Shane Ingram, Contributor
Left: Shane Ingram - Right: Chairman of Carreras, Christopher Burton - WINSTON SILL/FREELANCE PHOTOGRAPHER
PROFITS AT Carreras Group Ltd climbed 86.6 per cent in the third quarter (Q3) ended December 2005. Profits were achieved on operating revenues of $1.73 billion, down 3 per cent relative to the comparable quarter of 2004. The decline in revenues was explained by the removal of approximately $121.4 million from aggregate revenues following the sale of San Souci Development Ltd in September 2005. It should be noted, however that revenues from the tobacco division grew four per cent to $1.73 million in the period.
Carreras further reorganised its business in the period when it began outsourcing the manufacturing of cigarettes to Trinidad as of November 2005. Costs reflected the move as direct operating costs fell 8.52 per cent, which triggered the improvement in gross margins from 49.0 per cent to 51.8 per cent. This increased operating efficiency allowed gross profits to inch ahead 2.1 per cent to $898.4 million for the quarter. Simultaneously, however, interest and other investment income fell $195.4 million or 48.9 per cent on account of the low interest rate environment and the 17.3 per cent reduction in the Group's stock of earning assets. Nonetheless, much of this was offset by other operating income (mainly exchange gains) that contributed $324.9 million as Carreras apparently took advantage of the volatility in the currency markets during the quarter.
MARKETING ACTIVITIES
Approximately $101.1 million was spent on marketing activities in the period, 15 per cent less than the expenditure booked at the same interval in 2004. Administrative expense also contracted 7.2 per cent due to the reorganisation activities. These favourable changes brought about a 23.46 per cent jump in pre-tax profits to $993.3 million at December 2005 and consequent rise in pre-tax margins from 44.8 per cent to 57.2 per cent. Net profits eventually climbed 86.6 per cent to $795.3 million (earnings per share of $1.64) as the company also benefited from a significantly lower effective tax rate in the period.
The strong movement in all classes of profitability margins aptly demonstrated the benefits derived from Carreras' decision to restructure the entity and concentrate solely on its cigarette operations. It was interesting to note that profits directly attributable to the tobacco segment actually expanded 22 per cent in Q3, which used in conjunction with the fact that revenues only increased four per cent in the quarter, spoke volumes of the efficiencies reaped from the move to Trinidad.
MANUFACTURING OPERATIONS
It is expected that Carreras will continue to see improved results in coming quarters as the removal of both operating and capital costs associated with the manufacturing operations allows Carreras to operate on a strictly sales margin basis. Although the move to Trinidad allows Carreras to focus on marketing and distribution activities, it, however, scarcely addresses the root issue of declining demand for cigarettes - a condition highly reflective of the fairly mature cigarette market as well as the local and global pressures for healthier lifestyles. Accordingly, Carreras is also prohibited from engaging in the explicit advertising of its tobacco products. Of course, demand is relatively insensitive to price changes and so Carreras may be able to effect price increases in order to energise the top line.
Against this backdrop, expectations are for profit growth to be in the region of 20 per cent over the next four quarters driven largely by cost efficiencies. These improved profits should further enhance the company's ability to sustain its lucrative dividend payout ratio - averaging in excess of 60 per cent for the past four years. Unfortunately, investors are likely to remain cautious about this stock until there is a ruling on Carreras' case with GoJ.
RECOMMENDATIONS
We hold favourable outlook for CWJA, NCBJ, PJAM, DB&G, and BNSJ. Seprod, CRTS, and JBG could also perform well over the short-term. Please contact DB&G's Stockbrokerage department at 1-888-CALL DBG for further information on these and other stocks or visit for detailed analyses.
Disclaimer: All information contained in this article has been obtained from sources that DB&G believes to be accurate and reliable. All opinions and estimates constitute the author's judgement as of the date of the article. No warranty as to the accuracy, timeliness or completeness of this article and as to the opinions based thereon is given or made by DB&G. DB&G and/or its employees or directors and/or any associated person may have an interest in, or interest in the acquisition or disposal of, the securities or class of securities mentioned herein. Call 1-888- CALL DBG if in doubt about the content of this article. Decisions based on information contained in this article are your sole responsibility
STOCKS REBOUND THIS WEEK?
Stock prices rebounded this week as investors appear to have 'oversold' in the prior week due to the disappointing results entering the market. Shrewd investors, however, used that opportunity to increase their positions in 'value-buys' that were being disposed of cheaply. Brokers also reported increased interest from institutional investors seeking to make long-term equity investments.
