Manufacturing and distribution sector withstands COVID-19 fall-off in earnings for the March quarter

Business

Manufacturing and distribution sector withstands COVID-19 fall-off in earnings for the March quarter

Seprod leads sector with earnings up 102.8%

BY DURRANT PATE
Observer business writer

Wednesday, June 03, 2020

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Despite the disruption to business activity caused by the novel coronavirus pandemic, the manufacturing and distribution sector had a relatively better March quarter than others did.

In fact eight listed companies in the sector recorded an increase in earnings during the period with five experiencing contractions while only two reported losses. The outturn for the sector was in line with the Planning Institute of Jamaica (PIOJ) estimates, which stated that the sector recorded a growth rate of 2.7 per cent.

This makes the manufacturing and distribution sector the second-best performing sector for the first quarter of 2020 behind agriculture, forestry & fishing with a 7.8 per cent increase. Meanwhile, the outturn for the financial sector was less favorable, with nine listed companies in that sector reporting losses, relative to four reporting contractions, and four reporting higher earnings.

This was mainly due to the fall-off in the price of assets held by these institutions. NCB Capital Market did a Market Commentary & Analysis of the various market segments and their performance during the COVID-19 pandemic, which showed the manufacturing and distribution sector coming out on top of sectors such as finance.

The March 2020 earnings season on the Jamaica stock market has so far captured some of the impact of COVID-19 on the financial performance of listed companies. Fifty-two listed companies have already reported earnings for the March quarter, with 22 experiencing a year-over-year increase in profit, 14 recording contractions, and 16 reporting losses for the quarter.

SEPROD LED GROWTH IN MANUFACTURING AND DISTRIBUTION

Seprod led the growth in earnings in the manufacturing sector up 102.8 per cent, followed by Derrimon Trading with 33.7 per cent, Lasco Distributors with 21.4 per cent, Caribbean Flavours and Fragrances 19.1 per cent, Fontana 14.6 per cent, Carreras 5.2 per cent and Wisynco up 4.5 per cent.

Seprod attributed its outturn to efforts made in prior years to strengthen the business fundamentals.

These efforts include consolidation of the dairy factories, increasing exports, and expanding the distribution footprint through the acquisition of the Face Consumer business.

Despite the increase in earnings, the management of Seprod was quick to note that the current March quarter did not reflect the full impact of COVID-19 on sales, which will be revealed in the coming quarters when the lockdown was in full effect.

NCB Capital Market notes that Wisynco also echoed similar sentiments regarding the effects of COVID-19 on sales in the coming quarters, and stated that the company saw a decline in sales in the latter part of March, when the containment measures were being imposed. This was due the closure of the hotels, schools, bars, restaurants, and lounges, which are major customers of Wisynco's products.

COVID-19 CONTAINMENT MEASURES HAVEN'T STOPPED GROWTH

On average, earnings for the manufacturing & distribution sector have grown by 2.2 per cent year-to-date, despite the downward pressure of COVID-19 containment measures on revenues for a number of companies. This increase comes against an average decline of 11.2 per cent in stock prices for the sector since the start of the year.

The fall-off in stock prices for the sector is reflected in the Sagicor Select Manufacturing Index, which incurred a net loss of $4.36 billion year-to-date, which was reported in its just-ended March quarter. This net loss is reflective of an average decline of 27.6 per cent of equities in the portfolio.

NCB Capital Markets says it expects prices to trend upwards in the coming quarter, as the economy gradually reopens and investors see an opportunity to enter into companies with low multiples and strong growth prospects after the effects of COVID-19 recedes.

“Furthermore, we expect the sector to pick up in the period after July as the economy reopens, and containment measures become more relaxed. Once bars, restaurants, and lounges are allowed to operate at full capacity demand for consumer items should see a further increase,” was NCB Capital Market's assessment.

During its assessment NCB Capital Market noted that producers and distributors of consumer staples, such as household foods, recorded strong growth in earnings during the period.

GraceKennedy saw significant growth in its food manufacturing and distribution business with revenues and operating profits up 11.3 and 60.3 per cent respectively.

CONTRACTIONS

The largest contraction was recorded by Fosrich, which saw an 85.4 per cent decline in earnings for its first quarter ending March. This was primarily due to a spike in administrative expenses, as the company expanded the size of its staff and created a number of new executive positions.

Other companies reporting year-on-year contractions included Salada Foods (78.2 per cent), Jetcon Corporation (32.3 per cent), Honey Bun (15.2 per cent), and Lasco Manufacturing (8.8 per cent). The outturns for these companies were due to higher expenses and the movement in the exchange rate, particularly in the case of Salada. In the case of Jetcon the decline in revenue was mostly due to higher administration expenses, while for Honey Bun it was selling expenses, and in the case of Lasco Manufacturing it was higher taxes.

Two companies reported losses with Jamaica Teas incurring the largest loss. Interestingly, this loss was primarily due to the fair value loss of $653.92 million on the company's investment activities, which is a reflection of the fall-off in the market prices of the equities held through its QWI subsidiary.

The company's core manufacturing business, which is the production of a variety of tea products and food items, actually saw an 18.7 per cent increase in sales, due to strong demand for its products domestically and on the export market. Its retail business, which is essentially a supermarket operation, also saw a 67.7 per cent surge in revenue, which was likely due to the stockpiling of food and beverage items by consumers due to restrictions imposed to contain the spread of the novel coronavirus.

The other company recording a loss was Caribbean Producers Jamaica, which saw a 5.5 per cent slowdown in revenues for the quarter ending March, given that it distributes a significant amount of its products to the tourism sector, which was closed as a result of the coronavirus pandemic.


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