Carbacid Investments Limited announced their unaudited results for the period ended 31st January 2015 on 6th March 2015.
Recommendation: HOLD, Target Price 24.7 (Downward revision from 33)
Poor Top Line Performance: Turnover Declined by 13.4% to KES 410 Million while Gross Profits shaved 14% to KES 252 Million
Carbacid Limited’s primary business of mining and sale of purity food grade carbon dioxide gas was negatively impacted by lower demand particularly in the export regions of Central and East Africa. As a result, the gross profit margin dipped to 61.5% (61.9% HY 2014).
Margin Compression as Operating Profits drop 16.7% to KES 215.98 Million (KES 259 Mn HY14)
Despite a marginal 5.8% hike in operating expenses (Opex), the EBIT margin fell to 52.7% (54.76% HY14). The bottom line was resuscitated by improved investment returns with gains on equity investments shooting up 72.2% to KES 27.4 Million (KES 15.9 Million HY14) and finance income up 36.4% to KES 53.9 Million. Investments are carried out through subsidiary companies – Goodison Twenty Nine Limited & Goodison Forty Seven Limited. They consist of quoted equities on the NSE, real estate and corporate bonds as well as fixed deposits (finance income). Consequently, pre-tax earnings shed a minor 5.9% to KES 298.9 Million yielding a strong pre-tax profit margin of 72.9%. Profit after tax stands at KES 221 Million (KES 235 Million HY14) culminating in Half year EPS of KES 0.87 .
From a macro perspective, we anticipate gross profit margin creation over 2H15 as the current ease in pump prices will lower transportation costs for the company, whose main distribution is via a fleet of tankers, while a reduction in power costs should also supplement operational efficiency. Both of the above have been cited previously by management as crucial constraints to the CO2 business in addition to new higher mining royalties. The company remains fairly priced trading at 12.5x earnings with its price-to-book (p/b) at 3.18x, below the manufacturing industry average of 7.02x but above its listed competitor BOC Gases Limited (NSE: BOC) trading at a p/b of 2.01x. Return on equity (ROE) is strong at 26.59%.
While investment income remains vulnerable to market dynamics, the decision by the board to refrain from offering shareholders interim dividend as has been the norm (KES 0.40 interim dividend HY14) should translate to a boost in investment income if the cost savings are well utilized. We remain optimistic that the favorable macro-economic climate and ramp up in manufacturing capacity of carbonated soft drinks in Kenya will aid recovery of the CO2 business over 2H15. However, as a small cap company, (Market Cap KES 6.1 Billion, USD 66.8 Million) earnings growth is paramount to support an investment case.