Royalty and energy prices drag Carib Cement earnings
Carib Cement profit impacted by royalty and energy prices<strong id="strong-1">.</strong>

While the construction boom continues in Jamaica, Caribbean Cement Company Limited’s (CCC) profit growth has significantly slowed down as rising fuel and electricity costs plus a royalty and service fee eat at its bottom line.

The cement manufacturer’s profit before taxation (PBT) had grown by 172 per cent to $1.89 billion in the first quarter of 2021 when revenues increased by 31 per cent to $5.97 billion. In the first quarter of 2022, CCC’s revenue increased by 13 per cent to $6.81 billion, loss on foreign exchange decreased by 81 per cent to $38.59 million, but its gross profit only increased by 15 per cent to $2.17 billion.

The main culprits for the reduced earnings growth were the 19 per cent rise in fuel and electricity cost to $1.25 billion and $133.86 million paid as a royalty fee to several Cemex SAB de CV subsidiaries. CCC signed an agreement to pay a royalty fee of up to two per cent on its consolidated net sales for 2022. The fee came out to 1.96 per cent of CCC’s revenue. The royalty fee kicked in during the introduction of the co-branded Vertua-certified cement in February. Jamaica, Barbados, and Trinidad and Tobago had a seven per cent reduction in carbon dioxide emission rates in the first quarter. Cemex is the ultimate parent company of CCC.

To account for the rising energy and material costs, CCC increased cement prices by eight per cent on January 17. CCC purchases coal and other raw materials from Cemex subsidiaries. The price of coal is up 308 per cent year over year to US$326.30 per metric tonne. While CCC noted in its published report that increased cement demand in the domestic market was responsible for higher revenue, the company didn’t specify the volume sold on a comparative basis. When the Jamaica Observer reached out to CCC’s management team, they declined answering questions, referring us instead to what was published in the quarterly report.

Upon checking Cemex’s 6K release to shareholders on Thursday, it stated that regional cement prices in its South, Central America and Caribbean (SCAC) segment were up by nine per cent, with domestic gray cement volume down two per cent on a comparative quarterly basis. It also stated that a second round of price increases occurred in April in markets that represented 30 per cent of cement volumes. The Dominican Republic had a four per cent decline in bagged cement sales. A kiln was reopened to increase production capacity by a third during April.

Despite higher taxes during Q1, CCC’s net profit rose by 4.20 per cent from $1.53 billion to $1.59 billion. Without the royalty fee, CCC’s net profit would have increased by 12.91 per cent to $1.72 billion. Although CCC’s stock price increased by two per cent to $72.53 on Friday, it remains down 40 per cent from the peak closing price of $119.89 on October 8.

Cemex’s actions, through its direct stake and subsidiary Trinidad Cement Limited (TCL), at CCC’s annual general meeting (AGM) in December has reduced confidence by large shareholders in the company and its stock. Mayberry Jamaican Equities Limited (MJE) was the largest minority shareholder in CCC up to September, with 13,447,860 ordinary shares or 1.58 per cent of the company. It sold 3,838,136 shares in the fourth quarter and 1,513,153 shares during the first quarter. Guardian Life Limited, PAM – Pooled Equity Fund, and Barita’s capital growth fund increased their stake during the first quarter.

“As you know, we think Cemex is a very bad actor. They have abused minority shareholders using their majority power to take money out of the company ahead of the shareholders and robbing the Government of tax dollars. They are bad actors, and everyone needs to let them know that. The main risk I see to Carib Cement’s stock price is energy prices. I don’t know if it will be offset against the construction sector and high interest rates,” stated Executive Chairman of MJE Christopher Berry at a recent investor briefing.

CCC had developed a dividend policy in March which it plans to present to shareholders at its AGM later this year for approval. The release in March stated that the dividend policy wasn’t an undertaking or commitment to declare and pay any dividends.

CCC’s cash flow from operations declined by 71 per cent to $660.94 million as it reduced its trade and accounts payable balance during the first quarter. TCL’s shareholder report stated that this was driven by a reduction of our trade payables as a result of the cancellation of the factoring programme of some services. Cash and cash equivalents was $401.69 million.

Although the company paid off its long-term debt during the fourth quarter of 2021, it didn’t redeem any of the $1.45 billion preference shares owned by TCL in the first quarter. The company also gave no update related to the US$30-million expansion of its Rockfort plant in Kingston, which will increase production capacity by 30 per cent. CCC’s total assets were up by four per cent to $27.93 billion, while shareholders equity climbed by 33 per cent to $17.42 billion.

TCL’s consolidated revenue increased by seven per cent to TT$529.39 million, with its net profit attributable to shareholders improving by 26 per cent to TT$39.04 million ($910.49 million). Its other expense line jumped by 456 per cent to TT$13.35 million, related to the same two per cent Cemex royalty fee. TCL’s stock price increased by 10 per cent to TT$3.88 for the week.

Cemex’s guidance on cement sales growth for 2022 is mainly flat in the SCAC region and low single digits for the larger markets. Its normalised net profit attributable to shareholders tripled to US$198 million for the first quarter. JP Morgan has maintained an overweight valuation on the company and expects it to hit an investment grade credit rating in 2022 or 2023. It also noted that Cemex has hedged a great portion of its costs. Cemex’s New York Stock Exchange stock price is down 45 per cent over the last year to US$4.43.

BY DAVID ROSE Observer business writer

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