In last week's article we suggested, in passing, that the Volkswagen emissions problem may have some negative fallout for its local dealer, Best Auto Ltd. Considering that Massy Motors has only a 50 per cent stake in that company, which comprises a relatively small part of its total automotive business, this event is not likely to affect that group to any significant extent.
In any case, most of the cost of the repair exercise would naturally fall on Volkswagen. In the short to medium term, the greater challenge is the potential for lost sales of that brand.
Of greater immediate positive significance was Massy's sale on September 22, 2015 of its 20 per cent stake in Banks Holdings Ltd to SLU Beverages Ltd, which is owned by Cerveceria Nacional Dominicana SA. In turn, CNDSA is controlled by the Brazilian beverages giant, Companhia de Bebidas Das Ame?ricas–AmBev.
SLU, which increased its stake in banks to 40 per cent, has since made a formal offer to buy the remaining shares in BHL at the same price of Bds$4.00 per share. The directors have received the formal offer and indicated that they will respond and give their recommendation to shareholders by October 19, 2015.
The sale of 13.1 million shares was executed at Bds$4.00, thus realising Bds$52.6 million or about TT$171 million. As at September 2014 the market value of this investment was TT$123.4 million. The profit on this sale will be included under "other income" in Massy Holdings Ltd 2015 accounts, which closed on September 30.
The sale of BHL could also have positive implications for Sagicor Financial Corporation, which owns 3,956,722 BHL shares or about 6.1 per cent of the total outstanding.
We turn now to Massy's third quarter results for the nine-month period ending June 30, 2015.
Massy's Q3 performance
Total third party revenues rose by 12.7 per cent to $8.97 billion from $7.96 billion in the comparative 2014 period.
Operating profit before finance costs advanced by a modest 1.4 per cent to $624.8 million from $615.9 million recorded in the previous period.
Although finance costs did decline by $1.8 million in the third quarter, the year-to-date figure registered at $63 million. This represented an increase of $29.1 million or 86.2 per cent greater than the 2014 figure of $33.8 million. This was mainly attributable to the $1.2 billion bond that was used to refinance short-term debt and to fund new acquisitions.
This movement pulled down operating profit to $561.8 million from the previous level of $582.1 million. In addition, the results from associates and joint ventures did not help matters; the contribution from these sources fell to $24.6 million from 2014's $35.1 million.
In 2014, the re-branding exercise pulled down profits by $59 million to $558.2 million. In the current period, this line item was a modest $313,000 which enabled Massy to report a pre-tax profit of $586.1 million; this compares favourably with the $558.2 million reported for the 2014 period.
After allowing for taxation and minority interests, the net profit attributable to shareholders came in at $415.9 million versus $396.3 million. This reflects a current EPS of $3.95 versus $3.74 previously.
Segment comments
Profit increases were recorded in both the automotive and industrial equipment and insurance divisions. Increasingly, Massy United insurance is tying in vehicle and auto sales into one package.
Despite higher revenues in the integrated retail segment, profits were lower. It is here we see the major effects of higher finance costs, which climbed to $27.7 million from $15.7 million. Profit margins were also squeezed, moving from 6.18 per cent in 2014 to 5.87 per cent currently.
Lower profits in the energy and industrial gases segment were largely attributable to reduced activity and prices.
Implementation delays pulled down profits at the ITC division. Meanwhile, the investments and other segments suffered from lower poultry prices in Barbados and the absence of the Huggins Shipping contribution.
Interestingly, third party revenues at its Trinidad operations increased to $4.47 billion (2014: $4.27 billion) while pre-tax contribution from that source declined to $410 million from $439.3 million. Higher profit levels were recorded in Barbados, Guyana and Columbia; in the case of the latter, albeit, from a low 2014 base.
Share price, dividends and prospects
Massy's share price closed on January 2, 2015 at $68.25. During that month a final dividend for 2014 of $1.39 was paid.
