Shane Ingram, Contributor
INGRAM
SALADA FOODS Ltd. outsourced its production and administrative activities in the final quarter of FY 2005 and retained only the top level management team on its payroll.
The reorganisation resulted in approximately $18.6 million in legal and redundancy costs for the year but laid the foundation for a more profitable future company. Thus, even as sales dipped five per cent to $69.9 million in the opening quarter of FY 2006, gross profits increased two per cent to $23.5 million as gross margins strengthened from 31.4 per cent to 33.7 per cent on the back of restrained direct production costs.
In keeping with the company's sales-driven strategy, expenditure on selling and promotion activities increased six per cent to $4.4 million. However, the effect of these activities on sales was overshadowed by the adverse weather experienced in October 2005. Meanwhile, administrative expenses trended downward by three percent such that on aggregate indirect costs absorbed 22 cents in each revenue dollar - only one cent more than the results as at December 2004. Consequently, the savings from direct cost triggered the favourable movement in operating margins from 12.9 per cent to 13.6 per cent and the slight shift in operating profits from $9.45 million to $9.47 million. However, it was the inclusion of $346,000 in miscellaneous income, as opposed to $149,000 in cost in the prior year, that ultimately pushed net profit margins from 8.4 per cent to 9.4 per cent and EPS from 59.70 cents to 63.0 cents.
Salada has realised an annual average sales increase of nine per cent over the past five years an achievement largely based on the reputation of its renowned brands Jamaican Blue Mountain and Mountain Peak Coffee. The company is the largest of four coffee processing companies in Jamaica, and one of two soluble (instant) coffee processing plants in the Caribbean. Its leadership in the local market for instant coffee together with its increased presence in various markets cross the Caribbean, North America, Japan and Europe provide the leverage necessary to sustain current trends in sales.
Management's move toward a marketing/sales-driven strategy should also benefit profits. The company intends to rev-up in-store promotions over coming periods in order to increase visibility and brand appeal. Management also contends that it will be seeking to expand its sales to the local hotel industry. The company is similarly focused on expanding exports, particularly to the U.S.A., in order to widen its income streams and balance foreign exchange risks. While sales grow, expectations are for costs to remain subdued as coffee production (the input), and hence price, continues to recover from last year's adverse weather conditions. Growth in labour costs is also expected to follow closely with the level of domestic inflation given the reorganisation activities.
AFFECTED BY LOW WORLD PRICES
However, on the international front, the value of exports may be adversely affected by low world prices and an overall increase in worldwide coffee production. More efficient technologies have also meant that manufactures can now use less beans to produce coffee. In particular, Jamaica's coffee production is based on the 'Arabica typica' variety of bean, which some manufacturers have been able to reduce and still conform to the American tastes, America being the world's largest importer of coffee. Salada will be looking to offset this challenge by increasing its focus on the high end of the world coffee market, mainly Japanese consumers.
While profits should grow to reach close to $25.4 million or $2.45 per share for the next four quarters, the high liquidity risks and the consequent erratic trading pattern will likely limit sustained appreciation in the stock price.
RECOMMENDATIONS
We hold favourable outlook for CWJA, NCBJ, PJAM, DB&G, and BNSJ. Lascelles, CRTS, and JBG could also perform well over the short-term. Please contact DB&G's Stockbrokerage department at 1-888-CALL DBG for further information on these and other stocks or visit for detailed analyses.
Disclaimer: All information contained in this article has been obtained from sources that DB&G believes to be accurate and reliable. All opinions and estimates constitute the Author's judgment as of the date of the article. No warranty as to the accuracy, timeliness or completeness of this article and as to the opinions based thereon is given or made by DB&G. DB&G and/or its employees or directors and/or any associated person may have an interest in, or interest in the acquisition or disposal of, the securities or class of securities mentioned herein. Call 1-888-CALL DBG if in doubt about the content of this article. Decisions based on information contained in this article are your sole responsibility.
TRADING VOLUMES INCREASE THIS WEEKWhile the see-saw motion in the main indices persisted, there was a noticeable rise in daily trading volumes this week. Activity generally concentrated around the likes of NCBJ, GraceKennedy and Carib Cement with the latter seeing heavy losses as fresh news of a product recall exacerbated last week's news of a reduction in the tariff on imported cement.
