LASCO Manufacturing profits in the future

In the aftermath of the first quarter results to June, investor’s would be forgiven if they were disappointed in the results of what many see as the flag ship of the three Lasco companies listed on the junior market. Revenues grew “oh so slightly” to $842.7 million from $835.4M in 2012. However, the company was able to maintain and control its costs of sales, thus achieving gross profit of $250.3 million slightly above that of the first quarter of 2012. Profit was not as fortunate as it slipped to $138.751 million from $153.54 million in 2012. The stock which was trading at $1.80 pulled back on the release of the results and closed at $1.45 on Wednesday.

Operating expenses | The first quarter operating expenses increased due to an under-accrual for a promotional expense during the last quarter of 2012-2013, which was brought to account in the current quarter. In addition, the company had to honour a retroactive duty charged by customs on the disposal of damaged raw material, which consequently impacted on the profitability for the period. But investors should be looking well beyond the latest results and focus instead on the major expansion that is currently under way. Once completed, the increased sales from new products will not only boost sales but profits and ultimately the stock price.

Not to be underestimated is the impact that the factory expansion is having on costs and the diversion of cash to fund the factory expansion that would otherwise have been available for investments.

Exports | LASCO Manufacturing exports 10% of sales as finished products to the United States, Canada, England, Panama and the Caribbean. The company is currently exploring West Africa, and Ghana in particular, as a new market. Exports are planned to move to 25% within a short time period. That will take some doing as local sales is also expected to grow. Current export sales would be need to increase by one and a half times to meet this target.

The chairman, Lascelles Chin, told the attendees at a press conference on Monday that “the development of a new product range has become an important facet in our strategic plan and every effort is being made by the team to ensure the margins required are obtained.

The chairman also disclosed that the factory expansion will cost just under US$30 million, this well be over the original planned figure of US$10-15 million. The factory is expected to be operational by September, at which time the company expects to roll out new products that will be priced very aggressively to compete with others in the market place. According to Chin, “The results of the manufacturing expansion currently underway at the White Marl location will undoubtedly unlock potential in the company for our consumers, shareholders and other stakeholders”. He indicated that this will be the largest factory in Jamaica at 340,000 square feet and will produce many new products to add to the current range.

The expansion is not only about new products. A significant factor will be the reduction of current costs and the ease of production. The new factory and machinery will result in waste reduction and eliminate the doubling-handling of goods.

The chairman reiterated, “With the expansion project near completion within the next two months, we expect that LASCO Manufacturing’s financial performance will improve significantly. Over the next year – many new products will be pivotal to the company’s growth and we look forward to being able to make further positive announcements about new products to you in the near future.”

Balance Sheet | Trade payables increased from $258.8 million at the end of 2012-2013 financial year to $333.8 million in June 2013 due to increased purchases of raw materials, which is typical for the period in anticipation of the summer, back to school and hurricane season. This was affected also by the exchange rate fluctuations during the first 3 months of the financial year. The receivable surge was due to extended credit terms offered to a major distributor. The company borrowed $1 billion to help fund the expansion of the factory with about $1 billion being internally generated funds. The loan represents just under 2 years of cash flow at present revenues.

Insider call | LASCO Manufacturing is a IC Insider Buy Rated stock.