Business

A bird’s eye view at Jamaica Broilers

SSL in the Money

Ryan Strachan

Wednesday, September 12, 2012    

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ON the heels of contributions to SSL's 'In the money' by my esteemed colleagues Gillian Bernard ('Thirsty for a new investment? Look to water') and Patrick Robins ('Growing corn in your portfolio') comes the opportunity to connect the two and show the potential benefits to accrue to a locally listed company, Jamaica Broilers Group Limited.

Going by the ticker JBG on the Jamaica Stock Exchange, the group was incorporated 54 years ago in 1958 and boasts several divisions and subsidiaries which include Best Dressed Chicken, Best Dressed Foods and JB Ethanol. Net profit for the year-ended April 30th, 2011 amounted to $956 million, a 27.46 per cent, decline from the $1.3-billion profit of the 2010 financial year. Mr Robert Levy CD, serves as non-executive chairman whilst his son Christopher Levy is president and CEO. Of note, the JBG board of directors boasts several luminaries and titans of Jamaican commerce. That aside, were one to take into account the points raised by both Gillian and Patrick, this decline in profit and subsequent fall in share price to $4.76 (as at close of trading on Friday, September 7th, 2012) may represent a fantastic opportunity for investors to give a second look at owning the JBG stock.

Having sprinkled seeds in the 2007/08 financial year via a substantial investment in JB Ethanol, the case can be made that the difficulties experienced in the division have ruffled feathers and been among the reasons for the 2010/11 financial year's declining results. This point is further reinforced when one considers that the Best Dressed Foods and Hi-Pro Ace divisions — which produce the lion's share of revenues — have grown substantially over the past three financial years. By this very token, one can reasonably conclude that an improvement in the fortunes of JB Ethanol will have a positive effect on the group's financial results.

With that said, a July 27th, 2012 release to the Jamaica Stock Exchange states that the group "has advised that JB Ethanol Limited, a subsidiary of JBG has booked processing (tolling) contracts for the period July 2012 to April 2013 which will result in a 200 per cent increase in volumes processed by the group's ethanol operations in the 2012/13 fiscal year, when compared to the previous year. The increased business is mainly attributable to favourable developments in market conditions which range from reduced cost of Brazilian hydrous ethanol and increased price of fuel grade ethanol in the USA." Considering that Gillian spoke to the current drought in the US (since slightly alleviated by the passage of Hurricane Isaac) and Patrick stated that companies producing ethanol have already started to feel the effects of the corn shortage (used in ethanol production) with output falling to their lowest levels seen since October 2009, it figures that JBG stood to benefit greatly from this opportunity.

The drought in the US has curtailed corn reaping and this has thus reduced the raw material levels necessary to produce ethanol, opening the door for external suppliers of ethanol like JB Ethanol, which produces the biofuel from sugar cane, to get involved. This impact of potentially positive fortunes in the ethanol division cannot be overstated as revenues from JB Ethanol fell by 70 per cent from $3.63 billion in the 2010 financial year to $1.08 billion in the 2011 financial year.

This also shines further light on why the group's overall turnover/revenue fell by five per cent for the 2011 financial year to $21.3 billion. Other factors which have contributed to this writer's guarded optimism in regards to JBG include the previously mentioned growth in core business, which is a remarkable accomplishment for an entity of this size. There are also the expected breaking-even of the Haiti Operation 'Haiti Broilers' by the close of the 2012 calendar year, and the unveiling of a green energy project, valued at US$10 million, which will introduce energy-saving devices such as LED lamps as a source of light on chicken farms throughout its supply chain. The ultimate result of this should be direct cost savings on their bottom line.

A caveat, however, is that while the increasing corn prices are likely to positively impact the JB Ethanol division by virtue of increased volumes/production, it is also likely to have a negative effect on the group's core business as corn represents an input cost.

Using fundamental analysis to conclude, the JBG price to earnings (P/E) ratio of 6.09 times (September 7th, 2012), is below that of its manufacturing sector average of 8.90. When these — the group's management team and board of directors, industry leader position and the expected uptick in revenues stemming from growth in JB Ethanol — are considered, the price of $4.76 at 27.88 per cent below its 52-week high of $6.60 could be viewed as attractive. These facts suggest that there may be golden eggs in store when the chickens come home to roost.

Ryan Strachan is the Manager of the Wealth Division at Stocks & Securities Limited and can be contacted via rstrachan@sslinvest.com.

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