For the financial year (FY) ended December 2020, Caribbean Cement Company Limited earned net profits of $3.2B which represented an increase of 69.7% or $1.3B when compared to the $1.9B in profits the company generated in the prior FY. The improved profit outturn came largely as a result of higher volumes sold and cost containment measures which improved gross and operating margins. The performance over the current period was also influenced by lower financial expenses amidst a lower debt stock. The company’s earnings per share (EPS) for the year was $3.76; up from $2.21 in the 2019 FY.
CCC generated total revenues of $20.1B for the 2020 FY; marking a 13.2% increase from the $17.8B generated the year before. The management team outlined that the higher sales were attributable to the greater local demand coupled with the company’s increased capacity to supply the market. During the December 2020 quarter, the company earned $5.0B; 17.7% higher than the fourth quarter of 2019. The improved sales revenue for the quarter occurred against the background of preliminary data by the Planning Institute of Jamaica (PIOJ) indicating the construction industry grew by 6.2% quarter-over-quarter. The PIOJ indicated that the growth in the construction industry for the three months to December 2020 was particularly driven by increased capital expenditure on civil engineering activities by the National Works Agency due to expenditure on the South Coast Highway Improvement Project and the Urban Development Corporation. The accompanying graph shows CCC’s quarterly revenues and the quarterly growth in the construction industry. Of note, the PIOJ indicated that the construction sector fell by 0.8% for the 2020 calendar year; making it one of the least affected parts of the economy. CCC’s gross profits improved as well, growing year-over-year (y-o-y) by 26.4% as a result of higher sales volumes and gross margins improving from 40.7% in 2019 to 45.4% in 2020.
Figure 1: Quarterly Sales ($B) & Growth in Construction Industry
As at December 2020, the total asset base of the company stood at $26.3B or 4.9% below the asset base as at December 2019. This came mainly due to a reduction in the value of CCC’s property plant and equipment period-over-period. During the review period the Company invested capital expenditure of $778.0M whereas depreciation charges of $1.5B were brought against assets. Of note, the company’s cash position fell by 5.8% to close the year at $513.1M. Total assets were funded by liabilities of $14.9B and equity of $11.5B. Total liabilities as at the close of the year represented a decrease of 21.3% when compared to December 2019. The reduced liabilities were driven mainly by the company paying down its debt stock by to $6.7B. Most notably, CCC retired $4.9B of its variable rate USD loan owed to CEMEX Espana during the 2020 FY. As such, the total debt stock for the company finished the year at $6.7B compared to $12.3B the year before. CCC’s debt to equity ratio stood at 0.6 times for 2020, down from 1.5 times as at December 2019. The accompanying graph demonstrates the trend in the company’s debt stock and debt to equity ratio. Shareholders’ equity increased by 38.8% to close the period at $11.5B. The improvement in equity primarily represented an increase in accumulated net profits which grew to $1.9B compared to a small accumulated loss the year before.
Figure 2: Trend in Debt Stock (J$B) and Debt to Equity
CCC has not paid a dividend in recent years due to substantial accumulated losses. However, company has successfully wiped out these accumulated losses and has a positive reserve of distributable capital. However, pursuant to CCC’s agreement with TCL, to repay outstanding preference shares, it is required to pay an amount equal to at least 43% of the USD equivalent of its profits. Additionally, the preference shares would command a rate equal to or higher than any dividends declared on the ordinary shares. Consequently, for the purposes of the projections in this analysis, it is assumed that the company will be conservative in its dividend policy and opt to retain all of its profits.
Forecast and Valuation
Data provided by the PIOJ indicated that for 2020 the local construction industry contracted by only 0.8% and experienced two quarters of growth during the year. Notwithstanding, over the same period, CCC grew its revenues by 13.2% which was driven by the company’s relatively strong third and fourth quarter revenue outturns. Against the background of the country’s anticipated phased loosening of coronavirus related restrictions as vaccinations are rolled out across the island, growth in local construction activity, and by extension the company’s top line is expected to be buoyed by an albeit limited economic recovery. In particular, construction activity is likely to be supported at least in part by government capital expenditure initiatives such as those outlined in the 2020/2021 budget. These include, among other things, a $17.7B allocation to the Southern Coastal Highway Improvement Project (SCHIP) under the Ministry of Economic Growth and Job Creation. Additionally, as the economy recovers, a general pickup in activity is anticipated to carry through to the construction sector from private spending.
Fig 3: CCC Historical and Projected Revenues (J$B)
Against this background, CCC’s revenues are projected to increase by 6%, the compound annual growth rate of the company’s revenues over the past five years, and close at $21.3B for the 2021 year (FY). The trend in revenues and the 2021 projection are depicted in Figure 3. Applying a net margin of 17%, net profit is forecasted to be approximately $3.6B for the 2021 FY; a potential EPS of $4.25. The projected net margin for the 2021 FY has a 1% premium to that of the 2020 FY’s net margin, reflecting the anticipated decline in interest costs that will emanate from the company repaying significant portions of its debt during the 2020 FY. As the March 10, 2021, the stock closed at a price of $66.74 per share. This price represents a trailing price-to-earnings ratio (P/E) of 17.8X. At the same time, the price-to-book-value (P/BV) ratio of the company stood at 4.9X.
Applying a forward P/E ratio of 18.0X, in line with how the stock has been recently trading, to the projected EPS, the stock is projected to trade as high as $76.45 per share at the end of the 2021 FY. This is a potential capital gain of 10.6% compared to the recent close price of $69.14.
The company’s equity base is estimated to be approximately $15.1B as at the close of the 2021 FY or a book-value-per-share (BVS) of approximately $17.8, assuming full reinvestment of net profits over the period. Applying a forward P/BV ratio of 4.9X, in line with how the stock has been recently trading, to the projected BVS, the stock is projected to be approximately $87.19 per share at the end of the 2021 FY. This is a potential capital gain of 26.1%. The following charts show the trend, average and current P/E and P/BV ratio for the company.
An analysis of the financial statements and forecast of the estimated earnings growth suggest that the share price is likely to appreciate to between $76.45 and $87.19 by the end of the 2021 FY. The forecast trading prices suggest a potential total return of between 10.6% and 26.1% with respect to the last traded price. Against this background the stock is recommended as a BUY.
 Data from PIOJ for the 3 Months to December 2020: https://www.pioj.gov.jm/wp-content/uploads/2021/02/Infographics-QPB-25_3-Oct-Dec-2020_Feb-2021.jpg
 Reasons for the increase in the Construction Sector: https://www.pioj.gov.jm/wp-content/uploads/2021/02/DGs-QPB-25_3-Oct-Dec-2020-Speaking-notes-FINAL.pdf#page=5
 Details on Preference Shares owned by TCL: https://www.jamstockex.com/wp-content/uploads/2021/02/Caribbean-Cement-Co.-Ltd-Audited-Financial-Statement-Year-ended-Dec.-31-2020.pdf#page=57
 Spending allocated to infrastructure in the 2021/2022 budget: https://jis.gov.jm/31-1-billion-infrastructure-programme-to-drive-jobs-economic-activity/