VMWM Research Department, August 19, 2014

Stock Analysis: GraceKennedy Limited (GK)

Price target : $62.75

Market Price: $59.50

Symbol: GK

52-Week Range: $53.50 - $63.00

Recommendation: BUY

Historical Financial Performance

Shares Outstanding: 332,330,340 units

Market Value of Shares Outstanding: $18,610,499,040
Financial Year End: December 31, 2013
Dividend Yield: 3.96% (2013)
Executive Summary: GraceKennedy (GK) was created on
February 14, 1922. Over the years since inception it has
garnered approx 50 subsidiaries and associated companies
around the world. For the financial year ended December 31,
2013 it had assets of approx $108 billion. GraceKennedy is a
conglomerate with 3 main operating segments: GraceKennedy
Foods (GK Foods), GraceKennedy Financial Group (GKFG) and
Hardware and Lumber Limited (H&L). GK has generated the
majority of its pre-tax profits from the Money Services
subsidiary followed by the Food Trading segment over the last
5 years.
th

Company Overview: GK is the 4 largest locally domiciled

listed company by market capitalization. It has several
operating segments with operations across the Caribbean,
Central America, North America, Europe and Africa. Therefore,
it has a diversified geographical revenue stream. GK continues
to execute on its plans to increase revenues generated outside
of Jamaica.
GK Foods operations include businesses that manufacture
food and external suppliers. The segment also manufactures
rd
and distributes 3 -party brands domestically and
internationally.
The GKFG segment is composed of Commercial Banking,
Remittance, Insurance Brokerage, General Insurance, Cambio
and Payment Service businesses.
H&L is a retailer and wholesaler of building material and
agricultural products. This segment generates 100% of its
revenue in Jamaica through its 10 Rapid True Value locations
and 6 Agro Grace Retail Centres located throughout the island.

Net
Income
(J$M)
EPS ($)
ROE (%)
TTM P/E
(x)
Dividend
Yield (%)

Q1 Mar
31, 2014
833

Profit and Loss Summary

Q1 Mar Change YE Dec
31, 2013
(%)
31,2013
689
20.90
3,222

YE Dec
31,2012
3,479

Change
(%)
-7.39

2.51
3
2.50
5.54

2.06
3
2.25
4.46

21.84
11.11
24.22

9.65
11.96
5.70

10.41
12.76
4.80

-7.30
-6.27
18.75

1.24

1.48

-16.22

3.96

4.00

-1.00

Outlook: Our outlook on GK is positive for the long-term despite possible nearterm headwinds. GKs expansion into foreign markets should bode well for it in
the medium- to long-term. The negative impact of factors such as currency
fluctuations, high energy costs and a slow growing local economy could be
mitigated by foreign expansion. The major pre-tax profit generating units have
shown consistent growth over the past 5 years. The sale of First Global Financial
Services to Proven Investments Limited effective May 30, 2014, in a transaction
valued at over $3.05 billion should boost the Groups cash position. The
proceeds from this transaction, as indicated by GK, are slated to be used to
strengthen and expand First Global Bank and GK Groups financial services
regionally.
Projections and Valuation: We have compared the average P/E multiple and P/B
multiple that GK has traded at over the past five years to arrive at a valuation.
Also, we have reviewed the average
P/E of its peers, for which GK trades
at a premium but, we view this as
TTM P/E: 5.54x
warranted given the strength of
GKs balance sheet. Given its
P/B: 0.55x
longstanding listing history and
stability we view the historical P/E
Book Value per share:
comparison as an appropriate
$102.00
methodology. For 2013, GK had an
Enterprise Value of $308,763,000,
EV: $308,763,000
which we believe significantly
undervalues the Group given its
cash and investment holdings of over $30 billion. However, ROE and ROA have
been declining marginally over the last 3 years. This could weigh on the price
multiple investors are willing to pay for the stock.

