TPS Serena: Results Analysis -Half Year Ended June 2011

Kshs 000's	FY 2009 31-12-09	FY 2010 31-12-10	H1 2010 30-06-10	H1 2011 30-06-11
Revenue	3,889,365	4,462,614	1,785,452	2,113,639
Gross profit	858,906	1,108,018	394,059	430,426
Gross Margin	22%	25%	22%	20%
Profit before tax	519,689	692,933	215,621	264,709
Net Margin	13%	16%	12%	13%
Profit after tax	380,362	516,384	142,178	185,671
Earnings per share	3.32	4.39	0.96	1.36
Dividends per share	1.25	1.25	-	-

Change from prior year	FY 2009 31-12-09	FY 2010 31-12-10	H1 2011 30-06-11
Revenue	20%	15%	18%
Gross profit	24%	29%	9%
Profit before tax	57%	33%	23%
Profit after tax	70%	36%	31%
Earnings per share	58%	32%	42%
Dividends per share	-	-	-

Analysis:

TPSE revenues for the half year ended June 2011 rose by 18% compared to the same period in the prior year. Half year profits were up 31%.

TPSE’s overall performance has improved over the last 3 years, despite rising cost of operation arising from inflation in the region, as well the lingering effects of the global financial crisis and the impact it has had on the source markets for tourists.

The weakening shilling and huge increase in tourism numbers (media reports indicate that tourism arrivals are on course to surpass last year’s record) would likely translate into to a very strong half year performance.

The Ministry of Tourism launched a reclassification in March 2011 exercise based on the criteria laid out for the standardization of accommodation facilities. This means tourists will have access to more detailed information and thereby make informed choices about where to stay in East Africa. TPS Serena lodges and hotels are bound to benefit from the additional exposure.

While growth prospects for the company are good, the company faces significant threat from global hotel chains which are now eyeing East Africa: Marriot Hotels (one of the world’s most renowned hotel chains is constructing a hotel in Kigali, Rwanda that is scheduled to open in 2012). 

TPS Serena’s trailing P/E is 13.21 based on the September 22 closing price; Kshs 58. While this is would be a good valuation in normal market conditions, the P/E is high compared to that of other stocks listed on the NSE most of which are currently trading at sub 10 P/E ratios. 

Mumias Sugar: Results Analysis - Year Ended June 2011

Kshs 000's	FY 2009	FY 2010	FY 2011
Revenue	11,791,708	15,617,738	15,795,300
Gross profit	3,322,539	4,884,538	5,446,730
Gross Margin	28%	31%	34%
Profit before tax	1,193,161	2,179,874	2,646,575
Net Margin	10%	14%	17%
Profit after tax	1,609,972	1,572,383	1,933,225
Earnings per share	1.05	1.03	1.26
Dividends per share	0.40	0.40	0.50
Change from prior year	FY 2009	FY 2010	FY 2011
Revenue	-1.36%	32.45%	1.14%
Gross profit	-22.11%	47.01%	11.51%
Profit before tax	-24.92%	82.70%	21.41%
Profit after tax	32.63%	-2.33%	22.95%
Earnings per share	32.91%	-1.90%	22.33%
Dividends per share	0.00%	0.00%	25.00%

Mumias Sugar Company revenues grew by 1.14% to Kshs 15.8 in 2011 from Kshs 15.6 reported in 2010.  

Profit after tax rose by 22.95% to Kshs. 1.933 Billion.

The company’s performance has been improving over the last two financial years. While revenue growth between 2011 and 2010 was minimal the gross profit margin improved to 34% from 31% in 2010. The margin improvement reflects greater pricing power enjoyed by the company.

The steep increase in profit before tax indicates that Mumias Sugar is containing overhead costs. The net profit margin leaped from 10% in 2009 to 17% in 2011.

Mumias sugar has raised dividends by 25% to 50 cents a share. At the current share price of Kshs 6.10 (as of September 7, 2011), the dividend translates to a yield 8.20%.

The PE ratio is at an undemanding 4.84.

Outlook:

Global sugar prices are close to all time highs (currently USD 750 per tonne).  Sugar prices are expected to remain at this elevated level in the medium term. The high price, if maintained, should shield the Kenyan sugar industry from the threat of cheap sugar imports. Lower cost sugar producers in the COMESA bloc would prefer to export to other world markets should the high prices be sustained beyond January 2012 when restrictions on selling to the Kenyan market are lifted.

Mumias Sugar has diversification strategies in place to mitigate the potential losses from cheaper sugar in the region come 2012. Mumias already produces electricity which fetched Kshs 353 Million in net revenue in 2011. A water bottling plant is expected to be commissioned in September 30, 2011 and an Ethanol distillery with a 22 Million litre annual capacity by December 31, 2011.  

It is difficult to predict at this stage whether Mumias will withstand the potential influx of cheap sugar imports from 2012 onwards. The share is inexpensive on a PE, and price to book value basis (market capitalisation of Kshs 9 Billion versus shareholder’s equity of Kshs 14 Billion), however the significant competitive threat and uncertain earnings from its new product lines make it a speculative buy.