JSE COMPANY ANALYSIS

Transcription

1 JSE LASCELLES demercado & COMPANY LIMITED Analysis for the six months ended March 31, 2007 RECOMMENDATION: BUY OVERVIEW Lascelles demercado & Company Limited (Lascelles), incorporated in Jamaica in 1914, started operations in 1870 and has since become a prominent conglomerate with ordinary and preference shares listed on the Jamaica Stock Exchange. Lascelles has 11 subsidiaries and 5 business segments. Some of the most notable subsidiaries are Wray and Nephew Group Limited, Globe Insurance Company, Lascelles Merchandise Limited and Tradewell Limited. The operations of the company are well diversified ranging across the following 5 business segments: Liquor, Rum and Sugar, General Merchandise, General Insurance, Investments, and Transportation& Other. SEGMENT / COMPETITIVE ANALYSIS The table below ranks Lascelles among the other major players in the Jamaican Manufacturing Industry. Lascelles ranks first or second in most categories; which is a strong reflection of the company s financial strength. Lascelles Desnoes & Geddes Jamaica Producers Grace Kennedy Lascelles' ranking # ordinary shares 96,000,000 2,809,171, ,024, ,046,003 Market Capitalisation $23.33 billion $19.57 billion $4.87 billion $19.08 billion Trailing EPS $26.20 $0.76 $1.32 $5.67 1st Trailing P/E rd Price/Book ratio nd EPS growth rate 35.26% -6.09% % % 1st Book Value per share growth rate 22.89% 15.35% 14.89% 12.50% 1st Gross profit margin 37.51% 43.48% 18.83% 7.06% 2nd Return on Assets 10.69% 32.83% 2.65% 2.85% 2nd Return on Equity 15.22% 49.52% 1.75% 11.39% 2nd Debt to assets 1.45% 0.00% 7.61% 8.43% 2nd Dividend payout ratio 7.52% 72.39% 34.78% 18.46% 4th Page 1

2 1) Liquors, rums, wines and sugar Main activities: cane cultivation, sugar manufacturing, distillation, ageing, blending, bottling, distribution and export of alcohol, rums, wines and other liquor based products. Global Industry Growth Trends 1 : Between 1995 and 2005, global rum volumes increased a healthy CAGR 2 of 2.8% derived from very low-price markets, such as India (the #2 global market) and the Philippines (#3). The international rum market represents 38m 9-litre cases and about 10% of the total international spirits market. It has been growing regularly and faster than the overall market in the last ten years, 2.1% CAGR, compared with a 0.9% increase for all international spirits. Larry Watson, Appleton s recently departed managing director, distribution division, says: We see the next five to six years really as a blossoming of the golden rum category. Within the next 20 years, we re looking to accumulate growth of 15% per year. Segment Highlights: LIQUORS, RUMS, WINES & SUGAR J$ '000s Revenue: External 7,334,239 7,624,662 9,130,121 9,212,398 10,130,783 Profit before net finance & tax 672, , , , ,234 Margin 9.17% 9.65% 9.92% 5.64% 9.40% This segment is the Group s major revenue earner with contribution to Group revenue and pre-tax profits averaging 63.3% and 43% over the past 5 years. Revenues have grown at a CAGR of 6.7% since 2002 due mainly to Wray and Nephew s leadership in the local rum-based alcoholic beverage industry, its thriving presence in international markets and double digit growth in rum exports. EBITDA peaked at $952.2 million in 2006 having grown at a CAGR of 7.2% as margins have improved from 9.17% to 9.40%. Margins have consistently been above 9.00% except for 2005 when Agricultural operations (and hence sugar production) endured losses of $500 million amidst the passage of Hurricane Ivan. 1 Global Market Review (GMR) of International Rum Report: 2007 Edition and International Wines and Spirits Record 2 Compound average annual growth rate Page 2

