RJR’s $106M 4th quarter loss

Things are not good for the media houses these days as economic pressure and the withdrawal of Claro mobile operations from the Jamaican market coupled with a soft economy has cut revenues for this sector. In a tough economy, RJR group suffered a pretax loss of $106 million in the quarter ending in March after writing off $35 million for impairment of the investment in Reggae TV and JNN. This result is a major swing from the similar quarter of 2012 when a profit of $15.6 million was made. Result after tax for the period came out at a loss of $51 million versus a profit of $5.6 million in 2012.

A 5 percent fall in revenue to $446 million from $470 million in the 2012 quarter was one of the major contributors to that big loss in the quarter.

Annual Loss | For the year to March, the loss before taxation came out at $79.5 million and $36.4 after tax, compared to a pretax profit of $146.5 million in 2012 and a net of $87.4 million after taxation of $59 million. The company reported revenues of $1.866 billion for the year, in 2012 revenues were $1.937 billion a decline of 3.7 percent.

RJR_Newslogo150x150Bad debt provision increased from $10.7 million to $30.5 million and special events cost amounted to $186.8 million compared to $90.3 million in the prior year.

While amounts in receivables were kept relatively constant with the previous year’s figures, payables at the end of March climbed to $124 million versus $44 million and the company borrowed $201.5 million. Fixed and intangible assets were purchased amounting to $192 million of which FIFA world cup rights accounts for a large portion.

Decline | The company has suffered a series of set backs over the years. One that is most noticeable is the fall in return on equity from 21 percent in 2000 and 19.7 percent in 2010 to 10.3 percent in 2011, 6.4 percent in 2012 and now a negative return in 2013. Even adjusting for the one-off cost items that are in the 2013 fiscal year, profit would still be inadequate to beat the return on equity of 2012.

RJR recovered from a stunning loss of $129 million in 2009 to record a profit of $222 million in 2010, so it could recover again. However, there are some differences. In 2010, revenues rose by nearly 21 percent on top of a 7 percent in the two previous years. This time around revenues are down in a soft market for advertising as revenues were flat in 2011, declined in 2012 and again in 2013. This is not a market where revenues can be easily raised to dramatically turn around profits. On the positive side, there are some costs in 2013 that should not recur in 2014. Depreciation charge is $109 million, which is not a cash item, so even if it were to continue to make a small loss it can continue to operate for a long time until it recovers as cash flow can be positive.

FIFA rights | The company paid $83.55 million for the exclusive right to transmit FIFA football matches in Jamaica between 2015 to 2022 which means that it will be some time before this investment pays off.

The company’s stock trades at $1.37 and it is difficult to see how this stock will be able to justify a higher price with these results, but more importantly, how will the company grow revenues or cut cost to restore reasonable profitability.

Cable & Wireless email moves to Google

Cable & Wireless (C&WJ) has announced that they are going to use Google to host cwjamaica.com email and portal services in the future. According to a message to their subscribers the company says “this is a very exciting change, as it will enable us to provide you with latest email technology through Google’s dynamic suite of communication applications.”

The company said that they expect the Google migration to be implemented within the next two months and that email addresses will not change and that the change will not impact virtual domain customers nor will it impact any aspect of their Internet connection.

“In preparation for this move, a change to your email password may be required. Once the mail services have been transitioned to Google, your email password will need to be at least eight characters. This change is necessary to be compatible with Google’s security requirements, if your password is already least eight characters, you will not need to make any change. If not, you will need to change the password before July 8th, 2013 to avoid any possible downtime during the move to Google.” the release from the company said.

The move is likely to make it easier for the company’s customers to send and receive emails, especially when overseas. Presently, when overseas, email access is through the company’s webmail service which is not user friendly.

$2B slide in landline revenues sinks C&WJ

Cable & Wireless (C&WJ) revenues from landlines slipped $2 billion in the year ending March 2013 which helped push the company’s operating income into a loss before an exceptional charge of $2.75 billion relating mostly to reduction in staffing. A $670 million increase in mobile revenues could not prevent a slide of $1 billion in overall revenues which came in at $19.1 billion versus $20.4 billion in the previous year. In spite of the fall in revenue, a $1.5 billion drop in out payments made to other carriers offset by $500 million increase in other cost of sales resulted in gross profit slipping by just $340 million.

