WITCO Demonstrates Resilience

Source from:  Trinidad Express 11/10/2009

For the nine months ended September 30, 2009 West Indian Tobacco Company Limited (WITCO) continued to materialise the benefits derived from increased cost containment as well as growth in top line earnings. For the period, WITCO reported an EPS of $2.27 compared to $1.74 that was achieved in the comparable period of 2008, representing a 30.5 per cent growth rate. The directors have approved the payment of a Third Interim Dividend of $0.59 per ordinary share payable on November 19 on record at the close of business on November 10 2009. Total dividends for the year is now $1.42 (2008 - $1.12). The Company reported an 11 per cent increase in Turnover year-on-year which moved from $586.1M to $650.4M. It is worthy to note that WITCO experienced a reduced Turnover growth in Q3 of 3.6 per cent compared to an 8.1 per cent growth achieved in Q2. It can be assumed that tightened economic conditions coupled with the recent price increases may have accounted for the slowdown. Gross profit for the period was $364.3M or 14.9 per cent higher than prior period as the Company was able to reduce Excise margin while maintaining Cost of Sales margin year-on-year. The main benefit for WITCO came from cost containment through reduction in all other Operating Cost. These include Distribution Costs, Administrative Expenses and Other Operating Expenses. Collectively, these expenses fell 9.6 per cent to $105.4M. As a result, Operating Profit was propelled to $258.9M from $200.3M, a 29.3 per cent improvement. Operating Profit margin increased from 63.2 per cent to 71.1 per cent. Profit after taxation rose to $190.8M from $146.4M, an increase of 30.4 per cent. WITCO's performance over the last two years is summarised in Exhibit 1. As is illustrated the Company has seen improvements in Profit margins due to lower Cost margins. As the Company moves forward, they will have to operate in a more controlled environment with the proposed amended Tobacco Bill which aims to have more stringent policies on the distribution and use of cigarettes. This may have an adverse effect on the level of Revenue for WITCO as sales quantity may be affected. This coupled with current dampened economic conditions and the recent increase in prices may further affect Revenue. Some evidence of this exists in the reduced level of Turnover achieved in the third quarter. It must be noted however that over the years, the demand for the Company's products has been generally inelastic in nature. On the expense side, the amended Tobacco Bill may actually have benefited the Company as they ceased major advertising avenues and removed product sponsorship to align itself with the Bill. This was seen in the reduction achieved in all other Operating Costs. A continued effort on overall cost containment would assist overall earnings for WITCO. The stock price has increased by 18.9 per cent for the year whilst the market index has fallen 6.9 per cent. At the current price of $31.50 the stock is trading at a trailing multiple of 10.47 times in line with current market multiples. Based on the fair valuation and the recent improvement in price, BOURSE revises it recommendation to a HOLD. One Caribbean Media Limited The struggles of One Caribbean Media Limited (OCM) continued into the third quarter of the year. For the nine months ended September 30, 2009 OCM recorded an EPS of $0.65 representing a 28.6 per cent decline in earnings when compared to prior period EPS of $0.91. At the top line, the Company reported a 12.9 per cent falloff in Revenue which moved from $379.4M to $330.4M. The Group was unable to improve its Cost of Sales margin which increased from 64.8 per cent to 66.9 per cent. As a result, Gross Profit recorded an 18.2 per cent decline year-on-year moving from $109.3M to $133.5M. Moving down the income statement, the Company reduced Administrative expenses but incurred an increase in Marketing expenses. Collectively, Total operating expenses fell 2.3 per cent from $54.2M to $53M. Year on year, Total operating expense margin deteriorated to 48.5 per cent from 40.6 per cent. It must be noted however, that on a quarterly basis OCM has seen some improvement in its cost structure in the last two quarters as illustrated in Exhibit 2. For the full nine months however, the Company was unable to make significant inroads in cost containment as Profit after tax fell to $43M from $60.6M, representing a 29.1 per cent decrease. Looking forward, with little or no improvement in local economic conditions, OCM may be challenged to achieve top line Revenue growth. The Chairman indicated in his statement that the Company has reduced expenses and taken steps to restructure some of its businesses. This was evident on a quarterly basis as illustrated earlier. A continued effort should be maintained on cost containment in an attempt to assist OCM in fostering bottom line growth. At the current price of $17.50 OCM is trading at a trailing multiple of 16.06 times, the second highest since the turn of the century. At this valuation combined with the muted Revenue outlook given current economic condition, BOURSE maintains a SELL recommendation. Enditem