3 2) General Merchandise Main activities: distribution of food, liquor and other consumer supplies, the manufacture and distribution of pharmaceutical preparations, other personal care products and agricultural chemicals. Segment Highlights: GENERAL MERCHANDISE J$ '000s Revenue: External 1,556,895 1,967,416 3,670,374 3,187,822 3,727,673 Profit before net finance & tax 19,897 57,659-19,070-9,470-45,537 Margin 1.28% 2.93% -0.52% -0.25% -0.25% Revenues from General Merchandise (GM) have grown by an average 19% (CAGR) over the last five years chiefly driven by the distribution of merchandise from Unilever, Connors Brothers, and more recently Walkers Wood and 3M, as well as, Lascelles own products. Being the only distributor of Unilever brands in Jamaica, Lascelles is able to command the distribution of key brands such as Dove, Multi-active Breeze detergents, Flora, Sedal and Hellman s. Margins have historically been thin in GM, hitting negative territory since 2004 amidst heavy start up costs for Lascelles Telecom (distributors of local prepaid calling cards), and a one-time charge of $88.4 million in 2006 arising out the discontinuation of the loss-making Plastic Containers Limited. 3) General Insurance Main activities: holding of investments and general insurance underwriting Segment Highlights: GENERAL INSURANCE J$ '000s Revenue: External 710, ,755 1,118,582 1,540,176 2,258,463 Profit before net finance & tax 14,452 40,366 48, , ,497 Margin 2.03% 4.23% 4.32% 18.24% 16.76% This segment has seen consistent growth in revenue over the last 5 years with total revenue moving from $710.9 million in 2002 to $2.6 billion in This growth has been boosted by the increased operating capacity of the merged operations of Globe, JGIC and Twickenham Insurance as reflected both in the jump in EBITDA and margins since Notwithstanding, management reports that this segment has been challenged by a deterioration in the local motor vehicle underwriting market. Page 3

4 4) Investments Main activities: investment holding of 74.3 million shares in Carreras Group Ltd and approximately 4.5 million shares in Scotia Group Jamaica Ltd (former Bank of Nova Scotia Jamaica Ltd) together with a healthy stock of other local and foreign denominated fixed income instruments. Segment Highlights: INVESTMENTS J$ '000s Revenue: External 287, , , , ,416 Profit before net finance & tax 622, , ,693 1,218,849 1,365,175 Margin % 84.99% % % % Lascelles investment arm boasts an average contribution of 46.6% to the Group s pre-tax profits for the period 2002 to Carreras lucrative dividend policy, paying out close to 60% of its earnings in dividends annually, has been the major reason for the significant growth in revenue for the Investment Segment. In fact, Carreras $9.80 Special Distribution in 2005 allowed the Investment arm to provide 61.2% of the overall profit recorded by the entire Group that year. Additionally, Lascelles conservative dividend policy and high cash-generative nature have allowed Lascelles to enjoy a healthy stock of cash and cash equivalents that continuously refreshes the growth rate in the Group s investment base. 5) Transportation & Other Main activities: aircraft handling, distribution of motor vehicles and spares, servicing and repairing of motor vehicles. Segment Highlights: TRANSPORTATION & OTHER J$ '000s Revenue: External 1,433,174 1,461,129 1,572,424 1,375,079 1,637,731 Profit b4 net finance & tax -28,305 2, ,280 8,744 Margin -1.97% 0.16% -0.04% -1.33% 0.53% Segment Book Value 329, , , , ,641 Page 4