New rates | Last year June, when it announced radically new low rates, “the company indicated that it hoped the “game-changing” Talk EZ plan will double its market share from 18 per cent to 36 per cent within three years. It currently has 400,000 pre-paid customers and 50,000 subscribers, according to a Jamaica Observer report. The initial up take of the service last year suggested that they were on target to achieving that target with 250,000 new subscribers by the end of December but by March this year the numbers melted down to a 16 percent net increase or just under 100,000.

More customers | For the September quarter, the company stated that the mobile customer base increased by 20% and that they attracted 100,000 customers within 100 days of launching the new plan. Extrapolating, they started off with 500,000 mobile customers which reached 600,000 by September. In March the company shifted the tax of 50 cents per minute on cell calls to customers which they had absorbed from July last year when it was 40 cents per minute. This shift seems to have resulted in the attrition in new customers. Our estimate is that C&W decision to absorb the cell tax, cost the company about $500 million, a cost that won’t be repeated this year.

cellphone280x150Banking | The company is banking on the recent reduction in termination rate to hand it an advantage, as they retain more of the amount customers spend with them, as they talk more with the new rate for both local and overseas calls to other networks. Down the road they expect that number portability will also present them with another opportunity as mobile users will be freer to switch networks.

Going forward | “Now that we have the new, lower Mobile Termination Rate that will be almost 90 percent less than what it was a year ago, LIME is in a better position to increase subscriber numbers and grow revenues,” management said in an exclusive response to IC Insider.

What seems logical is that persons will be less concerned about what number they are calling once the various rates are close to each other. So the scenario where customers were ring fenced to calling within their network due to the high cost of calling other network will no longer exists, allowing for freer calling and quite likely more time spent talking.

It will also reduce staffing and related costs and have a net benefit as a result of outsourcing the repairs and servicing to Ericsson. The first quarter of the last fiscal year had a lower margin on calls made to other networks as the termination rate came into effect in July 2012. In this year’s first quarter, C&WJ will enjoy a higher margin on cross network calls, helping improve the bottom line.

The savings to come from outsourcing of the field service support and from the absorption of the mobile call tax plus some growth in net cell revenues suggest that the company should be much closer to a profitable position, if not a profit, in the current year from normal operational expenses, assuming they maintain substantially existing business and continue to add mobile customers and get more talk time from existing ones.

Stock outlook | The stock last traded at 16 cents with a bid of 17 cents. The company has a negative net book value and it owes the parent company $28 billion which attracts interest at Treasury bill rates plus 1 percent. Working capital is negative with current assets being less than current liabilities.

Dividends & Insider Trades

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Seprod Limited | Declared a dividend of $0.53 per share payable on July 8, 2013 to shareholders on record as at June 21, 2013. The ex-dividend date is June 19, 2013.The previous dividend paid by the company was $0.30 per share, on November 9, 2012.  Prior to this, the company paid a dividend of $0.53 per share on August 7, 2012.

Seprod reported profits for the first quarter of this year that was down on the similar quarter in 2012. Profit after tax profit slipped to $231 million compared to $292 million in the 2012 first quarter.

JPS Preference dividends | Declared quarterly dividends for the issued preference shares which will be paid on July 1, 2013 to shareholders on record as at June 14, 2013, the ex-dividend date is June 12, 2013. The following are the shares and the amounts:

  • Jamaica Public Service Company Limited 7% – $0.035
  • Jamaica Public Service Company Limited 5% C – $0.025
  • Jamaica Public Service Company Limited 5% D – $0.025
  • Jamaica Public Service Company Limited 6% – $0.03

Insider trades | Jamaica Producers Group Limited advised that two Directors purchased a total of 290,287 of the company’s shares, between May 17 & 24, 2013. Mayberry Investments Limited has also advised that a connected party purchased 29,037 shares in the company on June 3, 2013.

