‘Grace’ Earnings Grow, NEL Lower

GKC Q12023

  • Earnings:  Earnings Per Share 22% higher from TT$0.076 to TT$0.092
  • Performance Drivers:
    • Increased Revenues
    • Improving Margins
  • Outlook:
    • Growth from Acquisition

 

  • Rating: Maintained as OVERWEIGHT

NEL HY2023

  • Earnings:  Earnings Per Share declined 63.6% to $0.75 from $2.05
  • Performance Drivers:
    • Significant increase in Dividend Income
    • Lower Fair Value Gains
    • Higher Taxation Expense
  • Outlook:
    • Moderation of Energy Prices
    • Optimistic Domestic Natural Gas Outlook
  • Rating: Maintained as OVERWEIGHT

  • This week, we at Bourse review the performance of GraceKennedy Limited (GKC) and National Enterprises Limited (NEL), for their three-month and six-month reporting periods respectively, ended March 31st, 2023. GKC benefitted from improved margins and successful acquisition activity, while NEL’s performance was impacted by the moderation of energy commodity prices and lower fair value gains. How will both companies fare in the upcoming months in an evolving operating environment? We discuss below.

    GraceKennedy Limited (GKC)

  • GKC reported Earnings per Share (EPS) of TT$0.092 for the three months concluded on March 31st, 2023 (Q12023), an increase of 22.0% over the corresponding period in Q12022.

    Revenue from Product and Services improved 7.6% from $TT1.5B to TT$1.6B, while Interest Revenue advanced 15.1% to TT$60.4M. Notably, Total Revenue advanced 7.8% to TT$1.7B in Q12023 from $1.6B in Q12022. Direct and Operating Expenses grew 7.0% to TT$1.6B, in contrast, Net Impairment Losses on Financial Assets fell 10.5% to TT$2.2M. As a result, Total Expenses expanded by 7.0%. Operating Profit margin increased to 7.4% from 6.7% in Q12022. GKC’s Profit from Operations increased 17.9% from TT$107.3M (Q12022) to TT$126.5M (Q12023). Interest Income from Non-Financial services gained 33.3% year on year (YoY), accompanied by a 6.9% decline in Interest Expense from Non-Financial Services. Share of Results of Associates and Joint Ventures increased 23.0% to $17.5M compared to the previous comparable period. Profit Before Tax (PBT) grew to $135.8M, up 20.6% from $112.6M in Q12022. Taxation expense moved from TT$30.5M to TT$36.7M, representing a decline of 20.2% from the previous comparable quarter.  Resultantly, Profit for the period was up 20.7%, an increased from TT$82.1M to TT$99.1M in the current review period.  In comparison to TT$75.90M recorded in the prior period, Net Profit Attributable to Owners of GKC increased considerably by 22.4% to TT$92.9M.

    Food Trading Segments Buoys PBT

  • Food Trading, the largest contributor to PBT (67.7%) increased 51.1% from TT$67M in Q12022 to TT$102M in Q12023. GKC’s food businesses remained focused on Grace and Grace-owned brands by improving operational efficiencies and expansion of manufacturing and distribution portfolios. Grace Foods and Services (GFS), Consumer Brands Limited (CBL), World Brands Services (WBS) and the Hi-Lo Food Stores all surpassed targets for Jamaican Food Distribution business for the quarter, according to GKC.

    GraceKennedy Money Services (GKMS), the second largest contributor to PBT (22.6%) remained relatively unchanged from the prior comparable period’s performance. Growth in the remittances business segment was primarily attributed to the performance of GKMS’ remittance business in Jamaica and Guyana.

    Banking and Investments (4.6% of PBT) declined 64.7%, on account of GK Capital Management Limited’s (GK Capital) decline in revenue and profitability. The performance was underpinned by the non-recurrence of IPO activity which benefitted GK Capital in the prior comparable period, as well as the sub-par performance of the Jamaican equity markets.

    The Group’s Insurance Segment, which accounted for 5.1% of PBT, fell 8.7%. GKCI announced its new partnership with Scotia General Insurance Agency Limited, which is expected to produce meaningful results in subsequent quarters.

    M&A Activities provide boost

    GKC’s strategy of expansion by acquisition continued into the first quarter of 2023. In February 2023, GKC increased its ownership in Catherine’s Peak Bottling Company Limited from 35% to 70%, placing GKC in a strong position within Jamaica’s spring water market. In March 2023, GKC completed its acquisition of Scotia Insurance Caribbean Limited (SICL), which will be rebranded to GK Life. This acquisition is consistent with the Group’s strategy to boost its insurance segment and expand GKFG’s Caribbean reach in the region.

    Margins Improve

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  • GKC margins improved in the current quarter, driven by the cooling in logistics /distribution costs, with continued positive momentum anticipated in light of the Group’s approach to cost management.  Operating Profit Margin improved from 6.7% in Q12022 to 7.4% in Q12023. Similarly, Profit Before Tax Margin increased from 6.3% (Q12022) to 7.9% in the current period. Looking ahead, the Group stated that it will maintain a focus on implementing cost reduction measures, extending its portfolio of production and distribution operations, as well as operating efficiency, which signals the potential for greater margin improvement.

