Cargills investing massively in expanding brewery capacity

Boosting 50,000 hl. to 600,000

Cargills (Ceylon) PLC which entered the soft alcohol industry early last year by acquiring the McCallum Brewery is investing massively in expanding capacity from the present 50,000 hl per annum to 600,000 hl within 12 months with installation of new equipment already begun and the expansion due to be completed during the new financial year, the company’s chairman, Mr. Louis Page has announced in its just released annual report.

"The investment in this project is substantial and the cost of capital, overheads and depreciation will affect the company’s profits in 2012/2013. However, upon commissioning of the new plant we are confident the brewery would give a substantial boost to your group’s results with our brands emerging as market movers," he said.

He noted that their entry to this business ``stemmed from the opportunity arising from a distinct change in consumption pattern stimulated by rising disposable incomes.’’

Increasing tourist arrivals expected to hit the million visitors mark this year plus last year’s 22.5% growth in malt liquor production indicated what he called the ``timely nature’’ of their investment.

The Three Coins range which re-entered the market in September last year had been well received and had won excellent reviews. However limited brewing capacity was a major constraint. This was being addressed with a twelve-fold expansion within 12 months.

Cargills had funded significant investments in its new businesses with had already been funded with debt and the interest on this debt, the anticipated revival cost and related losses have been born by the company’s established businesses. Page expected the new businesses to show attractive returns from the first quarter of 2013/14.

Page reported that they will also be investing substantially in a new commercial bank, Cargills Agriculture and Commercial Bank, which is sponsored by Cargills and its parent, CT Holdings PLC.

"The re-development of the historic Cargills property in Fort into a 6-star hotel would be initiated in collaboration with internationally renowned partners. These investments will also be funded with debt which would result in an increased interest expense over the next two years and steps have been taken to effectively manage this debt burden," he said.

Cargills which owns the country’s leading supermarket chain has concluded a successful year ended March 31, 2012 with group revenue up 30% to Rs.48.26 billion and the group profit after-tax up 0.08% to Rs.1.09 billion.

Page has said that retail remained the mainstay of their business with the sector continuing to outperform itself year-on-year with both Cargills Food City and its smaller variant, Cargills Food City Express, enjoying solid same-store growth with improved profit.

"Our expansion drive remains steady and focused towards meeting the mounting consumer demand from regional Sri Lanka," he said.

Despite challenging market conditions of spiralling fuel prices and increased electricity tariff, the retail performance remained robust with the group confident that its unique brand proposition of delivering quality at the most affordable prices anywhere in the island would enable the company to retain its market leadership position in a growing industry.

"The 100 new outlets program initiated in December 2009 is on target with 31 new outlets opened in the year concluded. The construction of the ‘Retail Mall Project’ in Jaffna is also keeping good time with the property due to open its doors do the public in mid-2013," Page said.

In the fast moving consumer goods (FMCG) industry, Cargills manufacturing business had posted 68.7% revenue growth with Magic ice cream doing particularly well with a sharp increase in both sales and profits.

Their meat products had also enjoyed steady growth in revenue despite tighter margins attributed to pressure from competition with the company confident that this business would reap the benefits of a rising export demand and the rebounded hospitality industry.

The market demand for the Kist range of cordials, jams and sauces was also rising and Kotmale has reported a strong performance in its pasteurized and ultra heat treated flavoured milk range.

The group had made substantial investments in the dairy processing business with production and storage capacity added to their dairy ice cream plants. They were also investing in consolidating their dairy facilities in a single location.

Their entering into biscuits manufacturing with a plant acquired the previous financial year had been below expectation with losses from this activity weighing down the otherwise strong manufacturing performance in the year under review.

"The distribution strategy in the segment has been revisited and the company is focused on reducing its losses in 2012/2013 and breaking even in the following financial year," Page said.

He reported that increased rates of taxation payable by their manufacturing units which were previously exempted and higher interest cost of borrowings for their acquisitions had also impacted on profitability.

Shareholders would appreciate that the substantial rise in administration cost associated with newly acquired businesses would stabilize in the medium term and the growth in cost would be moderate in the future.

The directors have recommended a dividend of Rs.1.30 per share on top of an interim 70 cents paid in January maintaining the previous year’s dividend rate.

Cargills has a stated capital of Rs.130.7 million, reserves of Rs.4.6 billion and retained earnings of Rs.2.9 billion in its books. Total assets ran at Rs.24.85 billion and total liabilities at Rs.17.13 billion.

CT Holdings with 70% of the company is its major shareholder followed by Mr. V.R. Page with 6.43% and the EPF with 3.09%.

The Cargills share with a net asset value of Rs.34.07, up from Rs.31.07 the previous year, traded at a high of Rs.240 and a low of Rs.117 during the year under review. This compared with a trading range of Rs.253 to Rs.70 a year earlier.

The directors of the company are: Messrs. L.R. Page (Chairman), V.R. Page (Deputy Chairman/CEO), M.I. Abdul Wahid (MD/Deputy CEO), S.V. Kodikara, P.S. Mathavan, Jayantha Dhanapala, A.T.P. Edirisinghe, S.E.C. Gardiner, Sunil Mendis, Anthony A. Page, J.C. Page and E.A.D. Perera.

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