Grace profit up but much work needed

Grace Kennedy’s profit is growing nicely at 21 percent but the nice bump up is due to lower taxation than from normal trading gains. Revenues in the September quarter, rose by the highest level for the year, with an 18 percent increase, against a lower 15 percent year to date, hitting $20.76 billion from $17.56 billion in 2013, for the quarter and $59.28 billion in the nine months to September, from $51.46 billion in 2013.
Pretax profit only grew by 9.5 percent well below the revenue growth, to $1.12 billion from $1.02 billion in 2013 and for year to date, $3.7 billion versus $3.36 billion, a 10 percent gain. Lower taxes helped push net profit up by 21 percent for both the quarter and the nine months’ period, to $704 million from $584 million in 2013, for the quarter, and $2.38 billion from $1.98 billion year to date.
As impressive as the profit gains appear, the sprawling group has much work to do, with annualized return on equity below 10 percent, based on the net profit to date. Management in commenting on the results states “the domestic segment has been focusing on several projects to enhance efficiency, capacity and profitability. These projects include product improvement, more efficient energy utilization and providing assistance to our local raw material suppliers.”
Elsewhere, the acquisition of Le Foods is expected to start the full marketing of the Grace products in 2015, which is expected to deliver higher margins for the group, a spokesperson for the group indicated shortly after they acquired the company, earlier this year.
Margin got squeezed, as operating cost rose faster than the growth in revenues, helping to keep profits down, but Grace’s traditional stream of business lines in foods, have not delivered increased profits so far, in 2014.
Segment results tell an eloquent tale of what happening within the group and the stagnation that exist. The food business that so much hope is pegged on, delivered little increase profit year over year, with the 2014 period delivering $879 million versus $874 million in 2013, in spite of revenues rising 21 percent to $40 billion from $33 billion, in 2013. Banking and finance showed lower results, with a fall to $275 million from $505 million in 2013. The insurance segment recovered from insurance liability adjustment in 2013, to post a profit of $448 million from a loss of $25 million in 2013. The money transfer business has been the star performer for the group with segment profits of $1.64 billion versus $1.35 billion in 2013.
The stock traded at $60 on Friday on the Jamaica Stock Exchange and is priced at a PE around 5 times 2014 earnings which should come in around $12 per share. The net book value is $106 per share, well ahead of the price. There is room for growth for the stock and a buy for medium to long term gains can pay off well. Grace just declared a dividend of 85 cents per share bringing the total for the year to $2.33.