1
Shares offer attractive long-term appreciation potential from current prices. Would expect shares to outperform the market over a longer-term horizon and longterm investors can buy at current prices.
2
As at August 19, 2014
3
ROE for the first quarter ended March 31

VMWM Research Department, August 19, 2014

Stock Analysis: GraceKennedy Limited (GK)

Price target : $62.75
Dividend Timetable
Payment date
Dividend Per Share ($)

Market Price: $59.50

52-Week Range: $53.50 - $63.00

2014
September 30
0.78

April 30
0.70

December 11
0.70

2013
September 30
0.78

Recommendation: BUY

March 27
0.70

2012
December 18
0.70

Over the past 4 years GK has made three dividend payments per year. The next dividend is expected in or around December 2014. We expect the
dividend to be in line with the previous payments at a level of $0.70 per share.
Management and Corporate Governance
The Board of Directors has a prudent structure with the roles of CEO and Chairman being separated. However, it has fewer than 60% of its
members being independent, below the recommended standard of 75%. Executives have important areas of expertise which is ideal for a company
with GKs size and diverse business segments. The expertise of the members of the Board is balanced, comprising members in the areas of Finance,
Mergers and Law, amongst others.
Directors
Gordon V. Shirley, OJ
Donald G. Wehby
Frank A. R. James
Courtney O. St. A. Campbell, JP
Michael K.A. Ranglin
Joseph P. Esau
Mary Anne V. Chambers
Parris Lyew-Ayee, Jr
Everton L. McDonald
Gina M. Phillipps Black
Douglas R. Orane, CD, JP
G. Raymond Chang, OJ

Experience
Chairman of GK. Chairman, President & Chief Executive Officer of the Port Authority of Jamaica
CEO, GraceKennedy Group
GK Group, Chief Financial Officer
CEO, GraceKennedy Financial Group Division
CEO, GK Foods Division
Consultant on new project financing and mergers and acquisitions
Former Ontario Cabinet Minister (Canada), Retired bank executive
Director of Mona GeoInformatics Institute and Senior Lecturer at UWI Jamaica
Financial Consultant and retired Public Accountant
Attorney-at-law and partner in the law firm, Myers Fletcher & Gordon
Retired company executive
Director of CI Financial Corporation

Top 10 Shareholders
Top 10 Shareholders
NCB Insurance Co. Ltd. A/C WT109
GraceKennedy Limited Pension Scheme
Luli Limited
National Insurance Fund
Sagicor Pooled Equity Fund
Xaymaca Limited
Douglas Orane
Michele Marie Stewart
FCIB (Barbadoes) Limited A/C C1191
Jamaica Producers Group Limited
TOTAL

Number of Units Held

18,137,652
15,064,157
14,874,208
13,930,113
13,165,608
9,063,461
6,807,116
6,565,572
6,367,499
5,242,550
109,217,936

Percentage Held (%)

5.44
4.51
4.46
4.17
3.95
2.72
2.04
1.97
1.91
1.57
32.74

VMWM
MWM Research Department, August 19, 2014

Stock Analysis: GraceKennedy Limited (GK)

Price target : $62.75

Market Price: $59.50

52-Week Range: $53.50 - $63.00

Recommendation: BUY

SWOT Analysis
Strengths

Diversified revenue stream across products, services,

geography and currencies

1/3 of revenue generated overseas (36% in 2013

2013)

Strong brand recognition locally

Strong capital base

Rapid growth in Foods division in Continental Europe and

Africa
Opportunities

The REIT market provides further revenue diversification

Energy project collaboration with the University of the

West Indies could reduce energy costs

Expansion in new markets such as the North America

American
west coast and Russia

Growth in the financial services segment regionally

Weaknesses

The majority of revenue is generated in one

on economy, which has been
struggling (Jamaica)

The majority of pre-tax

tax profits is generated in one subsidiary, ie
Money Services, so weakness in the rest of the group can significantly
impact profits