By February 5, the price had dropped to $64.00 and it further declined before ending at $63.00 on May 26, 2015. A tepid recovery started and the price closed at $64.26 on June 5, 2015. During June, shareholders received an interim divided $0.51, which was unchanged from the previous year.
Once again, the share price began slipping and was recently quoted at $62.50.
At that price, the annual dividend of $1.90 gives investors a yield of 3.04 per cent.
With substantially all the rebranding costs behind it and despite higher finances costs, the group should report a reasonable 2015 profit.
The higher costs of super and diesel fuels, announced in the 2016 Budget, could place a small damper on the sales of its current range of vehicles. On the other hand, the fortuitous sale of its Banks' shares, as indicated above, combined with any other miscellaneous items could provide a useful lift to its profits.
These developments suggest that its final dividend could be higher than last year's $1.39. Increasing its dividend would also improve its yield and, eventually, help restore its share price.
Lower finance cost boosts PHL's Q3 results
The tone of the Chairman's comments has shifted favourably, as follows: "Customer Service and satisfaction remain a major focus of management and represent our biggest opportunity for improved growth and profitability."
This change suggests that, even in the highly competitive food retail business and in a slow growth economy, which is likely to continue for some time, focussing on the right priorities can result in profit growth and improved returns to shareholders, including employees.
For the nine months to August 2015, PHL's revenues advanced by a modest 3.65 per cent to $723.2 million from $697.7 million in the 2014 comparative period. Even so, gross profit margins improved by 4.1 per cent to $261.5 million (2014: $251.2 million).
Higher restaurant operating expenses (up by 6.1 per cent) and administrative expenses (up by 2.8 per cent) restrained operating profit to $62.5 million. This was marginally higher than the $62.2 million reported for the 2014 period. The higher restaurant operating expenses reflect the costs of upgrading the TGI Friday's outlets at Price Plaza and Gulf City.
However, the biggest improvement was shown under net finance cost, which contracted to $6.36 million from last period's $9.15 million.
Resulting from this decline, pre-tax profit advanced by 5.8 per cent to $56.1 million from last period's $53.1 million.
Lower taxation of $14.98 million (2014: $16.8 million) saw the after-tax profit register at $41.16 million; this was 13.5 per cent greater than the $36.3 million recorded for the nine months to August 2014.
In 2014, there was $826,000 reversal of a previously recognised deferred tax asset, which contributed to a higher tax cost in that year.
EPS, including ESOP shares, improved from $0.583 to $0.661.
On the basis of these results, the interim dividend was increased from $0.15 to $0.16; this will be paid on October 19, 2015.
Share price, dividends and prospects
PHL's share price closed at $9.56 on January 2, 2015. Following the release of its 2014 results, the price advanced to $10.00 on March 18. It remained firmly at that price until May 28, 2015, when it weakened to $9.99. In early May, the final dividend for 2014 of $0.17 was paid.
For the next several months, the price ranged from $9.85 to $9.90.
At the higher price and using the 2015 calendar dividend of $0.33, the yield is 3.33 per cent.
On the basis of the trend in its performance, we can project a full-year EPS of $0.85. That estimate suggests that its final dividend could be $0.19. This would bring its total dividend for fiscal 2015 to $0.35 (2014: $0.32 and 2013: $0.27).
PHL has a healthy hoard of cash totalling $68.7 million (November 2014: $57.3 million). In addition, its current assets of $151 million comfortably exceed its current liabilities of $121 million.
Also, its retained earnings of $193 million are within striking distance of its total liabilities (current and long-term) of $224 million. Finally, its dividend pay-out percentage is about 40 per cent.
Traditionally, the company has grown faster by making acquisitions within its field of competence (the most recent being Subway).
Do these metrics suggest that PHL is building up its reserves in order to execute an appropriate purchase at a time of its own choosing? Might Linda's Bakery or another eligible target become part of its 2016 game plan?