COLLISTER

Desnoes and Geddes

Desnoes and Geddes' export volumes have grown an impressive 31 per cent for the second year running, according to financial controller Laurence Turnbull. This was driven by the beverage company's U.S. market and an outstanding 60 per cent performance in Canada, leading to overall volume growth of 8 per cent despite a mild 1 per cent decline in domestic volumes.

Whilst trading profit was up 14 per cent to $1.996 billion on an 11 per cent increase in sales to $10.11 billion, profit after tax declined 6 per cent to $2.21 billion for the full year.

This decline was due to the fact that the previous year's results included a $406 million gain from the disposal of assets, specifically the sale of lands to Pepsi Cola Jamaica Bottling.

If this 'one time' gain were excluded, profit after taxation would also have risen 14 per cent.

D&G's 'quality of earnings' is very high with its large investment and marketing programme entirely self funded, return on equity is an impressive 46 per cent, down from an extraordinary 57 per cent the previous year, and the company paid out an extremely healthy 77 cents dividend in 2005 - albeit inflated by a special dividend - and is projected to pay 57 cents this year.

The company has invested heavily in the export business in recent years, which now represents 34 per cent of production volume, with almost all the 20 per cent increase in marketing costs of $1.06 billion in the last financial year ending June 2006 being increased marketing expenditure on exports.

However, Desnoes & Geddes is still reliant on its local sales for the majority of its profits, as the overseas business has much lower margins and requires very high marketing expenditure as a proportion of sales.

Short term traders should therefore not pull the trigger until the profit impact of the end of D&G's five year tax relief becomes clearer, and they can see that the local beer market, D&G's main profit driver, is definitely recovering.

The stock can be bought by investors with longer term time horizons such as pension funds up to its last traded price of $8.10 or just over 10 times 2006 earnings per share of 78.74 cents.

JMMB

Despite increased assets, Jamaica Money Market Broker's net profit performance was flat given the narrowing of local and foreign interest rate spreads.

Notwithstanding JMMB's relative sophistication, it will take time for the brokerage to make enough money from its current diversification plans to offset the impact of even a small further decline in spreads in its core money market business.

Even at its current price of $10.40, well below its high of $18.20, it is not yet a buy as it is trading at a premium to other players and had a poor first quarter.

Medium term however, the performance of its recently acquired 50 per cent of Intercommercial Bank in Trinidad is likely to be one of its brighter areas, and combined with the recovery of its CMMB subsidiary, which also had poor first quarter results, should lead to improvement in profits.

Investors should watch the stock, looking to accumulate when they see a combination of a recovery in Trinidad's stock market (likely when Trinidad's rate rising cycle ends), and increasing profits from JMMB's continued regional expansion.

Jamaica Producers

Historically, Jamaica Producers (JP) has been a strong 'value buy' when its cash and investments of mainly shares in GraceKennedy equaled its market capitalisation, meaning that you got the rest of the company for free. Recently it approached this level again, but the 'news' of the potential sale of its 65 per cent holding in its banana ripening business to its minority partner Dole has driven the shares up sharply, making it only a long term buy.

The stock is currently being bought in volume at its last traded price of $43 by one major institutional 'value investor'. At that price, JP is valued at $8 billion, which is just above its approximate $7.9 billion in cash and investments, including the $2.76 billion expected purchase price from Dole. Investors should watch the company closely, particularly the U.K. Sunjuice business, and the price of Grace shares, as JP could become too good a 'value' buy to ignore.

Confidence and the market

The latest rise in business confidence by 15 per cent is driven by higher current and expected profits. This is a positive sign for the stock market going forward, but the surprising disconnect between improved profits and companies' negative investment plans suggests one should still adopt a cautious approach to one's stock market investing.

keithcollister@cwjamaica.com

NOTE: Vantage Point will return to its regular slot in Sunday Business this week.