1 - AMCL (Revenue Composition)
2 - NML (Revenue Composition)
Sreshtha B Tewari
Economic growth is always the centre of attention of a country.
This is because such growth is a necessary ingredient for
higher incomes and living standards.
This article seeks to explain three indicators of economic
growth and their possible impact on some of the companies
listed on the exchange. The indicators to be discussed are
gross domestic product, inflation and unemployment.
The national output is measured by a countrys gross
domestic product (GDP). The GDP is basically the value of
all the finished goods and services that have been produced
within the country.
Therefore, comparisons of growth in GDP over similar periods
would indicate the health of a countrys economy. Real
GDP discounts inflation while nominal GDP only reflects changes
In 2005, Trinidads real GDP grew by seven per cent driven
by the energy sector. Partial indicators for this year all
point to even faster economic growth as the energy sector
remains buoyant while the momentum of the non-energy sector
is aided by high government expenditure. One of the main drivers
of the non-energy sector is construction.
The phenomenal growth in construction activity supported by
government spending on infrastructural development and the
erection of office and residential buildings should result
in improved performance of the companies operating within
For example, Trinidad Cement Limited (TCL) should ideally
prosper from the booming construction activity. In fact, reports
are that its plant is currently operating at capacity in order
to satisfy demand. Unfortunately, expenses stemming from problems
experienced in its first quarter have negatively impacted
that periods results.
The construction boom should also have a positive effect on
construction related items such as aluminium, steel, PVC pipes
Hence companies which engage in the manufacture of such materials
such as Abel and Caribbean Roof Tile Company stand to benefit
from better revenues.
Therefore as some of these companies fall under the manufacturing
arm of Ansa McAl (AMCL), it suggests continued healthy earnings
in that division which no doubt bodes well for the Group.
In fact AMCL has already reported stellar results for its
year ended 2005 in which its bottom line saw a 45 per cent
increase. Its manufacturing segment contributed approximately
34 per cent to total revenue (See Figure 1).
In addition, companies involved in other construction related
materials such as home finishings and paints should also reap
benefits from the construction boom. Hence, better results
should be expected from companies such as Berger Paints and
Penta Paints is part of the Ansa McAl group so any increased
revenues would benefit that conglomerate. Berger Paints, however,
is a company with a small capital of which 75.91 per cent
is held by substantial interests. Hence, because of the illiquidity
of the share, the price would not be easily influenced by
In any event, at Wises forecasted EPS of seven cents
and the current price of $3.40, this share is trading at an
unusually high price/earnings ratio of 49 times.
While the growth in GDP is a favourable statistic for companies
operating in this sector, it could also result in limitations
being placed on companies if they are not able to supply the
For example because of the construction boom and the supposed
shortage of cement, there have been threats by
Government to reduce tariffs on cement making imported cement
a viable alternative.
In Jamaica, the government had to reduce tariffs previously
in place in order to quell the severe shortage that plagued
the island. TCL, however, is vehement that it is able to supply
its respective markets and is not bothered by the probability
of Government importing cement to support demand.
A booming economic environment, however, makes it difficult
to contain inflationary pressures.
Inflation is the rate at which the general level of prices
of goods and services are rising. Headline inflation includes
the impact of food prices.
In comparison to the beginning of the century, when the domestic
economy saw headline inflation averaging approximately 3.5
per cent from 2001 to 2003, 2004 saw this figure rising to
5.6 per cent and to 7.2 per cent in 2005. The main driver
for this was the rise in food prices which averaged 10.3 per
cent from 2001 to 2003 but moved to 20.6 per cent in 2004
and 22.6 per cent in 2005.
The upward spiral of food prices began in 2004 owing to flooding
in the last quarter of that year. The floods came at a time
when the buoyant economy was boosting domestic demand.
The increasing demand in the face of declining capacity therefore
resulted in the rise in headline inflation. Large price increases
were also witnessed in the pharmaceutical industry.
The increase in prices because of demand should translate
to increased revenue for companies with a pharmaceutical arm.
For example, Agostinis revenues are usually driven by
its pharmaceutical sector; hence there should be continued
growth in this sector given the demand and the rising prices.
The grocery and pharmaceutical arms of the conglomerates should
also do well.
For example, Neal & Massys retail, distribution
and logistics sector is usually a major component of revenue
contributing more than 54 per cent to third party revenue
(See Figure 2) and more than 30 per cent to operating profit.
This, therefore, bodes well for the conglomerate as it should
experience increased revenue from the segment which should
translate into bigger profits.
In addition, Neal & Massys target is to grow at
least 15 per cent each year and the current environment makes
this target achievable.
The robust economy has led to low levels of unemployment resulting
in shortages of both skilled and unskilled labour.
According to a report in Business Day, analysts have said
that the labour shortage is as a result of the construction
boom and greater job benefits on foreign cruise ships.
Labour shortages could force companies to increase salaries
and so hike their operating expenses and ultimately eat away
at earnings. Such shortages have already been affecting companies
such as Prestige Holdings Ltd which cited the labour shortage
as having an effect on its performance. Rising demand in labour
could lead to companies having to spend more on staff costs
and so result in a hike in expenses.
There is, however, evidence that technological improvements
in the manufacturing sector has led to a reduction of manual
labour. It is important to note, though, that investments
in information technology would initially impact on operating
For example, Unilever Caribbean Ltd has had a hefty increase
in its operating expenses in part to ongoing information technology
improvements. However, such improvements are supposed to aid
efficiency and should eventually add value to the company
as it enables workers to produce more output with the same
amount of resources.
Overall, the positive direction of the performance indicators
is favourable for the companies.
Growth in profit for such companies should translate to the
lowering of price/earnings multiples providing further opportunities
for attractive buys on the market.
One, however, has to be cognizant of the impact of inflation
and the ability of companies to take advantage of the purchasing
power of consumers.
Sreshtha B Tewari, research analyst, West Indies Stockbrokers
Ltd. Telephone: 625 9473 ext. 2225.
E-mail: [email protected]
Source of Economic Data: Central Bank of Trinidad & Tobago
Monetary Policy Report (April 2006)