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Jamaica Broilers sees strong Q2 on ethanol expansion

IT was only one year ago that Jamaica Broilers Group Ltd (JBG) suffered a net loss of $120.92 million, led by its ethanol segment, as the most severe economic downturn in decades dragged down energy prices. Crude oil prices halved between June and October 2008, while ethanol fell 39 per cent. The Company was also affected by one-off events including a hurricane in the US Gulf, which delayed its regular shipment of grains, forcing it to purchase from a more expensive source. As the poultry division was struck with input prices that were 22 per cent higher, as well as a government-imposed 13 per cent ceiling on its selling prices, it saw its results decline.

At the same time, it was also a year ago that Stocks and Securities Ltd (SSL) assured investors that these results were better than they appeared at first glance, and were not necessarily a gauge for upcoming quarters. In fact, JBG’s poultry division

in particular performed remarkably well when compared to its US counterparts. More importantly, SSL reckoned that the Company was well positioned to improve its results in the quarters that followed, and despite a continuing challenging overall economy, JBG has done just that.

After last year’s second-quarter loss, JBG has posted positive earnings for every quarter that followed. And now, one year after its $0.10-per-share loss, it recorded earnings per share of $0.26 for fiscal Q2 2009/2010 and the segment that once weighed on its bottom line has become a top performer.

The Company’s gross profit increased by $616 million in the quarter, year-over-year of which the ethanol business contributed $480 million. The ethanol division also contributed the most (35.76 per cent) to Group total results for the second quarter, swinging to a profit of $234.74 million from a loss of $178.59 million.

For the second-straight quarter, the ethanol division’s results surpassed JBG’s core poultry segment, which earned $200.15 million in the latest quarter. Without a doubt, the Company’s ethanol division has grown a great deal since it commenced production in 2007. For the six-month period ended October 13, 2007, results from the ethanol segment stood at $20.19 million, compared with $565.5 million for the current half-year results.

The increase is in-part attributable to the Group’s US$36-million investment to construct the Port Esquivel, St Catherine ethanol plant. This included US$20 million for the first facility and US$16 million for the second which doubled the plant’s capacity to 120 million gallons per annum. Based on the current exchange rate of $89.58 per USD, the division has earned 17.56 per cent of the total investment during 6M 2009/2010 alone.

The additional capacity from the second facility allows JBG more flexibility as it can now take greater advantage of production not involving contracts. This means that the Group is in a position to jump on rising ethanol prices, which after remaining relatively unchanged for most of the year, have begun to inch upwards since September 2009. After averaging US$1.54 a gallon for the first three quarters of the calendar year, the price of ethanol on the Chicago Board of Trade climbed to an average of US$1.86 a gallon for the fourth quarter to date.

Ethanol is poised to continue to prove a valuable segment for the Group. At its Annual General Meeting held in October 2009, the Company suggested that it was leaning towards investments that earn foreign exchange. JBG currently earns about 30 per cent of its net profit in hard currency, and it has set a goal of increasing the proportion to 50 per cent.

The United States, which is a key market for JBG currently, has experienced a significant increase in ethanol demand in recent years. Ethanol consumption in the country soared to 6.8b gallons in 2007 from only 900 million gallons per year in 1990. To a large extent, this growth is owing to stipulations in clean air legislation, which currently include a renewable fuel standard requiring that gasoline distributed in the US contain a renewable fuel, like ethanol.

Furthermore, it has been reported in recent weeks that the US Environmental Protection Agency expects to make a decision in the middle of next year about whether to increase the permissible ethanol content in fuel to 15 per cent, from its current 10 per cent level. This would present a window of opportunity for JB Ethanol Ltd, which is able to export the ethanol it processes to the United States duty free under the Caribbean Basin Initiative.

JBG is a fundamentally sound Company, which has produced solid results across divisions.

The strategy to diversify its operations away from strictly poultry has proven very successful for the Group. With its expanded facility, the Company is even better prepared to take advantage of rising ethanol prices as the global economy recovers. This, coupled with a strong domestic footing in its Poultry and Feed and Farm Supplies, positions the Group to continue to produce strong results in upcoming quarters.

Shari DaCosta is a Research Analyst at Stocks & Securities Ltd. You can contact her at sdacosta@sslinvest.com.



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