Global Investment House – Equity Update Research Report on the General Trading & Food Processing Company (TRAFCO) stock- General Trading and Food Processing Company (TRAFCO) has emerged as one of the largest food companies in Bahrain. Since its establishment, the company is actively involved in developing the food industry in Bahrain mainly through acquisitions of similar lines of business. The strong focus on its various business segments, which are trading business, central markets and retail sales has helped the company to grow over the years both in terms of sales revenue as well as the bottom-line profits. Going forward, the company’s current expansion plans on the retail side of the business along with continuously exploring different investment opportunities in the region, such as Joint Ventures will allow the company to take on the future challenges facing the food trading and processing sector in Bahrain and in the region.
Keeping in line with the improved performance of TRAFCO and our expectations about its future potential, we have valued TRAFCO’s share price at 298fils. The stock currently trades at around 310fils, which implies that the value arrived at using the weighted average method is around 3.9% lower than the current market price. Currently, TRAFCO is trading at a price-earnings multiple of 12.24x its estimated earnings for the year 2006. Hence, we recommend a ‘HOLD’ on the stock with a medium term perspective.
Financial Performance FY-2005
TRAFCO’s total sales rose by a marginal 1.5% in 2005 as compared to the previous year. TRAFCO had total sales of BD24.87mn in 2005 as compared to BD24.51mn in 2004. It is worth mentioning that since 2002, the group reported increase in its revenue stream, growing by a CAGR of 12.3% over 2002-2005. This can be attributed to the change in strategies and the aggressive marketing campaign, which paid off rich dividends over the past few years. The improvement in the overall business profitability could have shown a much better picture but the unsatisfactory performance by the subsidiaries have hampered the overall bottom-line performance of the group.
The Group’s revenue stream is divided into four broad operational units, which are imported foodstuff, investments, dairy products and others (which includes Applebee’s restaurant and preparation and sale of sandwiches and beverages). Although, the revenue for the group is divided into four units, the investment revenue is shown separately as it is not the core business of the group. The imported foodstuff unit of the Group contributed around 63% of the total revenue for the year 2005 as compared to 58% in 2004. The imported foodstuff unit is the primary source of revenue for the Group. The other source of revenue for the Group is dairy products, which contributes about 33% of the total revenue for 2005 as compared to 38% in 2004. The Applebee’s restaurant and preparation and sale of sandwiches and beverages contributed about 4% to the total revenue, which is in line with the previous two years (2003 and 2004).
The net profit margin on the imported foodstuff increased from 4.3% in 2003 to 9.5% in 2005, whereas the other units reported a decline in profit margins. In 2005, the company reported a net profit of BD1.91mn, registering a growth of 13.2% over the previous year. As a result, the net profit margin of the company improved from 6.87% in 2004 to 7.66% in 2005. The net profit margin ratio for TRAFCO would have shown a different picture, if we exclude the investment gains for the year 2005. In that case, the net profit margin would witness a drop from 5.05% in 2004 to 4.26% in 2005. It is evident that the loss incurred from the subsidiaries and associates have hampered the overall performance of the Group. At the gross profit level, the gross profit declined by 12.1% to BD5.31mn in 2005 from BD6.03mn in 2004. As a result of a higher cost of sales, the gross profit margin declined to 21.34% in 2005 from 24.63% in 2004.
At the end of 2005, the total assets stood at BD28.20mn registering a marginal growth of 2.6% over the previous year. The growth in assets was primarily derived by their main business which accounted for about 35% of the total assets of the company at the end of 2005. The other investments, which mainly comprised of primarily quoted equity investments and some unquoted investments also formed one of the major categories of assets. The investment portfolio constituted about 38.9% of the total assets of the company in the year 2005. This ratio of investments to total assets has increased from 28.55% in 2003 to 38.92% in 2005, however, it has remained in line with the year 2004. In 2005, 70.9% of the investment portfolio is invested in the Bahraini capital market, 9.3% in the other GCC capital markets and the remaining 19.8% in unquoted investments. However, the total investment portfolio is more than their core business operations, which means that the company is exposed to the greater risk as gains from investment portfolio will primarily depend on the performance of the capital markets.
