March 16th, 2010.

West Indian Tobacco Company Limited

The West Indian Tobacco Company Limited (WITCO) has continued to show strong growth in earnings for another year. For the year ended December 31 2009, WITCO reported an EPS of $3.07, representing growth of 23.8 per cent as compared to $2.48 in 2008.

The directors have approved the payment of a final dividend of $1.64 per ordinary share payable on April 22 to shareholders on record at the close of business on April 13 2010, bringing the total dividend for 2009 to $3.06 (2008 - $2.48).

The group traditionally pays out 98-100 per cent of earnings in dividends.

At the top-line, turnover increased 11.9 per cent to $891.2M and excise charges were 2.4 per cent higher than in 2008 at $225M.

Correspondingly, net turnover increased 15.5% to $666.1M as WITCO was able to match the growth rate from the previous year.

Cost of sales increased 18.8 per cent to $170.9M for the period and gross profit increased 14.5 per cent from $432.7M to $495.197M.

As a percentage, the gross profit margin improved slightly from 54.3 per cent to 55.6 per cent as displayed in Exhibit 1.

Overall, operating expenses were cut over the year despite increased distribution and administrative expenses.

Operating expenses fell 2.8 per cent to $145.3M. As a result, operating profit moved from $283.2M to $349.9M, a 23.6 per cent gain.

The operating profit margin increased from 35.6 per cent to 39.3 per cent. Profit after taxation rose to $258.4M from $209.2M, an increase of 23.4 per cent.

In 2009, the central statistical office recorded inflation in the ’alcoholic beverages and tobacco’ category of 14.0 per cent due to increased excise and duties levied in the national budget announced in September.

WITCO was able to pass on most of this cost to consumers due to the relatively inelasticity of tobacco products.

It is important to note that production volumes declined 2.7 per cent for the year, following a 7.6 per cent reduction in 2008.

Going forward these changes in the economic and business environment will pose a challenge to the group in growing at the top-line.

Continued focus on cost-containment should benefit the group, but with operating expenses cut by 15 per cent in the last year, WITCO’s ability to further reduce expenses may be constrained.

The stock price has appreciated 23.5 per cent year-to-date to $40.01, significantly greater than the average market gains as investors move towards the better performing and higher dividend-yielding companies.

WITCO has traded closely in line with the market price/earnings valuations over the past five years.

The stock is now trading at a trailing P/E multiple of 13 times, above the market average of around 11 times.

It is now somewhat expensive by comparison and the price may not be sustainable at the current levels.

BOURSE revises its recommendation to a SELL.

Agostini’s Limited

Agostini’s Limited recorded an EPS from continuing operations of $0.38 in the quarter ended December 31st 2009.

This represented a 5.6 per cent over the EPS of $0.36 earned in the comparative quarter ended December 31st 2008.

The slowdown in the local economy was reflected in lower revenues across all of the group’s operating segments. Turnover declined 2.1 per cent year-on-year from $230.2M to $225.3M in Q1 2010.

Trading, the main component of revenue remained flat at $190.0M, while the construction and manufacturing segments declined 3.3% and 30.2% respectively as seen in Exhibit 2(a).

However, a reduction in expenses boosted operating profit by 8.2 per cent to $20.5M.

This is seen in the improved operating profit margin of 9.1 per cent, from 8.2 per cent in the Q1 2009.

Performance improved in the trading sector as operating profit increased by 19.7 per cent, partially attributed to improved service cost efficiencies from the combination of Agostini’s Marketing and Hand Arnold as shown in Exhibit 2(b).

Finance costs declined 16.3 per cent year-on-year to $3.5M as the Group’s liabilities continued to decline.

Maintaining this lower level of finance charges will continue to assist the group’s overall profitability.

Profits before taxation increased 15.1 per cent over the period from $14.8M to $17.0M.

Even with a higher effective tax rate of 36.0 per cent in the quarter, as compared to 30.9 per cent in Q1 2009, the group’s profit from continuing operations gained 6.5 per cent to $10.9M from $10.2M.

Going forward, Agostini’s will continue to be impacted by the weak economic conditions in the T&T economy.

In particular, the construction and property development areas will reflect this slowdown, while trading, which accounted for 84 per cent of revenues and almost all of the operating profits in the last quarter, should remain relatively stable.

Synergies from the acquisition of Hand Arnold should continue to provide cost benefits in the coming quarters.

The pending merger of Superpharm, Smith Robertson and Company with Agostini’s could further improve the group’s efficiency as it focuses more on the core areas of pharmaceuticals and personal care.

Additionally, with the disposal of loss-incurring Agos Lighting, the group is anticipated to show improved profits this year.

Based on the group’s estimated combined turnover of $1.2b and profits after taxation of $60m after the acquisition, EPS should be around $1.02 for the year.

At a share price of $7.50, the stock is trading at a forward P/E of 7.5 times as compared to its five-year average P/E of 10.2 times.

The current market-to-book ratio of 0.96 is also attractive in comparison to the average of 1.41 over the past five years.

BOURSE revises its recommendation to a BUY.


DISCLAIMER: THE PICTURE PUBLISHED WITH STORY ABOVE DOES NOT NECESSARILY RELATE TO THE ACCOMPANYING STORY-CITADEL LIMITED.