Jamaica’s sole cement manufacturing company Caribbean Cement, reported a fall in profit from $621 million in the June quarter of 2015 down to only $221 million and for the six months to June $1.05 billion versus $869 million.
Investors seemed to have focused more on the fall in the quarter than on the details of the results and the clear message sent by them. As a result, the stock was sold down to $19.25 from $23 the prior day, with very few buyers at the close, but investors who sold were making a bad decision. This is a classic case of bad news is indeed good news. For one, revenues climbed 9.6 percent in the quarter and 10.3 percent for the half-year but local sales of cement are up a very strong 27 percent. “Despite a reduction in export cement and clinker volumes by 8 percent and 77 percent respectively, total revenue increased by $777 million. This was mainly due to an increase in domestic cement volumes by 27 percent arising from increased projects and strong retail demand. Improvements in operational efficiencies, effective control of fixed costs, lower financing costs and lower energy costs, contributed to the improvement in earnings before interest, tax, depreciation, amortisation, manpower restructuring costs,” the directors’ report to shareholders stated.
Importantly, the cement company took a charge for manpower restructuring, amounting to $421 million, a huge positive development and augurs well for improved profit margin and increased profits going forward. In addition there is a charge for excess inventory amounting to $400 million, this is one off and therefore unlikely to recur. Stripped of these costs, earnings would be up by 63 percent to $1.16 million before tax compared to $708 million in 2015 that includes one off income of $168 million for the quarter and pretax profit of $2.1 billion versus $996 million in 2015.
Not only will the cost for redundancy not recur for the current set of staff being severed, it should results in savings in a year, in the region of the sum expended.
During the twelve months to June, the company repaid Trinidad Cement, its parent, loans and other debt $1.6 billion leaving only $556 million more to be paid. Cash funds were left at $788 million after more than $600 million was added to fixed assets since June 2015. At the pace profits are coming in the accumulated deficit of $4.6 billion will be wiped out in 2017.
IC Insider’s forecast for full years earning form normal operations is $4.75 which excludes the one off cost leaving the stock strongly in the buy column. The stock is listed on the main market of the Jamaica Stock exchange and closed at $22 on Friday.