Vantage Point With KEITH COLLISTEROn Monday, Lascelles reported stellar first-quarter earnings of $849.4 million, or earnings per share of $8.85, up 55 per cent over corresponding quarter last year.
Profit before finance income and taxation increased to $928.5 million from $567 million, driven largely by a huge increase in operating profits from the liquors, rums, wines and sugars segment from $428.6 million to $657.6 million, coupled with improved profit performances on the general merchandise, general insurance and investment front.
The only poor performance was the transportation segment, which increased what had previously been a small loss. Nevertheless, as the segment is less than 7 per cent of total sales of $4.84 billion it is unlikely to affect the company materially. The 4.5 per cent increase in sales mainly represented the most profitable rum etc. segment, and indeed, there may be an argument for the company to sell the transportation division to concentrate on their core spirits business.
True position underestimated
Even the excellent performance for reported earnings share so far described underestimates Lascelles true position as it doesn't include approximately $660 million of investment gains which went directly to reserves, so the true earnings per share, called "recognised gains per ordinary stock unit" were closer to $16 for the quarter. The first quarter results also don't include the recently declared Carreras dividend, which will impact Lascelles in their second quarter. Also worthy of note, is Lascelles low effective tax rate and creditable expense control.
In their latest report on Lascelles first quarter results, NCB Capital Markets rate Lascelles as a hold with an estimated forward price of $310.60 by December 2007 based on projected earnings of $31.06 and price earnings ratio of ten times. First Global also rates Lascelles a hold, based on a similar earning per share target of $31.42, and a forward multiple of only nine times.
I believe this is very conservative. Lascelles deserves to trade at the market multiple of around 12 times earnings, and should produce earnings per share of at least $35 to $40 for this fiscal year. Therefore, I believe Lascelles is a buy rather than a hold, as one of the few "growth" stocks in our local market, and as a value stock with severely undervalued assets. Whilst one can't accurately predict the market price at the end of the year for a company like Lascelles, operating earnings alone should be higher than the broker projections previously mentioned, whilst the company is virtually debt free with cash and short investments of nearly $4.4 billion.
The stock could ultimately be worth up to double its current price, depending on the value of its brand to a potential foreign buyer. However, this is not a short term projection as investors should note that Lascelles has always traded at a significant undervaluation to its assets, is relatively illiquid and its relatively low dividend yield of less than 1 per cent does not pay an investor to wait. Moreover, like NCB, Lascelles share price has not responded to its excellent results, trading at the same price of $275 that it traded a week ago before it released its results, so investors may want to seek to buy it slightly cheaper.
Poor performance expected
I also continue to be up beat on Bank of Nova Scotia and its new acquired subsidiary Dehring, Bunting and Golding. DB&G released quarterly results last week, revealing a 17 per cent fall in profits over the corresponding quarter last year. While not impressive, this poor performance was expected, and in fact was slightly better than I had anticipated reflecting as it did mainly a reduction in trading gains rather than a fall in net interest income. NCB Capital Markets currently rates DB&G as a hold, expecting the price will essentially be flat around the current level at $27 by June, using a price earnings ratio of nine times the expected earnings per share of $3 verses the current $2.80.
While this may turn out to be an accurate short-term forecast in current market conditions, the key issue is not DB&G's short-term earnings per share performance, but the opportunity represented by its association with BNS, such as the planned amalgamation of Scotia Jamaica Investment Management Limited ("SJIM") into DB&G in return for an issue of fully-paid DB&G shares. This may allow DB&G to gain greater critical mass by acquiring BNS's repo book (and thus the possibility of reducing overhead costs), as well as lowering its cost of funds as a result of being rated more highly as part of the new Scotia group.
Better short term share price performance will however depend on improved investor confidence over the coming months, for which it is so far difficult to see the catalyst.
