Shrinking margins and lower gross profit could not prevent Seprod from enjoying a bump in profit of $312 million in the June quarter versus $161 million in 2012 and $542 million for the six months period versus $453 million in 2012.

Seprod got a boost of $107 million from the sales of equities in the June quarter. Also in the quarter, they benefitted from a gain of $54 million from holding of assets in foreign currency. Finance and other operating income rose to $112 million in the quarter, up from $80 million in 2012 and for the six months, $206 million versus $167 million. Management has kept selling and administration cost under control with both areas falling in the latest quarter and just rising slightly for the year to date period. Selling expenses which came out at $100 million for the quarter was $6 million less than in 2012 and admin cost came out at $372 million versus $374 million in 2012. For the six months, selling expenses climbed by $4 million to $198 million and admin went to $784 million up from $751 million in 2012. Finance cost moved up to $42 million from $26 million in the June quarter and in the six months period, it rose from $48 million in 2012 to $82 million in the latest period.

Revenues | Revenues were down 2 percent in the first quarter, falling to $3.7 billion and off by $74 million from the year ago period. However, revenues increased by a healthy 17 percent to $3.7 billion in the June quarter and is up 7 percent for the 6 months to June.

The biggest issue the company is currently having is a sharp fall in profit margin. To June 2012, gross profit as a percentage of direct cost was 28.2 percent and has fallen to 24 percent for the 6 months to June this year and to only 21 percent versus 24 percent in the June quarter. The deterioration has occurred in the distribution segment as profit stagnated at $99 million, a slight 3 percent rise in that area while sales rose 11.5 percent. In the manufacturing segment, profit is up by 12.5 percent to $893 million and revenues is up 3.5 percent to $4.7 billion.

Earnings per share for the 6 month period is $1.05 and the full 12 months to December should be around $1.80-$2.

Finances | Seprod has $3.9 billion in cash and investments. Borrowing is at $2.26 billion up a billion dollars from June 2012. Current assets are well in excess of current liabilities by 3 to 1 and equity stands at a strong $9.6 billion.

Longer term | Seprod has never been one of those sexy companies but it has done remarkably well since listing back in the 1990s. It appears that for 2014 and beyond a lot is being predicated on the fortunes of the sugar operations in St Thomas where the target for sugar production is the processing of 300,000 tonnes of canes that should work out to around 25,000 tonnes of sugar. Management indicates that the expanded canes farms are already planted and the production should be coming in the 2014 crop. The group acquired Bowden Estates with 3,000 acres along with another property in the area and lands that were in bananas have now been planted out in canes. Management states that the sugar company is critical to them as a foreign exchange earner that can supply foreign currencies for the group when needed.

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Revenues are down to $3.6 billion for the March quarter for Seprod, who manufactures and processes oils, fats, cornmeal, soaps, milk, sugar and run a cattle farm. In the 2012 period, the group recorded revenues of $3.7 billion. Profit followed in the path of revenues slipping to after tax profit of $231 million compared to $292 million in the 2012 first quarter. While sales declined, cost of sales moved up, resulting in just over $100 million less gross profit. Costs in other areas were kept well within the amounts for the previous year. Had it not been for a significant foreign exchange gains, the decline in profits would have been far worse than reported.

It was the cash generated from operations that is eye catching with nearly $500 million generated in the first quarter this year. Those figures translate to $2 billion per annum. However, these numbers include income from the sugar operations and for the rest of the year this operation will provide no sales for fresh inflows. The company also benefited from $95 million in FX gains which is unlikely to recur this year. Hence, the cash inflows will be much less and more likely to be just over a billion dollars for the full year. Loan payment of $330 million has to be made in the next 12 months and could reduce the net cash inflows along with the payment of dividends which would use up more than $400 million.

Seprod has $3.7 billion in cash and investments plus $253 million to be collected from short term receivable in the next 12 months from March. The big question is, what are the funds being piled up for?

Sugar operations | Long term loans increased by $977 million in the quarter primarily for use in the sugar operations. The target for sugar production is based on processing 300,000 tonnes of cane that should work out to around 25,000 tonnes of sugar and that all depends on the sucrose contents of the canes. Added to that, St Thomas, where the operations are, has heavy rainfall close to the beginning and the end of the crop each year. The timing to reap is critical in maximizing the quantity of sugar that is extracted from the canes.

Management indicates that the expanded cane farms are already planted and the increased production should be coming in the 2014 crop. The group acquired Bowden Estates with 3,000 acres and another property in the area plus lands that were in bananas are now planted out in cane. For the current year’s crop 18,000 tonnes of sugar were produced at about a break even level. If the important things go well and they make close to next year’s target, the operations should end with a profit.

Management states that the sugar company is critical to them as a foreign exchange earner for the group. The sugar factory can be pushed up to grind 400,000 of cane but no decision has been taken on that. It would require major capital injection to get to that level of production. The cost of energy for the group is an important area of focus and thought has been given to increase the generation of power at the sugar factory and wheel it to others in the group. The estimate for such a project would be in the order of US$15 million, which would allow for the installation of new broilers to power the factory using bagasse, the byproduct of cane milling, to generate heat and steam for electricity thus cutting the overall energy cost for the group.

The company indicates that they are always on the lookout for acquisition. The funds being built up are to allow for acquisitions when suitable ones arise as well as for capital spend. But the main focus is to fully turn around the Duckenfield sugar operations. That objective is important since Seprod profits have been stagnated subsequent to their investment in sugar production. It has proven much more difficult than most of the directors first thought possible. At the first annual general meeting, one shareholder warned them of the challenges they were going to meet. Three to four years later and after more capital injection than originally contemplated, management has had enough time and experience to appreciate the unsolicited advice.

Notwithstanding the challenges faced, the group is in a very healthy financial state with $9 billion in equity and a relatively small amount of debt. Working capital is also in good nick as well.

Stock outlook | The company’s stock last traded at $15 and seems fully valued based on current market conditions. Investors will need to bear in mind the softening in the price of sugar on the world market and commodity prices in general which could push up the breakeven level and continue to have a drag on profits as well as eat up more capital. These risk factors need to be factored in when considering the investment in this stock.