GK enters acquisition mode

•Conglomerate eyes purchases to ramp up growth •In command of targets in 2 of 3 geographical markets to become global consumer group

CAMILO THAME Business co-ordinator thamec@jamaicaobserver.com

Wednesday, March 12, 2014

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GRACEKENNEDY executives last week signalled that acquisitions will be a critical part of the food and financial conglomerate's growth strategy going forward.

One team focused on purchasing food-related businesses and another on financial services have already been formed, according to group CEO Don Wehby at an investors' briefing last week.

What's more, the group's $34-billion capital base (of which $9 billion was in cash as at December 31, 2013) augurs well for a shift into an acquisitive mood.

"Debt to equity remains low at 35 per cent, which puts GraceKennedy in a strong position to invest in business for future growth," said group CFO, Frank James.

The conglomerate's revenue climbed by 10 per cent to $67.3 billion in 2013, while profit before tax grew by 26 per cent to $5.1 billion in 2013.

Most of the growth happened outside of Jamaica, which experienced a six per cent rise in revenue to $43 billion, or 64 per cent of total sales in 2013, down from 66.2 per cent the year before.

All other markets saw double-digit growth, with sales to Europe now well past 15 per cent of GraceKennedy's revenue.

North America was a little over $1.3 billion shy of the 15 per cent mark last year and will likely become as relevant as Europe is now in two to three years, if growth there continues apace.

However, GraceKennedy still has a long way to go in Africa in its drive to become a global consumer group, where 50 per cent of its profit would come from outside of Jamaica and 15 per cent of revenue is realised from each of the three continents.

Indeed, progress in Ghana is going well — sales there grew by 93 per cent year over year to $79 million in 2013.

Now, GraceKennedy is moving towards becoming its own distributor rather than selling through a third party in the African country, having incorporated and opened GK Ghana Limited earlier this month.

It is also eyeing a manufacturing plant there, where hopes springs on Ghanaian oil and cheaper electricity to produce beverages — particularly Tropical Rhythms, which now represents 35 per cent of sales into the continent.

But perhaps GraceKennedy stands to gain more from dramatically cutting the cost of shipping goods from Jamaica and Europe to Ghana and neighbouring African countries, according to group CEO Don Wehby.

Still, revenue from Africa will have to reach closer to $19 billion by 2020 for it to hit the 15 per cent-of-total-revenue mark for GraceKennedy, by Business Observer calculations.

Executives declined to indicate what they might purchase first, but more focus is expected to be on financial services.

GraceKennedy's banking and investment division, which operates the First Global brand, saw pre-tax profit grow from $650 million in 2012 to $692 million, after taking a $293-million hit from two government debt swaps — the national debt exchange (NDX) and the private debt exchange (PDX).

A special exercise conducted at Jamaica International Insurance Company (JIIC) also led to an extraordinary adjustment to the tune of $350 million, which led the insurance division to a reduction in profit before tax from $401 million in 2012 to $122 million last year.

"Persons are far more aware of and inclined to pursue compensation where they perceive that they have suffered a loss," said GK Financial CEO Courtney Campbell. "Our (annual) reviews have not kept pace with this change... we are playing catch up."

Money services continued to do exceptionally well — pre-tax profit grew from $1.65 billion to $1.9 billion. Also, regional expansion with its remittance company partner, Western Union, has expanded the conglomerate's money transfer network to nine countries, including Dominica, Trinidad, Guyana and, more recently, the British Virgin Islands.

Overall, GraceKennedy's profit before tax grew by 26 per cent to $5.1 billion in 2013, but changes to the income tax rates over the last two years translated into flat net earnings.

The Government had lowered the corporate income tax from 33 1/3 per cent to 25 per cent January last year, then introduced a five per cent surtax on large unregulated companies last April, before removing it at the beginning of 2014.

From an accounting standpoint, this meant that the tax for 2012 was restated — to an effective rate 7.7 per cent of pre-tax , or $316 — and the rate for last year came in at 25.2 per cent, or $1.3 billion.

As a result, net profit in 2013 was roughly the same as the year before at $3.8 billion, or $9.65 a share.

At just under $60 a stock unit, group executives still maintain that the share price is still undervalued, which means that the share buy-back programme will continue up to October.

GraceKennedy plans to buy back up to 8.4 million shares, or 2.5 per cent of the company using excess liquidity.

Up to December 31, 2013, 1.66 million shares were repurchased at a fair value of $99.5 million.

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