     

    The Bourse View

  • At a current price of $3.50, GKC trades at a P/E ratio of 11.0 times, below the Conglomerate Sector average of 18.6 times. The stock offers investors a trailing dividend yield of 2.5%, below the sector average of 3.1%. The Group announced an interim dividend of TT$0.02, which was paid to shareholders on June 16th, 2023.

    The Group is expected to continue with its growth strategy of inorganic opportunities, while simultaneously placing emphasis on cost containment initiatives within its existing businesses. On the basis of improving margins and relatively attractive valuations, aided by acquisition activity, Bourse maintains an OVERWEIGHT rating on GKC.

     National Enterprises Limited (NEL)

  • NEL reported an Earnings per Share of $0.75 for the six months ended 31 March 2023 (HY2023), a decline of 63.6% compared to $2.05 in the prior comparable period.

     Notably, the Group’s Dividend Income grew by 3,883.1% to $376.9M from $9.46M in the previous period.  Other Income increased by 71.3%, from $3.1M in HY2022 to $5.3M in HY2023. Operating expense fell by 69.6% to $1.03M in HY2023, from $3.4M in HY2022. Operating profit increased by 4,061.6% to $381.2M in HY2023, led by significant increases in dividend income. NEL reported a Profit Before Tax of $450.2M in the current period, down from $1.2B (HY2022). Unrealized fair value gains in its investee portfolio companies of $68.9M, while positive, was 94.4% lower relative to $1.2B in the prior comparable period. For the review period, tax expenses climbed by 195.38% to $2.7M. Overall, the Group recorded $447.5M in total comprehensive income in HY2023, which was 63.6% lower than the previous comparable period.

    Energy Prices Lower

  • Within the period October 2022 – March 2023 Natural Gas production in T&T averaged 2,645 mmcf/d, marginally higher than an average of 2,634 mmcf/d in the prior comparable period. The average price of Natural Gas (using Henry Hub pricing) declined 12.8% year-on-year (YoY) to US$4.08/MMBtu for the period October 2022- March 2023, relative to a previous average of US$4.68/MMBtu. Prices have moderated thus far in 2023 to an average of US$2.53/MMBtu, mainly pressured by weaker demand. 

    The domestic production of Natural Gas Liquids (NGLs) contracted by 18.0%, from 3.1M barrels/day to 2.5M barrels/day over the comparable period. Using a weighted basket, the average prices for NGLs (propane, butane and natural gas) declined 26.7%, averaging US$1.21/Gallon from US$1.65/Gallon in the prior comparable period, affected by warmer-than-expected winter weather, which lowered the demand for gas for heating purposes.

    NEL’s investment exposure to the Ammonia industry (through its 51% holding in Trinidad Nitrogen Company Limited) would have been adversely affected by a 10.4% drop in Ammonia prices, which declined from an average of US$966.0/Tonne to US$865.5/Tonne in October 2022-March 2023.  Domestic Ammonia production also trended downwards, moving from 2.4 Million Tonnes (MT) to 2.2 MT.

    During the period October 2022- March 2023 Liquefied Natural Gas (LNG) production stood at 8.9M cubic meters, 4.7% higher than 8.5M cubic meters in the prior period.

  • NEL’s book value per share declined marginally in HY2023, driven by a reduction in fair value of its investee company – Trinidad Nitrogen Limited (Tringen) – due to the decline in Ammonia prices. The Group’s Book Value Per Share (BVPS) fell from $7.14 in HY2022 to $7.10 (-0.6%) in the most recent period.

    When combined with the increase in its stock price, NEL’s price to book ratio increased from 0.4 times in HY2022 to a current level of 0.5 times. NEL’s cash position has significantly grown year-on-year, advancing 221.8% to $132.8M in the current period, relative to $41.3M in the prior period.

    The Bourse View

  • At a current price of $3.44, NEL trades at a trailing P/E of 1.7 times, below the Non-Banking Sector average of 42.5 times. The stock is currently trading at a market-to-book value of 0.5 times, below its recent historical average of approximately 0.9 times. The stock offers investors an attractive trailing dividend yield of 18.0% relative to a sector average of 6.2%. It should be noted that, given the cyclical nature of NEL’s investee companies, dividend payments are typically not be as stable as other industries.

    As indicated in the Central Bank of Trinidad and Tobago (CBTT’s) May 2023 Monetary Policy Report, the domestic economy is expected to improve and be broad-based with several energy sector projects forecasted to modestly boost energy production volumes. However, despite the forecast for improved volumes, the lower energy commodity prices could weigh on NEL’s energy-related cash flows and asset valuations. The U.S. Energy Information Administration (EIA) in its short-term energy outlook forecasted on June 5th, 2023 that Henry Hub natural gas prices will average US$2.66/MMBtu in 2023. Cognizant of moderating near-term energy prices, but focusing on the stock’s relatively attractive valuations, Bourse maintains its OVERWEIGHT rating on NEL.

     

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