that distributors stocked up on the product in anticipation of price increase and stopped stock piling once the price adjustment was implemented.
Expenses rise | While revenues plummeted, expenses have not, with sales & marketing going up by a third to $207 million from $152 million and rising by a smaller 22 percent for the half year to reach $415 million. Administrative expenses, which increased by 15 percent from to $320 million was up 19 percent to $634 million for the six months period.
Tax Recovered | The tax now recoverable that was down to $1.4 billion at June from $1.733 billion at the end of March, is now at $1.17 billion. If the tax authority continues to allow recovery against current liability then the full amount could be recovered before the end of the 2015 fiscal year and most likely be distributed as dividends to shareholders.
Carreras ended up with cash funds of $3.4 billion at the end of September, equity is at $3 billion or $6.30 per share. Current liabilities are at $2.67 billion which includes tax payable of $1.5 billion against current assets of $4.3 billion. There are no borrowed funds incurred to fund operations.
Carreras cut the quarterly dividend from $150 paid last year to $1 in light of the profit decline.
Outlook | Our forecast is for earnings to hit around $5 per share this current fiscal year, and if so, then the stock would be a reasonable buy around $35, the current price level. With a dividend yield of more than 10 percent before tax, the stock will be an attraction for income seeking investors.
Related Posts | Carreras takes a big hit but tax recovery starts | Dividends galore coming
Image courtesy of Scottchan/FreeDigitalPhotos.net
[…] Carreras is added to the Market Watch list based on IC Insider’s assessment for earnings around $5 per share for the current fiscal year and dividend yield above 10 percent. Trading in the mid $30′s, this stock has a very good chance to head back into the mid $40 range. […]