WITCO's Earnings Rise

Source from:  Trinidad Express 08/18/2009

West Indian Tobacco Company Limited (WITCO) continued to record good earnings despite the slowdown in the local economy. For the half year ended June 30 2009, WITCO reported an EPS of $1.44 compared to $1.11 that was achieved in the comparable period of 2008. This represented a 29.7 per cent increase in EPS growth which was fuelled not only by top line growth, but by the company cutting all expense margins.

The directors have approved a second interim dividend of $0.55 per ordinary share payable on August 20 on record at close of business on August 11 2009. This brings the total dividends for the year to $0.83. Turnover increased by 10.5 per cent year on year from $382.6M to $422.9M. With an Excise margin of 25.3 per cent compared to 28.7 per cent in the prior period, the company's Net Turnover was propelled to $316M from $272.7M, a 15.9 per cent improvement. WITCO experienced a 15.1 per cent increase in Cost of Sales which moved from $69.9M to $80.4M. However, when expressed as a margin, the company was able to achieve a slight reduction from 25.6 per cent to 25.5 per cent year-on-year. As a result, Gross Profit grew by 16.2 per cent to $235.6M from $202.8M. Collectively, all other Operating Cost fell from $76.2M to $72.1M, a 5.3 per cent improvement for the company. As a margin, the company achieved improvement with the ratio moving from 37.6 per cent to 30.6 per cent. As such, Operating Profit increased 29.1 per cent moving from $126.6M to $163.4M. Profit before taxation increased 30.4 per cent from $125.8M to $164M. With an effective tax rate of 26.2 per cent, Profit after tax rose to $121M from $93.3M, a 29.7 per cent increase. The chairman noted in his statement, that WITCO has been faced with reduced sales volume during the period. It can be assumed that the price increases that were implemented during the first quarter has compensated for the loss in sales quantity. Looking ahead, given the general inelastic nature of the product over the years, maintaining current levels of revenue may not be too difficult for the company. An alternative strategy which could result in bottom line growth while revenue remains relatively flat would be through cost containment. WITCO has demonstrated this during the current period as all expense margins were reduced year-on-year. The chairman also attributed the growth in the company's profit to a focus on internal efficiencies. The reduced margins can be attributable not only to improved efficiencies by the company but could also be a result of the company aligning itself with the proposed Tobacco Control Bill 2008, whereby, WITCO ceased major advertising avenues and removed product sponsorship. WITCO has shown over the years that they are one reliable source of dividends and currently stands as one of the best dividend stocks on the market. During the period 2004 - 2008 the company's Dividend Yield has risen from 5.1 per cent to 9.4 per cent as illustrated in Exhibit 1. This trend is expected to continue in 2009. At the current price of $24.50 the stock is trading at a trailing multiple of 9.25 times compared to a nine year historical average of 14.9 times which suggest that the stock may be presently undervalued. Given consistent earnings growth, current valuation and attractive dividend yield, BOURSE maintains a BUY recommendation. Neal & Massy Holdings Limited Neal & Massy Holdings Limited (NML) reported an EPS of $3.20 for the nine months ended June 30 2009, compared to $3.56 achieved in the comparable period of 2008. This represented a 10.1 per cent decline in EPS growth. The Group's Third Party Revenue increased 20.5 per cent year on year moving from $5.2B to $6.3B mainly due to the consolidation of BS&T. The 2008 results would have included two months of BS&T results. On a quarterly basis, NML has witnessed two consecutive quarters of declining growth in Revenue which has translated into the company's bottom line as illustrated in Table 1. Operating Profit for the nine month period increased from $441.2M to $451.8M, which represented a 2.4 per cent improvement. As a margin, Operating Profit decreased from 8.5 per cent in the comparable period to 7.2 per cent, indicating that the Group was faced with higher Operating Costs during 2009 when compared to 2008. However, on a quarterly basis, NML achieved a 1.1 per cent improvement in Operating Profit margin from Q1 09 to present as illustrated in Table 1 below. With a 69.4 per cent decline in Share of results of Associated Companies which fell from $60.9M to $18.6M, Profit before taxation was down 6.3 per cent to $470.4M for the period. Adjusting for Taxation of approximately $134.4M which represented a 28.6 per cent tax rate, Profit after taxation declined 5.7 per cent to $336M from $356.2M. With recent data from the Central Bank of Trinidad and Tobago indicating that new motor vehicles sales fell by 31 per cent in June 2009 compared to June 2008 and consumer credit remaining virtually flat, the Automotive sector of NML may be challenged. Upside potential in this area remained relatively bleak as economic indicators point to further downside for the local economy. With projections for continued volatility in energy prices, NML Industrial Gases & Energy sector would be faced with additional pressures to generate revenue growth therefore affecting NML's top line. Other non-energy sectors may also be challenged as the non-energy sector of the economy fell 5.4 per cent year on year to March 2009. Even though international economies are showing signs of recovery, tourist arrival may continue to be weak in Barbados thereby affecting Almond Resorts Inc. revenue and NML overall earnings. On a positive note, the Group has already begun to focus efforts on cost containment which was exhibited on a quarterly basis since the start of the Group's 2009 financial year. NML continues to stand behind a strong Balance Sheet with an Asset base of approximately $8.2B and Total Equity of $2.7B up 4.4 per cent and 19.7 per cent respectively year-on-year. The Group was also able to reduce Total Debt by $90.6M or 1.8 per cent year-on-year. The Group is highly diversified, operating in almost all sectors of the local economy and throughout various countries. From a technical standpoint, at the current price of $49.50, NML is trading at a trailing P/E multiple of 10.44 times compared to a 3 year historical average of 11.1 times which may suggest that the stock is fairly valued. BOURSE maintains a HOLD recommendation. Enditem