5 Contributing less than 1% to profits, this segment is one of the group s smallest profit centers with total revenue averaging $1.5 billion over the past 5 years. The challenges arising from the reduction in the size of the luxury vehicle sector and shrinkage in the new car market have retarded growth in profits. Unit sales negatively affected by currency fluctuations as the devaluation of the Jamaican dollar against mainly the US dollar (2006= down 4.2%) has affected the pricing of luxury vehicles in local market. Lascelles business segments may be analyzed according to the Porter s Model as follows: Threat of new Entrants Bargaining power of buyers Bargaining power of suppliers Rivalry among existing competitors SEGMENT: LIQUORS, RUMS, WINES & SUGAR Moderate Moderate Moderate High High GENERAL MERCHANDISE High Moderate High High High GENERAL INSURANCE Moderate High Moderate High High INVESTMENTS Low Low High Low Low TRANSPORTATION & OTHER High High High High High Threat of Substitutes The analysis indicates that the main segments exposed to significant external threats are the Transportation & Other, General Insurance and General Merchandise segments. SWOT ANALYSIS Strengths: 1) Appleton has been successful in promoting the fact that its rums are set apart by its utilization of the Pot Still method, which is the hallmark of Jamaican rums and has enhanced the demand for these rums. After fermentation, the liquid is distilled in old copper pot stills using the small-batch method that is traditional in the country. 2) Lascelles possesses strong brand equity, strategic alliances with overseas distributors and diversified revenue streams which provide stability of income during the present volatile macroeconomic environment. 3) Very high internal liquidity levels: Cash per share (March 2007): $29.82, Long-term debt to assets (March 2007): 0.25%, Current ratio (March 2007): 2.57X 4) Ability to earn good foreign currency from international sales Weaknesses: 1) Investment segment is exposed to volatility risk in the prices of Carreras and Scotia Group. 2) ROA & ROE have been relatively low over the years. Page 5

6 3) Liquor, Rums, Wines & Sugar segment is greatly exposed to risk of loss of revenue in the event of unfavourable weather conditions. Opportunities: 1) Propriety product differences coupled with the high import duty on rum and liquor is expected offer protection from imports originating outside the Caribbean. 2) Product innovation, export expansion and acquisitions are avenues through which the company is expected to grow in the future. 3) Few companies could have foreseen the demand for aged rum; consequently supplies across the Threats: industry are generally inadequate to meet immediate demand. Fortunately, Lascelles has 200, ,000 barrels of aged rum in its inventory and is therefore equipped to meet this demand. 1) The automobile market in Jamaica has become highly competitive over the last couple of years due to the increasing number of dealers who seek to take advantage of a government policy which further liberalized the used car market in This would negatively impact revenue from the Transportation segment. 2) Revenue from aircraft handling operations may decline with the present downturn in the Airline Industry. Page 6

7 FINANCIAL STATEMENT ANALYSIS Lascelles, demercado & Company Limited Year Ended September 30 6 mths to 6 mths to (J$000) Income Statement -68% -63% -67% -62% -62% -62% -64% Operating Revenue 11,323 12,384 16,009 16,279 18,401 9,181 10, % Cost of Operating Revenue (7,702) (7,746) (10,724) (10,168) (11,500) (5,727) (6,465) 12.9% Gross Profit 3,621 4,637 5,286 6,111 6,901 3,454 3, % Administrative, marketing & selling expenses (2,631) (3,279) (3,548) (4,342) (4,377) (2,418) (2,532) 4.7% Operating Profit , , , ,525 1,036 1, % Other income (expense) % Profit before net finance costs & taxation 1,299 1,416 1,866 1,991 2,659 1,092 1, % Net finance income/ (costs) (43) (299) (59) % Profit before taxation 1,256 1,117 1,807 2,111 3,112 1,278 1, % Taxation (115) (175) (297) (222) (557) (128) (261) 104.6% Net profit attributable to ordinary stock holders 1, ,510 1,889 2,555 1,150 1, % 91% 84% 84% 89% 82% Balance Sheet Total Assets 18,173 22,137 20,086 22,173 25,619 23,418 26,726 14% Total Equity 9,521 11,357 13,437 15,065 18,513 16,260 20,066 23% Total Liabilities ,649 7,108 7,106 7,157 6,660-7% Mar-06 Mar-07 Change % Per Share Data EPS Book Value/Share Ratios Operating Margin 8.75% 9.06% 11% 11% 14% 11% 12% Net Margin 10.11% 7.62% 9% 12% 14% 13% 12% Return on Average Equity 15.05% 9.04% 12% 13% 15% 15% 12% Return on Average Assets 8.33% 4.68% 7% 9% 11% 10% 9% Current Ratio Total Debt/Equity P/E Ratio Price/Book Value Financial year ended September 2006: Revenues increased to $18.4 billion, 13% more than Net finance income jumped from $120 million in the prior year to $453 million, attributed to the net effect of increased investments and reductions in bank loans, overdrafts, unsecured loans and long-term liabilities. Page 7

