GraceKennedy

GraceKennedy Limited (GK) recorded strong top-line growth for the nine-month period ended September 30, 2022, with revenues of J$107.4B representing an increase of J$11.7B or 12.2% over the corresponding period in 2021. The main driver of this increase continued to be the Food Trading segment which contributed 80% of revenues with the least contribution coming from the Banking and Investments segment, contributing 6% of overall revenues. The increase in the Food Trading segment was by virtue of the increase in local distributions of food products such as Vienna Sausages, Tastee Cheese and Tropical Rhythms as well as the accelerated products portfolio, Caribbean Choice line which includes food products such as kernel corn, coconut milk, corned beef etc. Also contributing to this increase is the continued performance of GK’s chain of supermarkets, Hi-Lo Food Stores whose strategic performance improvement initiatives continued to contribute to revenue generation. The conglomerate has also seen improvement in revenues on the international front as all international businesses returned positive top-line results for the period despite experiencing recent economic and political shocks. Across all segments, profit before other income of J$5.3B represented a decline of 9.4% or J$550M compared to the prior year. Net profit attributable to stockholders was J$5.2B, 8.1% or J$458M lower than the corresponding period of 2021.

The Company’s bottom line was impacted by non-recurring gain on loan grant to subsidiary in the amount of J$308M in 2021 due to the Paycheck Protection Program loan held by the US based subsidiary. Excluding these gains, the decline in net profit for this reporting period compared to the corresponding period in 2021 would have been 4.7%. Net profit margin for the period was 5.3%, a decline of 1.2 percentage points from the 6.5% reported in the comparative period as the company still tries to maneuver the challenging economic environment.

Given that the money services business drives group earnings, GK was also negatively impacted by the decrease in the remittance inflows to Jamaica which ultimately affected the remittance line of the business. For perspective, total remittance inflows stood at US$2.56B for the January to September period of 2022, a 2% year over year decline versus the US$2.61B result for prior comparable period according to data from Bank of Jamaica.

The Company continues to operate in an increasingly challenging macroeconomic environment due to rising global inflation, supply chain disruptions and increasing interest rates. Food prices globally continue to be impacted by the ongoing Ukraine-Russia conflict that have severely impacted inputs such as grains and oil which have all contributed to the margins being compressed. Regardless of all this, the company remains optimistic amidst their plans of expansions through acquisitions as the food and financial conglomerate is set to close two local food deals and one international financial services deal in Q1 of 2023 which may expand revenues in the near term.

Revenues for the company should be supported by 2022 being the first COVID-19 restriction-free holiday season with anticipated growth in the food segment especially given GK’s recent price increases on a variety of its food products. However, we expect remittance inflows to continue to weaken for the 2023 FY due to inflation pressures and a softening labour market in the United States, which is the biggest source of remittance to Jamaica. This situation could continue to have a drag on the remittance inflows for the duration of 2022 and persist into 2023. It is expected that the food distribution business should record a commendable performance achieving growth in revenues and profitability. We however expect that with the increasingly volatile economic environment, the business’ bottom line is likely to continue to be negatively affected with continued narrowing of the margins.

GK currently trades at a P/E of 10.56x which is below the peer average of 11.36x. Based on the risks highlighted and GK’s 3-year historical average P/E of 13.04x, we believe that a 10.5x P/E is a fair level for the stock. Also, based on the expected pressure on the money services business and inflationary risks, we expect FY 2023 earnings (EPS $7.56) to fall 2.7% below the current level (EPS $7.77). Using our FY 2023 EPS of $7.56, and a P/E multiple of 10.5x gives a fair value of $79.38 which gives a downside of -3.22% from the current price of $82.02. With a dividend yield of 2.3%, this stock has a total expected return of -0.92%. Based on the foregoing, PROVEN Wealth Limited recommends that investors with a medium-term investment horizon MARKETWEIGHT this stock at the current trading price.

SPURTREE

Spur Tree’s revenues had a 9.4% uplift to end the nine months period at $672.06M, driven by the top-monthly sales obtained in September since the start of the year. However, further revenue growth was dampened by the shortage of cans for its ackee and callaloo distributions as well as the changes associated with the company’s largest US distributor. Additional distribution partnerships have been established both locally and internationally along with the partnership with Massy Distributors which will foster into a mutually beneficial alliance allowing for greater regional distribution outlets. Gross margins increased YOY from 31% to 35.4%, given a 9.1% reduction in direct costs used in production, reflecting greater efficiency. Of note, finance costs fell 71.7% year over year to $3.23M for the 9-month period of FY 2022 partially due to the proceeds of the January 2022 IPO being used to retire debt. This translated into net profits surging by 66.4% to $118.64M for the 9-month period of FY 2022 from $71.31M of the prior comparable period.

Based on its de -leveraging, brand strength and expanded production capacity, the company is positioned for growth both organically and inorganically which underscores an optimistic outlook for the FY2023. Through its acquisition of Canco Limited and Exotic Products, Spur Tree can ramp up on its ackee and callaloo productions increasing its market share locally and through exports with the aim of fulfilling the great demand from the diaspora and other external customers.

Despite the threat to weaker demand due to heightened inflation, the company has expanded their product offerings in ten locations of the US Stop & Shop chains in October 2022. Additionally, Spur Tree’s products are defensive, which tend to perform consistently even when economic conditions are adverse.

Spur Tree should gain from for the upcoming major holidays such as Thanksgiving and Christmas through increased volumes of its products as well as inflated prices which should boost revenues.

Based on the foregoing, we forecast FY 2023 EPS to be $0.10. The Junior Market Average P/E is 20.58x, and Spur Tree’s current trailing P/E is 35.20x, which is an outlier. We believe 24x is a fair level for the stock based on its growth trajectory and Return on Equity of 34.7%, which when combined with the $0.10 EPS, we obtain a target price of $2.40 for the FYE 2023. This represents a downside of -17.8% based on the current price of $2.92. On that basis, we believe that investor should SELL at the current price of $2.92.