Stocks to watch: 10th June 2013

Keep an eye on these stocks for movement during the week of 10 June, 2013.

  • Access Financial
  • Paramount Trading
  • Lasco Financial
  • Blue Power
  • AMG Packaging
  • Jamaica Broilers
  • Mayberry
  • Sagicor Life
  • Scotia Group

C&WJ announces $2.99 prepaid rate

Following on the decision of the Office of Utilities Regulation to lower interconnection rates, from $5 to $1.10 effective July 1, Cable & Wireless (C&WJ), today announced a one rate of $2.99 per minute for all pre-paid calls to any domestic and select international numbers, effective midnight tonight.

The standard Talk EZ Prepaid customers will enjoy the $2.99 per minute rate – billed on a per second basis – for local calls as well as the USA, Canada and landlines in the U.K. The Talk EZ plan is the default option for all new LIME customers, existing subscribers may activate the plan by dialling *123*1# from any mobile phone.

Garfield Sinclair, CEO, Cable & Wireless Jamaica and Cayman revealed that the TALK EZ prepaid plan will also extend to calls made to subscribers on its rival competitors’ network, Digicel.

cable-and-wireless-worldwide280x150Coming down from $6.99 per minute – the new cross network rate of $2.99 represents a 60% reduction in the cost to call across networks for its mobile subscribers. Digicel customers currently pay up to $14.20 per minute to call the C&WJ network, the CEO said.

Sinclair further announced an offer for persons wishing to capitalize on the company’s new rate adjustment with an in-store deal that will see customers receiving a free Alcatel 296 handset and a free SIM card with the purchase of $1000 pre-paid mobile call credit. The two-day offer will be available at C&WJ stores island-wide from Friday, June 7 to Saturday, June 8.

C&WJ, which has emerged as the clear mobile value provider, announced a dramatic rate cut in on and off-network calls on June 14 last year, when the Office of Utility Regulation (OUR) issued its Interim Determination to reduce the Mobile Termination Rate from $9 to $5 per minute.

LASCO Manufacturing: one for the radar

LASCO Manufacturing enjoyed a 15 percent increased profit for the year ended March 2013 before taxation from increased revenue of 13% for the year. Profit after taxation was up only 9 percent as the 2012 results benefited from a tax credit which boosted the after tax figure. In the latest quarter, revenues were up just 8 percent, a lower pace than the September and December quarters with growth of 21 percent and 15 percent respectively. But the best is yet to come with the near completion of the factory expansion that will cut cost and result in new products being introduced.

4th Quarter | Pretax profit for the March quarter was up 29 percent to reach $175 million. After tax, the increase was just 8 percent. In the March quarter, gross margin increased from 27 percent in 2012 to 30.7 percent and is up from 27 percent in the December quarter. Administrative expenses rose 6.5 percent year over year, much less than the growth in revenues while selling and promotional expenses remained flat for the year, helping to boost profit.

The improvement shown in a better margin and subdued cost increases has been highlighted by management in a report to shareholders. “The company continues to focus on cost control, cost containment, cost management and increased efficiency,” the statement said.

Lasco_FoodManufactoring150x150Financials | Trade Receivables increased by $180 million from $447 million in 2012 which management states was due to a temporary timing difference of payment with one of their distributors and has subsequently been settled. Inventory also increased $210 million from $279 million in 2012. Equity capital was $1.9 billion at the end of March, enough to facilitate the loan taken on, allowing for appropriate coverage.

Factory expansion  | LASCO Manufacturing embarked on 70 percent factory expansion of the manufacturing operation which is nearing completion at the White Marl location. When completed with new machineries in production, cost is expected to be reduced considerably. The areas that the reduction will be most visible include direct production cost, with less direct labour, material waste and cost relating to the double handling of goods. The capital spend on the expansion at the end of March is $1.7 billion out of a budgeted expenditure of J$2.2b. So far the company has drawn down J$1 billion of a loan facility to help fund the capital expenditure with the rest coming from internally generated funds.