Threats

Continued rapid depreciation in the Jamaican dollar,

dollar the local and
functionally currency of the GK Group

Decline in local consumers disposable income as a result of inflation

Low barriers to entry into the foods market

Impact of high energy costs on operating margins

Saturated Foods business segment in Jamaica with limited scope for

growth

Ratio Analysis
Risk: Over the past 6 years GK has been reducing its balance
sheet risk by reducing its debt. Its debt levels have stabilized at
approx 30% since 2012. Debt, as at December 31 201
2013, was
approx $10 billion. However, GK had cash investments in
excess of $29.1 billion (excluding the sale of FGFS
FS for approx $3
billion). Therefore, GK should be able to easily meet long
long-term
and short-term debt obligations. GKs financial
cial risk remains
relatively low given its existing cash and earning potential.
Given the diverse nature of the business, this could add
stability to cash flows. The sale off FGFS should decrease market
risk even as GK reduces its exposure to the financial market in
Jamaica, diversifies its revenue
evenue stream into a REIT and
strengthens the financial position of FGB.
Segment performance share of results: As with the historic
performance, Money Services continued to dominate pre
pre-tax
profit generation for the Group. Food and Trading has become
the second largest contributor to pre-tax
tax profits and
and, more
notably, has shown the strongest growth in share of results.
GKs planned expansion in Continental Europe and Africa could
propel further growth in the segment going forward. GK Foods
produced a 41% increase in pre-tax
tax profits in 2013, aided by
significant outperformance in Dairy Industries (Jamaica)
Limited, GraceKennedy Ontario Inc and Grace Foods UK
Limited. Banking and investments has lost share over the last 3
years and is likely to decline as a percentage of the total even
further with the sale of FGFS. However, over the long
long-term the
REIT business could compensate for the decline.

Debt/Equity
80.00%
60.00%
40.00%
20.00%
0.00%
2007 2008 2009 2010 2011 2012 2013 2014

Pre-tax
tax Profit Contribution
60%
Food Trading
50%
40%

Retail & Trading

30%

Money Services

20%
10%

Banking &
Investment

The growth in the African segments revenue is significantly

0%
Insurance
higher than all other geographical segments. However, the
2009
2010
2011
2012
2013
revenues are growing from a smaller base so it would tend to
-10%
be easier to increase revenue. The growth in the North
American and European geographical segments disclosed in Jamaican dollars is aided by the depreciation of the Jamaican dollar. In 2013 the Group

VMWM
MWM Research Department, August 19, 2014

Stock Analysis: GraceKennedy Limited (GK)

Price target : $62.75

Market Price: $59.50

52-Week Range: $53.50 - $63.00

Recommendation: BUY
generated 36% of revenues outside of Jamaica. Over 85% of revenue generated outside of Jamaica was generated by
b the Foods division. All
geographical regions recorded growth in revenue in 2013
2013, lead
by the 91% growth in the African operations. Over the past 5
years the portion of revenues being generated outside of
Jamaica has been steadily increasing, moving from 30% in 2009
50,000,000
to 36% in 2013.

Revenue by Segment

Revenue ($)

30,000,000

Jamaica

20,000,000

Europe

10,000,000

North
America

2009 2010 2011 2012 2013

Return/Margin
20.00%

12.00%
10.00%

15.00%

8.00%

10.00%

6.00%
4.00%

5.00%

2.00%

0.00%

0.00%
2007 2008 2009 2010 2011 2012 2013 2014
ROE

ROA

Operating profit margin

Net Profit Margin

Margins

Profit margins
argins have declined from their 2007 levels and aappear
to be stabilizing at current levels. Going forward we do not
expect much margin expansion as the products do not
command enough differentiation from competitors. However,
they have recovered from the depressed levels of 2008. Given
GKs consistent growth in revenue at a Compounded
ompounded Annual
Growth Rate (CAGR) of 4% over the past 5 years, increased
profits over time are possible, even with slightly contracting or
flat margins. GKs plans for higher energy efficiency could
increase operating margins going forward. GK has produced
lower ROE and ROA in recent times, down from the 2007
highs. The decline in ROE and ROA has taken place because Net
Income growth has failed to keep pace with the growth of the
Groups equity and assets. The highest growing geogra
geographical
regions in terms of revenue generation are Europe, North
America and Africa with growth rates of 8%, 9% and 163%
respectively.

