WITCO's Earnings Growth Slows

Source from:  Trinidad Express 03/16/2010

The West Indian Tobacco Company Limited (WITCO) has continued to show strong growth in earnings for another year. For the year ended December 31 2009, WITCO reported an EPS of $3.07, representing growth of 23.8 per cent as compared to $2.48 in 2008. The directors have approved the payment of a final dividend of $1.64 per ordinary share payable on April 22 to shareholders on record at the close of business on April 13 2010, bringing the total dividend for 2009 to $3.06 (2008 - $2.48). The group traditionally pays out 98-100 per cent of earnings in dividends. At the top-line, turnover increased 11.9 per cent to $891.2M and excise charges were 2.4 per cent higher than in 2008 at $225M. Correspondingly, net turnover increased 15.5% to $666.1M as WITCO was able to match the growth rate from the previous year. Cost of sales increased 18.8 per cent to $170.9M for the period and gross profit increased 14.5 per cent from $432.7M to $495.197M. As a percentage, the gross profit margin improved slightly from 54.3 per cent to 55.6 per cent as displayed in Exhibit 1. Overall, operating expenses were cut over the year despite increased distribution and administrative expenses. Operating expenses fell 2.8 per cent to $145.3M. As a result, operating profit moved from $283.2M to $349.9M, a 23.6 per cent gain. The operating profit margin increased from 35.6 per cent to 39.3 per cent. Profit after taxation rose to $258.4M from $209.2M, an increase of 23.4 per cent. In 2009, the central statistical office recorded inflation in the 'alcoholic beverages and tobacco' category of 14.0 per cent due to increased excise and duties levied in the national budget announced in September. WITCO was able to pass on most of this cost to consumers due to the relatively inelasticity of tobacco products. It is important to note that production volumes declined 2.7 per cent for the year, following a 7.6 per cent reduction in 2008. Going forward these changes in the economic and business environment will pose a challenge to the group in growing at the top-line. Continued focus on cost-containment should benefit the group, but with operating expenses cut by 15 per cent in the last year, WITCO's ability to further reduce expenses may be constrained. The stock price has appreciated 23.5 per cent year-to-date to $40.01, significantly greater than the average market gains as investors move towards the better performing and higher dividend-yielding companies. WITCO has traded closely in line with the market price/earnings valuations over the past five years. The stock is now trading at a trailing P/E multiple of 13 times, above the market average of around 11 times. It is now somewhat expensive by comparison and the price may not be sustainable at the current levels. BOURSE revises its recommendation to a SELL. Enditem