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

The only good news from Carreras‘ first quarter results is buried in the notes to the end of the quarterly report. Namely, the Tax Authority has made arrangements with the company to offset current tax liabilities against the amount owing and that they have so far recovered $338 million during the latest quarter.

Elsewhere, revenues plummeted from $3.1 billion in June 2012 quarter to just $2.155 billion, a sharp 30 percent drop that is not all coming from the recently announced smoking ban. Profit after tax fared even worse than the fall in revenues dipping by 40 percent. That is not good news for the stock which has been declining ever since the ban on public smoking was announced.

An interesting development is that gross margin improved to 100 percent from 90 in the 2012 similar quarter and 86.5 percent for all of the 2013 fiscal year. The price increase earlier this year has clearly had a negative impact with the company’s customers, which seems to have taken a big bite out of sales. A look at sales in 2012 showed a big jump in the last half of the year coming into the March 2013 quarter, suggesting that distributors were stocking up on the product in anticipation of price increase and stopped stock piling once the price adjustment was implemented. As such, the fall off in sales may not be as bad as it appears on the surface.

Expenses rise | While revenues plummeted, expenses did not. In fact sales & marketing went up by a third to $207 million from $152 million and administrative expenses from $278 million to $320 million, a 15 percent jump.

Tax Recovered | The tax now recoverable is down to $1.4 billion from $1.733 billion at the end of March. If the tax authority allows a full recovery, then the full amount of the current liability could be recovered this fiscal year and most likely be distributed as dividends to shareholders.

Carreras ended up with cash funds of $3 billion at the end of June, equity is at $3 billion or $6.30 per share. Current liabilities are at $2.6 billion which includes tax payable of $1.5 billion against current assets of $4.1 billion.

These are clearly times of uncertainty for the stock with the fall in revenues and the smoking ban that no one really knows what impact the ban will have over the next few months. With the stock not having a great deal of bids in the market currently, it’s anyone guess where the price will settle in the short term.

Carreras cut the latest dividend from $1.50 paid last year August, to $1 to be paid in August this year, an amount that is in line with the latest quarterly profit.

Related Posts | Dividends: Carreras cuts, Grace ups | JSE: Ban hitting investors harder than smokers  |  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.

The 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.