Shane Ingram, Contributor
Left: INGRAM. Right: Robert Levy president and chief executive officer of Jamaica Broilers Group. - IAN ALLEN/STAFFPHOTOGRAPHER
HEALTHY AND growing profits in the third quarter (Q3) along with prospects of an equally strong final quarter, renewed interest in Jamaica Broilers Group (JBG), but fears of bird flu continue to scare investors.
Although the local poultry industry has not been affected by bird flu, the spread of the disease across countries has increased fears of a possible local outbreak. In general, however, this issue forcefully highlights the fragile nature of JBG's operations. Moreover, while JBG's use of the tunnel house ventilation system reduces contact with wild birds (the major carries of bird flu), JBG's business interruption insurance does not cover reduction in profits arising from an outbreak. JBG would, however, be compensated for production costs if there is an outbreak.
Barring such catastrophes, however, investors may benefit from the company's strong earnings momentum. In particular, management expects the period of Lent to boost demand for white meat (chicken and fish). JBG will also look to shore-up revenues through price increases. This comes on the back of 45.6 per cent spike in net profits for Q3 in 2006 relative to the comparable outturn of the prior year. Sales grew 8.06 per cent to $2.44 billion in the quarter, but it was the rise in operating margins to 28.01 per cent that triggered the 30.4 per cent jump in operating profits.
Growth in cost of sales was capped below five per cent partly due to declining electricity expenses stemming from JBG's ownership of the co-generation plant since last year. Although the exact amount of savings from its ownership of this plant was not disclosed, industry observers originally forecast annual savings in the region of US$1 million per annum. Likewise, distribution costs were also restrained to less than five per cent above the comparable outturn of the prior year. The group's control over distribution costs traces back to 2003 when the group decided to outsource its trucking operation.
Through its recognised brand and strategic alliance with the island's major fast food chains and supermarkets, JBG commands close to 50 per cent of the overall local poultry market and 70 per cent of the market for processed meat. However, this market position is perennially under threat from illegal importers of leg quarters. Notwithstanding, this issue highlights JBG's relatively higher production cost per kilo of chicken when compared to international manufacturers, and the consequently lower level of competitiveness.
While the mature market complexion is expected to limit growth in volumes, JBG will look to its value-added line (rotisserie chicken, batter/breaded fish, burgers, fish sticks, and chicken nuggets) as a growth engine. The margins available on these products are much higher than the traditional line, but this area is still less than 10 per cent of current business and demand has underperformed expectations. The JBG's also intends to grow its aquaculture business such that it eclipses poultry operations over the next four to five years, but this area continues to be saddled by weak pricing. Original forecasts were for aquaculture to at least break-even this year, instead losses doubled to reach $71.1 million for the nine months to January 2006 due to weak pricing and high inventory costs. The feed and farm division, through Hi-Pro Ace, could do well given the widened product range and improved margins. Unfortunately, this area is susceptible to the vagaries of the agricultural sector. Overall, profits should rise in the upcoming quarter but the investor must consider the business risks involved in this particular stock.
RECOMMENDATIONS
Our outlook is favourable for GraceKennedy, NCBJ, PJAM, DB&G, and BNSJ. Lascelles, JBG, and Seprod 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 judgment 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.
BUSINESS & CONSUMER CONFIDENCE IMPROVES
The latest results on local business and consumer confidence showed significant improvement in both indices during the first quarter of 2006. The rebound in business confidence was due to more favourable expectations of economic growth during the year ahead the most favourable prospects recorded in more than three years. Improved investment forecasts as well as projected gains in financial situation also reflected an overall resurgence in confidence. Meanwhile, consumer confidence soared to the highest level recorded since the survey first began in 2001 on the back of strong increases recorded in expectations for an improved economy and job opportunities during the year ahead.
