After spinning off its investment portfolio as a separate company, in the form of QWI Investments Limited in September 2019, Jamaican Teas Limited is making preparations to spin off its manufacturing arm into a separate company which might come to the market in an initial public offering (IPO).
In its extraordinary general meeting (EGM) notice posted to the Jamaica Stock Exchange (JSE) on Wednesday last, Jamaican Teas outlined that the board approved the sale of its manufacturing business to its subsidiary Caribbean Dreams Foods Limited (CDF) for the allotment of 100 per cent of its share capital, subject to shareholder approval at the EGM. This includes the inventories, finished products, raw materials, packaging and other related machinery and equipment. The EGM is set for October 27 which is the same day as its annual general meeting.
Companies Office of Jamaica documents reveal that CDF was incorporated on August 10 and has John Jackson and John Mahfood as directors with Cameron Burnet as the company secretary. Jamaican Teas owns 10,000 shares in the new subsidiary. Jackson and Mahfood are chairman and CEO, respectively, of Jamaican Teas.
Jamaican Teas listed on the Junior Market of the JSE on July 12, 2010 with its tax break expiring last year. It had six subsidiaries before CDF which were involved in real estate development, ownership of a supermarket and investments.
When questioned by the Caribbean Business Report about the spin-off, Mahfood responded, “In 2010, when Jamaican Teas Ltd was listed on the junior stock exchange its primarily focus was manufacturing. Since then, it has ventured into real estate development through H Mahfood & Sons Ltd and investment Services through QWI Investments Ltd. We believe that there are many individuals and institutions that would prefer to invest in a pure play manufacturing business as opposed to a diverse group. Therefore, listing the manufacturing business separately will provide this opportunity for investors.”
Though Mahfood noted that the final decision hasn’t been made on whether or not they will make a public offering for the shares in the new business, he did note that the company would go to the Main Market of the JSE if they do choose the IPO route. Jamaican Teas and its subsidiary KIW International Limited sold its share portfolios to QWI Investments Limited for the issued share capital of QWI. QWI later raised $1.19 billion in an IPO on the market with the Jamaican Teas retaining 34 per cent of the ownership. Jamaican Teas now owns 40.61 per cent of QWI.
Another JSE-listed company Blue Power Group Limited spun off its hardware division into Lumber Depot Limited in August 2019 when existing shareholders got an equivalent number of shares in Lumber Depot. Lumber Depot listed on the Junior Market in December 2019. Mayberry Investments Limited did a similar share distribution in February 2018 when shareholders got one Mayberry Jamaican Equities Limited share for every 10 shares they already held as a dividend in specie.
Jamaican Teas’ revenue has grown by 24 per cent to $1.75 billion for the nine months ended June 30, 2021. With the equity markets rebounding, its net profit attributable to shareholders has improved by 269 per cent to $313 million. However, the company’s gross profit has been constrained with the third quarter being flat while the nine months only improved 14 per cent to $451.12 million. The company has attributed this to the decline in export sales from the reopening of the US economy and rise in shipping and raw material costs.
“The problems related to increased shipping costs and shortage of space for containers has been very difficult for all manufacturers. It has resulted in lost sales and reduction in service levels due to shortages of key raw materials. It has resulted in lower margins as we have not been able to pass on all of the increased costs and it has resulted in reduction in sales as consumers have cut back on purchases due to the increase in prices. Finally, it has resulted in higher inventory levels as we try to build stock levels to protect against stock outs. There is no indication that this situation will be corrected any time soon,” stated Mahfood.
Investors have already reacted quite confidently to the news of the spin-off as Jamaican Teas share price rose from $3.55 on Monday to a peak of $4.75 as of yesterday. Jamaican Teas executed a 3 to 1 stock split in November 2020 where the share price went from $6.07 to $2.02. Many persons are expecting a discount to be offered for CDF’s possible IPO as seen with QWI where Jamaican Teas shareholders got a discounted price of $1.25 to the $1.35 general public price.
“There is, however, an opportunity that comes from this situation that we must grasp. Freight rates from the Far East have increased by upwards of 500 per cent to Jamaica and by 600-700 per cent from the Far East to the US. However, freight rates between Jamaica and the US have not moved very much at all. This therefore creates opportunities for us to be more competitive compared to companies in the Far East and thus be able to export more of our goods to the US. It also allows us to find new suppliers that are closer to us and who are now able to compete better against the companies in the Far East,” said Mahfood on the opportunities for the manufacturing business.