8 EBIT grew 34% to $2.7 billion. After the consideration of finance income and taxes, net profits were $2.6 billion (EPS: $26.62) up from the $1.9 billion (EPS: $19.68) recorded in Net profit margin moved up from 11.6% to 13.89%. Segment Performance: Wines & Spirits provided 55% of total revenues reflecting the strength of Lascelles brands in both the local and international markets. The General merchandise segment with 17% sales growth had the second largest contribution to total revenue; earning $3.7 billion or 20% of overall revenues. Insurance revenue climbed 36% to approximately $2.6 billion on account of the wider portfolio created from the merged operations of Globe Insurance, JIIC and Twickenham Insurance Company. Investment revenues were down 33% to $646 million due mainly to the lackluster market conditions. Revenues from the transport & other segment grew 19% to $1.7 billion making up 9% of total revenues. Equity increased 23% to $18.5 billion and total assets grew from $22.2 billion to $25.7 billion. Given the backdrop of increased profits, ROE and ROA were 15.22% and 10.69%, respectively compared to 13.25% and 8.94% in Six Months ended March 2007: $M Revenues increased 11% to $10.2 billion Segment Performance: Total External Revenue (excludes inter-segment) Wine & spirits division General Merchandise General Insurance Investments Transport & other Period Mar-06 4,978 1,783 1, ,181 Mar-07 6,108 2,103 1, ,177 Change 23% 18% 4% -52% -27% 11% % of Rev. ('06) 60% 21% 11% 2% 6% $M Segment profit before Finance income/(costs) & tax Wine & spirits General General Transport & Total Period division Merchandise Insurance Investments other Mar ,092 Mar ,251 Change 45% 99% -52% -91% 15% % of Profit ('06) 49% 7% 25% 19% 0% EBIT grew 15% to $1.25 billion. After the consideration of finance income and taxes, net profit was Total booked at $1.2 billion (EPS: $24.99) compared to the $1.15 billion (EPS: $23.96) for the same period in Equity increased 23% over prior year to reach $20.1 billion and total assets grew from $23.4 billion to $26.7 billion. Page 8

9 TECHNICAL ANALYSIS Company Statistics As at 08 Jun 2007 JSE Symbol LAS Financial Year End Sep-30 Business Sector Manufacturing Ordinary Shares outstanding 96,000,000 Market Value of shares 23,328,000,000 outstanding Current stock price $ Bid/Ask $242.03/$ week high/low $299.99/$ week volume 740,825 Dividends paid 2006 $1,751,402,000 Year to date change % Quarter to date change -6.54% Month to date change -0.82% Dividend payout ratio 7.52% The share price is highly erratic moving in large increments during trading. This is due mainly to the limited availability of shares available for trading given the fact that there are 96 million shares outstanding and 50.2 million of these shares are tightly held by Lascelles top ten shareholders. The shares tend to be held by institutional players, namely pension funds, who adopt a buy and hold policy thereby limiting market supply. Lascelles is one of the largest companies on the Jamaica Stock Exchange with a market capitalisation of approximately $23.33 billion. Lascelles is relatively liquid and ranks within the top 15 most liquid listed companies with a liquidity ranking of 4. The stock has traded 568 times since the start of the year compared to GK, JP and DG which have 637, 374 and 509 year to date trades respectively. Lascelles has the fourth highest individual value-at-risk (VaR) of all listed companies reflecting the high volatility risk inherent in this stock. Its 99% 1-day VaR stood at 8.46% compared to GK: 3.34%, JP: 3.87% and DG: 3.30% ,000, ,500, ,000, ,500, ,000, ,500, ,000, , Price Volume Traded price , ,000 80,000 60,000 40,000 20,000 JSE main index The stock s beta of implies that Lascelles tracks the overall movement in the overall market (beta = 1) fairly closely as seen in the chart at left Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun-07 - Price JSE Index Page 9

