JP liquidating equity investments to fund growth plans... But declares love for its rival
Published:Friday | June 3, 2011 | 12:00 AM
Sabrina Gordon, Business Reporter
Jamaica Producers Group Limited (JP) has liquidated some of its holdings in blue-chip conglomerate stock GraceKennedy (GK) for capital to fund its growth plans, but says the transaction should not be taken as a signal of dissatisfaction with the performance of the company in which it has long held the single largest bloc of shares.
JP disclosed the sale of J$903.65 million of its equity holdings in a market filing at the top of the week, and on Wednesday chief executive officer Jeffrey Hall confirmed the transaction included, but was not limited to GK shares. He declined comment on the volume and terms of the sale.
"The announcement was made in relation to the holding in local trading equities in which we had a passive interest," said Hall. His company has no representation on GK's board.
JP at December 2010 held more than 31.15 million shares in GraceKennedy, making it the single largest shareholder with 9.39 per cent ownership of the food and financial conglomerate.
On May 25, some 14.599 million GK shares valued at J$774 million were traded on the Jamaica Stock Exchange - a volume that is equivalent to just under half of JP's holdings. For the month, more than 15.79 million units traded, valued at J$837 million.
Analysts polled said the bulk of the 14.6m volume traded was by JP. The GK stock is currently selling at J$52-53 per share, just above its one-year low of J$50 but significantly below its one-year high of J$65.
GraceKennedy's new CEO in waiting, Don Wehby, said at the company's May 26 AGM that GK stock was way undervalued on the stock market compared with its book value of J$80 per share.
Wehby, who takes over from Douglas Orane on July 1 - Orane will retire but retained under contract for one year as executive chairman - says he has set a target of 20 per cent return on equity this financial year, more than doubling the 2010 outcome of 8.9 per cent, according to a company-issued statement.
Producers, which three years ago made a substantial shift from its traditional but loss-making export banana business into snacks, and deeper involvement in the juice and smoothies markets in Europe, said in the market filing that it expected to book a gain from the disposal, and would use the proceeds to "support its planned investment and business development programme".
The investments were unspecified, but JP is about to diversify further into the coffee-growing and trading market in partnership with Pan-Jamaican Investment Trust - pending successful conclusion of negotiations for majority acquisition of the state-controlled Mavis Bank Coffee Factory.
Hall said JP's expansion plan focuses on the development of its speciality-food business, that is, snacks and juice in the Caribbean and Europe, and land management, which includes aggregate extraction and logistics.
Hall said only a portion of JP's GK holdings were sold off, while making it clear that his company was not liquidating the shares because of dissatisfaction with the performance of the stock or the company.
"We continue to hold shares in GraceKennedy, as well as various other companies in Jamaica," Hall told the Financial Gleaner.
"We have held investment in GraceKennedy for many years, and JP has been pleased with the return over the many years," he said.
GraceKennedy Limited is a 89-year-old conglomerate operating in multiple markets in Jamaica and overseas. Its business lines, while diversified, are divided into three main segments: food, retail and finance.
JP, which has been around for 82 years and was once Jamaica's pre-eminent banana trader with Europe, remains involved in shipping but is more heavily involved in snacks and juices, and is a nascent investor in mining since 2009.
With its market shift into food, the two conglomerates have become more direct rivals.
Last year, GK paid combined dividend of J$1.55 per share, producing about J$42 million of returns for JP, according to Financial Gleaner estimates.
This year, JP's share of dividend at 55 cents per share paid out by GK on May 27, would have amounted to more than J$17 million.
Both companies last year adjusted their dividend policy for more generous distribution, with riders relating to available cash flow: JP to distribute a minimum 15 per cent of annual after-tax profits to shareholders; and GK a minimum of 15 per cent of net profit attributable to stockholders, up from 10 per cent.
JP has paid dividend of 25 cents per share year to date, already eclipsing the 15 cents per share for all of 2010.
The second-largest shareholder in each of the two conglomerates is the GraceKennedy Pension Scheme, which up to December 2009 held 15 million shares or eight per cent of JP; and currently owns 15 million shares or 4.54 per cent of GK.
Hall's declaration, notwithstanding, market analysts say JP's returns from the GK stock were constrained by GraceKennedy's performance in the past three years under the recession in which its revenue and profit growth have stalled. Record revenue of J$57.4 billion dropped back to J$55.3 billion last year; while profit of J$2.3 billion fell from J$2.7b in 2009, and was about a third shy of the peak J$3.5b made in 2007.
"GK did not provide JP with a significant dividend yield annually; the strategy of holding GraceKennedy shares as a minority shareholder has not been benefiting JP from a minority or accounting standpoint," said Mark Croskery, president and chief executive officer of Stocks and Securities Limited (SSL).
"In addition, GK has been underperforming over the past three to five years, hence JP's underperformance as well on its corporate segment, where it reports its investments," said Croskery.
SSL, at last disclosure, owned 3.6 per cent or 6.78 million shares in JP, making it the fifth-largest shareholder.
Revenue in the corporate segment fell from J$207 million to J$182 million in 2010, but profit almost doubled to J$82 million. In the first quarter ending April 2011, corporate-segment profit grew more than thirtyfold to J$341 million, boosted by gains from the disposal of equity investments, JP said.
The group makes revenue of J$5-6 billion annually, and grew profit to J$302 million last year, or J$1.67 per share.
More than holding a passive interest in GK, Croskery also sees JP as a formative and successful competitor to GK.
"It is also our opinion that JP should and can successfully enter local markets and compete with GK in food manufacturing and distribution strategically by utilising these proceeds," said Croskery.
"In our opinion, the proceeds from the equity sales, which is a significant step in the right direction, should be targeted for a large profitable local acquisition, synergise with existing local business to increase EPS versus smaller acquisitions that can spread existing management thin and take a significant amount of time to yield net profit after tax," said Croskery.
In its quarterly earnings report, JP said that while its plan is focused on organic growth, it was open to acquisitions.