First Quarter Results – 2006
TRAFCO’s first quarter 2006 net profit dropped by 32.40% to BD0.501mn as compared to BD0.741mn recorded during the same period last year. The total revenue of the group also dropped by 10.2% to BD5.18mn in the first quarter of 2006 as compared to BD5.77mn during the same period last year. Although the cost of sales dropped by 5.5% during the first quarter of 2006 compared to the same period last year, the cost to sales ratio increased to 82.9% from 78.7%. As a result, the gross margin also declined from 21.3% in first quarter of 2005 to 17.1% in first quarter of 2006.
The imported foodstuff unit’s revenue dropped by 11.7% in the first quarter of 2006 as compared to the same period last year, which has dropped the overall revenue of the Group. Since the past few years, the Group has increased its investment portfolio due to the surging capital markets in the region, which has become an important source of income for the Group. In the first quarter of 2006, the investment income surged by 13.4% to BD0.52mn. At an operating level, the operating costs of the Group has dropped compared to the same period but it was not able to offset the overall drop in the Group’s revenue.
The total assets of the company stood at BD26.85mn at the end of first quarter-2006, representing a drop of 4.8% over the end of 2005. The drop in the asset base was mainly from the investment portfolio. The fair value of the investment portfolio dropped by 10.1% due to the declining capital markets. However, we believe that the capital markets will rebound in the second half of 2006, however, not to the extent seen in the year 2005. The total liabilities of the Group increased by 8.1% to BD9.59mn as compared to BD8.87mn at the end of 2005. The shareholders’ equity of the company was down by 10.8% to BD17.25mn during the period under review, which was mainly due to the payment made for dividends declared as well as the drop in the fair value of investments which was deducted from the reserves of the Group.
Growth Drivers
TRAFCO’s future objective is to concentrate on the existing business and further expand in the related business around the region mainly through joint ventures. Currently, the company is reviewing investment opportunities in the related business, both domestic and regional. The company has considered opening 2 new retail outlets in Bahrain with a total of 695sq.m. According to the management, one of the retail outlet will open in the third quarter of 2006 and the remaining one outlets will open in the fourth quarter of 2006. This two retail outlets will be an addition to the existing 5 retail outlets, bringing the total number of retail outlets to seven by the end of 2006. We expect sales growth of the group to be largely driven by its focus upon its key strategic business units and with the ongoing expansion plans by the group. In addition, we expect the subsidiaries of TRAFCO to perform positively but they will continue to remain in red for the current year 2006, as the signing of new contracts will kick in the financials from the year 2007. According to the management, the Group has no plans to sell the non-performing subsidiaries. We believe that the Group would show better results excluding the performance of their subsidiaries, which have affected the bottom-line performance of the group for the past two years.
The investment portfolio of the Group is not expected to generate exceptional returns for the coming year as the Bahraini market had dropped by about 9.1% at the end of 1H-06. This drop in the Bahraini market will affect the bottom-line performance of the Group as there will be a drop in the investment income. However, the outlook for food trading and food processing sector continues to look optimistic as the positive macroeconomic environment and the booming tourism sector should lead to improved demand for the food products. However, small size of the food market and intensifying competition is expected to limit growth opportunities in Bahrain.
TRAFCO at a Glance
Price July 31, 2006 Shares in Issue Market Cap 52-week price range
310 Fils 62,538,800 BD19.39mn 300-429 Fils
Year Revenue BD’000 Net Profit BD’000 EPS fils Book Value fils ROAE
P/E P/BV
2007 F 33,030 2,087 33.4 314.0 10.82% 9.29 0.99
2006 E 28,259 1,584 25.3 302.6 8.51% 12.24 1.02
2005 A 24,867 1,906 34.3 329.0 10.70% 12.25 1.28
2004 A 24,509 1,684 33.3 343.1 11.38% 12.57 1.22
Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in the Bahrain Stock Exchange as on 30th July 2006.
Source: TRAFCO and "Global’s" Estimates
Keeping in line with the improved performance of TRAFCO and our expectations about its future potential, we have valued TRAFCO’s share price at 298fils. The stock currently trades at around 310fils, which implies that the value arrived at using the weighted average method is around 3.9% lower than the current market price. Currently, TRAFCO is trading at a price-earnings multiple of 12.24x its estimated earnings for the year 2006. Hence, we recommend a HOLD on the stock with a medium term perspective.