10 VALUATION & RECOMMENDATION Going forward, the strong local and international demand for Lascelles rums is expected to continue its double digit growth in revenues, while expectations remain high for the performance of the General merchandise and Investment divisions. There is still a lot to be done on the side of the Transport & Other division as profitability has remained a challenge despite the recent realignment of staff and increased brand focus. The following are the assumptions used to project 12 month earnings performance to March 2008: 1) Segment Performance assuming the clean surplus accounting relationship holds: Liquor, Rums, Wines and Sugar: Barring any adverse weather conditions margins should hover close to 12.6% creating EBITDA of $1.5 billion. However, revenue growth may be significantly improved under a large vertically integrated distributor, as all the revenue can be captured on sale to the end user and not shared with overseas distributors. Book value should reach $11.7 billion. General Merchandise: With 3M and Walkerswood forming a closer relationship with Lascelles together with the popularity of its cellular top-ups, revenues should grow by 14% resulting in EBITDA of $47.2 million. Book value should reach $949.3 million. General Insurance: Assuming a 13.4% annual growth in total revenue and using a 145 margin, EBITA should be $369.9 million and Book value should reach $1.6 billion. Investments: Assuming 5-year revenue growth trends persist, EBITDA should reach $1.6 billion and Book value should reach $8.3 billion. Transportation & Other: Subsequent to the combination of increased efficiency and staff engagement re-aligned to provide greater brand focus, the automotive division should capitalize on its current marquee of Land Rover, Jaguar, Subaru and Ford and growth should be approximately 5% which when using a EBITDA margin of 1.9%, EBITDA should near $31.6 million with a Book value of $336.3 million. 2) Consequently, total revenue is expected to increase by the company s sustainable growth rate of 14.08% to reach $22.1 billion. Assuming that the group s 5-year margins of 35% persists, gross profit should be approximately $7.7 billion. 3) Management is expected to contain operating expenses within a 5% standard deviation of the forward 12 month inflation outturn. Consequently, operating profits should reach $3.1 billion which when coupled with the 5-year net profit margin, after tax profits should be approximately $2.8 billion (EPS: $28.81). Page 10

11 P/E Valuation Approach: Using a leading P/E of 11.79X,which is the average of Lascelles current P/E of 12.04X, the industry P/E of 11.58X and the average P/E of locally listed companies of 11.75X, Lascelles share price should region $ by March 2008 using the projected EPS of $ On a more conservative approach when the projected growth rates are discounted to account for the probability of an active hurricane season, the intense competition inherent in the Insurance and Transportation segment and the continuation of the downturn in the local stock market, Lascelles should earn approximately $25.20 per share by March 2008 which with an estimated discounted P/E of 10.5X should allow the share price to reach $ P/B Valuation Approach: Lascelles currently trades at a P/B ratio of 1.26X which indicates that the stock is attractively priced. However, the fact that the group s fixed assets are carried at amortized cost on the Balance Sheet and Lascelles has between 200,000 and 250,000 barrels of aged rum in its inventory which are not currently recorded on the group s financial statements, would serve to decrease Lascelles P/B ratio when these adjustments are made to increase Lascelles book value per share. Lascelles true P/B ratio is therefore much less than 1.26X and more accurately lies below 1.00X. Lascelles is recommended a BUY according to both valuations using a one year investment horizon and assuming investors have a moderate tolerance for risk given the high volatility of this stock. Portfolio Diversification Strategy: For investors who currently own DBG, CAR, NCBJ, JP and GK, it is recommended that Lascelles be included in the portfolio of securities to allow for the maximum diversification given the low correlation of the stocks with Lascelles as shown in the correlation matrix below: Source: Bloomberg Software Page 11