“We are poised for further growth as we experienced higher demand for our products in the local and export markets in the past year,” Management said.

Products | The company manufactures several well-known food items such the soy protein based LASCO food drinks, LaSoy Lactose Free, Oats Porridge Mix. It will also package Full Cream Milk Powder and Skimmed Milk Powder and purchase and co-package a wide range of other food items, consumer, personal care, infant care and household products.

Exports | The company exports its products to 23 countries, including UK, Canada and USA. Export sales now represent 9% of overall sales.

Stock outlook | Lasco has a competitive advantage with a well-known and respected brand and the expansion will reduce the cost of production making the existing products even more competitive. New products are to be added to the existing ones and some products that are being manufactured by others will be produced in house.

The stock price raced to $15 after the company announced a 10 for 1 stock split and it gained added support with the release of the recent results. The growth seen during the year, with more to come, makes this stock one that must be on all investors’ radar.

Carreras grew income

In the just concluded financial year ending March, Carreras grew its income from increased volumes and some price adjustment. Operating profit climbed from $5.175 billion to $5.68 billion. Administrative distribution and marketing expenses rose from $1.745 billion to $2 billion. The company is reporting profits of $6.49 billion up from $2.6 billion in 2012.

The latest results have been impacted by a $5.08 billion inflow from the pension funds representing a portion of the pension fund surplus which was distributed to Carreras. The company reported earnings per share from ongoing business of $6.14 versus $5.35 in 2012. Most of the pension surplus was distributed to shareholders as a special dividend. Carreras also picked up foreign exchange gains of $161 million during the year up from $19 in 2012. This may or may not recur in the current financial year ending 2014 and investors will need to pay attention to that.

Tax refund | Of import, is a refund of $1.7 billion of taxes that was paid over to the government and is to be refunded plus cost of legal fees and interest. The government has made provision of half a billion in this year’s budget to pay interest on the indebtedness. The entire amount is expected to be paid out as dividend when received.

Carreras_tobacco150x150The company’s product is not only mature but seems to be less socially accepted. The company has done most of the cost cutting hence increased profits in the future will come mostly from price adjustments. If the company is allowed to keep the price relatively stable for a while, then the possibility of picking up some volume increases may occur.

At the end of the financial year, the company had cash funds of $3.9 billion, some of which will be paid out as dividend in June. Liquidity is good with current assets exceeding current liabilities $4.76 billion to $3 billion. There are no borrowed funds being used in the operations.

Income stock | The stock is essentially one for dividends with the company paying the equivalent of $5.20 per share for the year. Lower interest rates in the financial sector is likely to drive more investors to this stock for the relatively high yield, but with withholding tax at 15 percent on dividends and an unsure growth path for profits, investors may be taking on added risk to eke out a slightly higher return from the dividends paid by Carreras.

Stock outlook | At this time, the stock is price to almost perfection in earnings with a PE of 10 times the latest earnings. The price of the stock to net book value is the highest in the market at more than 11 times.

Investors in this stock should ensure that their portfolio is appropriately balanced. In other words, investors should ensure the stock does not dominate their portfolio.

FX gains & securities boost Proven

Increased gains from foreign exchange and securities trading helped Proven Investments to report higher profits than in 2012 in its latest release of its audited financial statements to March this year. The investment bank reported 26 percent higher profits than in the previous year.

While interest income grew from US$7.076 million to $7.36 million, net interest income fell to US$2.89 million from US$3.1 in 2012. However, dividend income grew from $900,000 in 2012 to US$1.26 million in the latest year. Net fair value adjustments and realised gains accounted for US$4.51 million versus US$3.31 million in 2012. But foreign exchange trades delivered US$1.57 million, a turnaround from a loss of US$417,000 in 2012.

Us$_Bankroll280X150Bad debt of US$637 million helped to move up other operating expenses from US$1.9 million to US$2.8 million. The earnings work out at US$0.0141 per share versus US$0.0112 in 2012. The stock closed up slightly at US$0.115 at the end of Monday’s trading before these results were released. There seems to be room for further gains in the stock price with the PE ratio of the stock being 7.7 times the latest earnings. Management will have to pull out all the stops and be creative to drive earnings in the immediate future to continue to make the stock attractive to a wide array of investors.

