DESNOES and Geddes (DG) is a beverage company incorporated and domiciled in Jamaica with the company’s registered office located at 214 Spanish Town Road, Kingston 11. Its principal activities include the brewing, bottling and distribution of beers, stouts and spirits. In addition to carbonated beverages, DG also brews and distributes the following brands: Red Stripe Beer, Dragon Stout, Malta, Smirnoff Ice, Guinness, and Heineken. Notably, DG is a publicly listed company in which the Sweden-based Udiam Holdings AB owns a 58 per cent stake, but its ultimate parent company is the UK-based Beverage Company, Diageo PLC.

For the financial year ended June 30, 2014, DG reported turnover of $14.1 billion, an increase of 10.6 per cent when compared with the $12.7 billion booked last year. Special Consumption Tax (SCT) charged on the company’s Turnover amounted to $2.6 billion, an increase of 9.5 per cent relative to that of 2013. As a result, net sales climbed by 10.9 per cent to total $11.5 billion compared to the total of $10.4 billion in the prior year. According to DG, “This was primarily attributable to the domestic business which increased by 15 per cent, driven by strong growth of our brewed products and spirit portfolios, including our new innovation on 1 litre Red Stripe and Guinness brands.”

Gross profit also climbed by 11 per cent, amounting to $4.7 billion compared to the $4.3 billion reported in 2013, as Cost of sales rose by 10.8 per cent year over year to close at $6.8 billion, up from $6.1 billion in 2013. DG has indicated that “Cost of sales was impacted by the depreciating dollar on foreign currency denominated inputs, local inflation and the cost of direct distribution fees under the new outsourced selling and distribution model involving the joint venture business, Celebration Brands Limited. The company’s marketing costs also increased by 8.4 per cent to $1 billion, as a result of “increased promotional brand building”. General, selling and administration expenses declined by 8.5 per cent to $1.2 billion, “largely due to cost savings initiatives as well as savings associated with our outsourced selling and distribution activities”.

DG posted ‘Other income’ of $231.9 million, compared to ‘Other expenses’ of $129.9 million in 2013. As such, trading profit amounted to $2.7 billion, 46.6 per cent more than 2013’s trading profit of $1.9 billion.

Net employee benefit expense totalled $1 million, down 94.7 per cent from the prior year, and ‘Finance income’ was $24 million, down from $28 million in 2013. During the year, a gain on the disposal of investments of $973.7 million was booked from “the disposal of shareholdings in breweries in Haiti and St Lucia”.

However, the company booked a loss on the disposal of property, plant and equipment amounting to $22 million, an improvement on the 8 million reported in 2013. DG also reported a share of loss in joint venture of $22 million compared to a share in profit in joint venture of $12 million in 2013.

The company reported a profit before taxation of $3.7 billion, a 96 per cent increase from 2013. Net profit attributable to shareholders was $3.15 billion for the year, a 160 per cent increase on the $1.21 billion recorded in 2013, following taxation of $524 million, down 20.4 per cent from the prior year. Consequently, DG’s earnings per share for the period surged to $1.12, up from $0.43 in 2013.

Despite the improvement, the company only paid out dividends per share of $0.25 in its 2014 financial year, down from $0.35 in 2013.

DG’s total assets as at June 30, 2014, amounted to $12.25 billion, $1.41 billion more than its balance the year prior. This increase in total assets was driven primarily by an increase in property, plant and equipment by $942.4 million to total $5.5 billion and an increase in accounts receivable by $248.45 million to total $1.37 billion. Furthermore, shareholders’ equity increased by 17.5 per cent to total $9.01 billion compared to the $7.67 billion recorded in 2013. As a result, the group’s book value as at June 30, 2014 was $3.21 compared to $2.73 as at June 30, 2013.

This improved financial position year over year likely reflects the impact of the acquisition of a new combined heat and power plant via property, plant and equipment, as well as the significant growth in the company’s domestic business via receivables. It is anticipated that DG will continue to effectively deploy the company’s assets in a manner that will facilitate continued growth in shareholders’ value over time.

At a glance, it appears that the 160 per cent surge in net profits attributable to shareholders in the financial year ended June 30, 2014 to a total of $3.15 billion, was largely due to the 10.6 per cent increase in DG’s turnover year over year. However, judging by the fact that the company’s gross profit margin exhibited little change relative to last year’s, while DG’s net profit margin increased by more than 200 per cent, it is clear that this growth in profitability was significantly enhanced by the gain on disposal of investment properties. The gain amounted to $973.7 million resulting from “the sale of shares in Brasserie Nationale d’ Haiti and Windward and Leeward Brewery Limited”. This disposal is reportedly a part of DG’s brewery consolidation project which is designed to “reconfigure the brewery and process layout to ensure more cost effective production”.

In its continued commitment to achieving greater cost-efficiency, DG also commissioned a Combined Heat and Power plant in April 2014, which is expected to enable DG to become more energy-efficient in the near future. Furthermore, the company also embarked on an initiative titled ‘Project Grow’. Here DG is currently planting sweet cassava on a 36-acre pilot farm in an effort to reduce its reliance on imported raw materials. According to the company, “Cassava has been proven as an excellent brewing raw material, as parent company Diageo launched a beer in Ghana called Ruut Extra with over 50 per cent cassava in the 2013 financial year.” Red Stripe also reportedly created a trial batch of beer with the locally produced crop which received rave reviews.

In summary, DG appears to be yet another company listed on the Jamaica Stock Exchange that is poised to perform well in the near future. The company appears to be on track to maximise the revenue benefits of effective product line diversification, and is also actively working to improve its cost-efficiency. Consequently, barring any major unforeseen adverse events, it is likely that DG’s profitability will continue to expand, especially against a gradually improving economic background.

Leon Franscique is a research analyst at Mayberry Investments Limited.