40,000,000

ROA/ROE

Revenue generation by all segments has been increasing since

2011 in all geographical locations in which the Group operates.
Jamaica still makes up the lions share of GKs
s revenue.
However, the growth in the Europe and other non
on-Jamaican
segments is significantly higher than in Jamaica. Europe and
North America recorded growth of 19% and 16% respectively
compared to Jamaicas 6% growth for 2013. Given the current
historical growth rates we expect that, over time
time, revenue
generated in non-Jamaican segments could overtake Jamaican
revenue in the long-term. This would augur well for GK as it
would reduce revenue reliance on any single geographical
region.

VMWM Research Department, August 19, 2014

Stock Analysis: GraceKennedy Limited (GK)

2

52-Week Range: $53.50 - $63.00

Recommendation: BUY

10-Jul-14

10-Jun-14

10-May-14

10-Apr-14

10-Mar-14

10-Feb-14

10-Jan-14

10-Dec-13

10-Oct-13

10-Sep-13

10-Nov-13

GK

64
62
60
58
56
54
52
50
48
10-Jul-13

GKs stock price has traded in a range of $53.50 and $63.00

over the last 52 weeks. This range indicates a 16.4%
disparity from high to low. The stock is currently near the
low end of this range which, in addition to our price target,
would indicate that the stock price is positioned to move
higher in the medium-term. The past 52 weeks indicate that
purchasing the stock at around $54.00 should be an ideal
entry point, given that the stock has shown support at and
around that price level several times throughout the past
year. That entry price indicates an expected 16% price
appreciation to our price target.

10-Aug-13

Market Price: $59.50

Price ($)

Price target : $62.75

Valuation: We used an average of the P/E (6.12x) and P/B

(0.61x) for the past 5 years to arrive at fair P/E and P/B
ratios to be expected from the Company. This multiple is
then compared to expected earnings to arrive at a suitable
price target. Also, we have reviewed the average P/E of GKs
peer group of 4.94x for which GK trades at a premium.
Given its longstanding listing history and stability we view the historical P/E comparison as an appropriate methodology. Based on our price target
of $62.75, the stock is currently undervalued by approx. 5%. We believe our valuation is conservative given GKs improving balance sheet, segment
mix and operating performance and over the long term could surpass our target.
For 2013, GK had an Enterprise Value of $308,763,000, which we believe significantly undervalues the Group given its cash and investments
holdings of over $30 billion. However, ROE and ROA has been declining marginally over the last 3 years. This could weigh on the price multiple
investors are willing to pay for the Company.
We view the dividend discount model as unsuitable given the relatively low dividend yield, which is warranted as it leaves enough cash on the
balance sheet to allow for large acquisitions. The Free Cash Flow model is not suitable given the high uncertainty of future cash flows as a result of
the cash requirements of the different segments.

Conclusion: We view this stock as a BUY at its current price, given geographical, product and segment expansion. The Groups strategy of reducing
its exposure to the repo market and Government of Jamaica securities with the sale of First Global Financial Group is a positive for the long-term.
Given the Groups past valuations we have arrived at our price target, assuming the stock deserves at least a P/E price multiple of 6.12x given its
strong and improving fundamentals.

Disclaimer: This Research Paper is for information purposes only. The information stated herein may reflect the opinion and views of VM Wealth Management in relation to market conditions and does not constitute any
representation or warranties in relation to investment returns and the credibility of the sources of information relied upon in the preparation of this report, without further research and verification. Before making any
investment decision, please consult a VM Wealth Management Advisor.