The company reported assets of US$144 million up from $140 million in 2012. Equity capital stood at US$35.8 million at the end of March 2013. The company is reporting that exchange movement reduced the value of the preference shares during the year from US$11.24 million down US$9.922 million.

Going forward, much will depend on the ability of management to extract more gains from foreign currency trade as well as how well they do in investing in other forms of securities. In this regard investors, who may be interested in the stock, would need to focus on the management’s track record as there is less predictability in the potential earnings in trading securities and currencies.

LASCO Distributors lowers profit

Revenue for the year to March increased 11 percent, but profits fell by 8 percent cooling the rapid growth experienced in the previous year for Lasco Distributors. The stock price nevertheless jumped just before the release of the results from $10.50 to $15 in response to an announced stock split.  Profit came in at $507 million without any tax charge, down from $550 in 2012 after a tax charge of $30 million. The result helped to maintain the stock at the level reached before the actual results were published as earnings per share came in at $1.51.

Revenues grew by $795 million to $8,255 billion in a period when official data says the local economy recorded negative growth. Gross profit margin declined quite sharply to 19.9 percent  from 21 percent in the prior year due to a what management states is “a one off adjustment to cost of sales related to import duties, absorption in increased volumes for institutional sales at lower margins, and the impact of the volatility of the exchange rate.”

The management statement continued “during the last financial year there were unavoidable disruptions in the supply chain for key products which impacted on revenue and profit performance. Whilst the company makes efforts to improve efficiencies there were also investments for future growth.

lasco_logo_150x150“Administrative and other expenses increased by 15 percent to $871 million, due to organisational changes in staff resources to strengthen the company’s market presence and preparation for impending new projects.

“The company has had success in its marketing activities as it has seen growth in some core categories and deeper penetration in targeted distribution channels. The widening of appeal and stronger brand presence is the platform for newly launched products and other planned projects with our partners.”

Balance sheet | Inventories increased by $535 million over the corresponding period in 2012, primarily due to inventory carried for important institutions and planned major promotional activities for key products which extend beyond March. Trade and other receivables increased by $315 million due to the increased marketing activity and extended credit arrangements for key institutions. “The trade receivables continue to be managed within industry standards and extended terms for supplies to key accounts is achieved in collaboration with our suppliers. Current liabilities also increased as trade and other payables was $267 million over the corresponding period and this is due to the continued supply agreement with our strategic partners,” the company stated in a release to shareholders.

Equity capital stood at $1.89 billion while current assets amounted to $2.7 billion versus current liabilities of $1.16 billion. The company is virtually debt free with just $46 million in overdraft outstanding on the books at March.

LASCOPharma_logo150x150Looking forward | The company has geared up for improved business. Some of it seems to be government related. Additionally, Lasco Manufacturing expansion is well on its way and when completed and in full production, Lasco Distributors will benefit from increased flow of items to market locally.

The stock may be fully valued, currently at $15 each, bearing in mind the valuation of other junior market companies, but profits should improve going forward thus providing opportunities for further gains in the future.

Legal matter | There is a claim by Pfizer Limited (Pfizer) against Lasco Distributors Limited  and others for damages for breach of a patent relating to a particular product. The action has been tried and judgement entered in favour of the company. The judgement has been appealed by Pfizer. The appeal has been heard in the Supreme Court of Jamaica and the court has reserved its judgement. The matter has been further appealed to the Privy Council and the records of appeal have now been settled and communicated to London. It is anticipated that the matter should come before the Privy Council either by the end of this year or during the first quarter of next year.

The attorneys are of the opinion that the company should be successful on this appeal and anticipate that the amount to be recovered by the company may be approximately $400m. If not, the company will be liable for cost estimated at $25M and for an accounting as to profits made by the company as damages to Pfizer for its loss of profit attributable to the sale of the product from the commencement of the company’s dealing to the date of the interim injunction issued on 29 March 2005.