Caribbean Cream’s 49 percent jump in revenues in the first quarter to May this year, melted down to just 24 percent in pre-tax profits as costs rose above the growth in inflows. The situation for the February quarter was even worse as a 48 percent increase in sales delivered just $1.5 million in profit, a collapse from $18.6 million in 2012. Profit after tax rose to $11.7 million, up from $5.4 million, thanks to a roughly $6 million turn around in taxation.
Costs rise faster | In the May quarter, direct labour cost climbed 69 percent to $11.4 million, electricity moved up by 86 percent, water jumped 106 percent to $1.2 million, machinery depreciation was up 117 percent. There were savings in packaging cost, down 53 percent to $725,000, factory rental was down by 44 percent to $1 million. IC Insider understands that the company underwent some major changes in how some aspects of the operations are done. The company used to purchase certain items from Scoops Unlimited, but this operation is now taken over, hence costs are structured differently than in the prior year period. The acquisition of their own warehouse means reduction in rental but a rise in finance cost. There was also a price adjustment in March for the products to help cover the increased production cost.
Admin cost | Administrative cost was fairly well contained having increased far less than sales. The increase most likely would have been partially impacted by added costs to facilitate the IPO which occurred in the quarter. As such legal and professional fees were up nearly $1 million and audit and accounting fees by $1 million. Utility cost were down as well as depreciation but these may be due to reallocation of charges to direct expense instead of administrative expenses as was shown in the prior period. Interest and finance cost also showed an increase of $1 million. There was also a loss of $937,000 on disposal of fixed asset. The growth in profits before tax would be 36 percent if the loss on fixed asset is excluded. With the increased level of revenue, far more would have been expected under normal circumstances. The next quarter will be the true test when one-off costs should not recur.
Caribbean Cream’s rapid sale growth is phenomenal and looks as it can continue for a while yet. This is the aspect that many investors should be looking at as the company expands its customer base and captures market share with good products at competitive prices. As sales continue to rise rapidly, cost is likely to grow at a much slower pace thus helping to boost profits at a rapid pace.
At the end of May, current assets stood at $131 million up from $102 million at the end of February. Increased cash which stood at $65 million and a $24 million reduction in inventories were the factors giving rise to current asset change. Current liabilities on the other hand stood at $75.66 million a decline from February’s $126 million as the amount for payables was cut from $100 million to $64 million. Borrowed funds stood at $81 million, just a bit lower than the amount due at February.
Capital spend | The company spent $100 million on capital prior to the IPO but more is to be spent as new cold room machinery is to be installed later this year. Management states that this will cut cost and increase efficiency in freezing the product.
Valuation | The stock is selling at roughly 30 percent of sales. This compares with AMG Packaging at 100 percent of sales, Blue Power 50 percent and Jamaican Teas is around 100 percent of sales. The PE on forward earnings for 2014 is only 2 and there is much room for the stock price to move upward.
Management | The report containing the results show signs of some management weakness that they need to correct. In the investment world, communication is key. The changes in the operations and the resulting changes in the line items of costs should have been addressed in the directors’ report to shareholders. Costs that were of a one-off nature should have been highlighted so that investors could get a clearer picture about ongoing costs and profits. Instead, investors have to dig into the numbers making assumptions that really should not be necessary.
[…] depreciation, audit and accounting, security and other administrative and interest cost robbed Caribbean Cream of a better bottom line. Nevertheless, the company saw a 186 percent increase in profit before tax […]