The West Indian Tobacco Company Limited (WITCO) is a member of British American Tobacco Group of Companies, one of the world’s most international businesses, with brands sold in more than 200 markets around the world.
The company was established in 1904. Currently its Champ Fleur plant supplies 26 cigarette brands both to the local Trinidad and Tobago market, and regionally to 16 CARICOM Members and Associate countries. These include: Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname, Bermuda, British Virgin Islands and the Cayman Islands.
Locally, WITCO distributes through third party supply chains to approximately 7000 outlets around Trinidad and Tobago. Its local product portfolio is made up of four main brands, Dunhill, DuMaurier, Broadway and Mt. d’or. (Source: westindiantobacco.com)
What peaked our interest?
You may have noticed that WITCO’s share price has steadily declined over the last two years. Revenue has fallen 9% from 2019 levels and profit has fallen 9.4%. Gross margins have contracted from 77.9% to 75.7%, which isn’t too drastic after facing lockdowns and the halting of entertainment events and trading outlets. Even dividends were lowered by 9.1% from 2019 levels. The stock price has fallen a dire 44.7% however we do not believe that this decline is justified.
Is it time to buy?
During 2021, WITCO had to close its factory for 1 month due to lockdowns which negatively impacted exports to Jamaica, Guyana, and other Caribbean Islands. As a result of the Government imposed lock downs, social gatherings and events were banned, effectively denying WITCO the sales figures they were accustomed to. As of now, further lockdowns appear behind us. Despite all of this, WITCO was able to maintain healthy margins and pay dividends to shareholders. The stock is currently trading at a low of 16x and offers a dividend yield of 5.9% at the price of $24.00. This is quite attractive as the business is entering 2022 with a stronger outlook and improved operating environment. The company invested $85M in 2021 towards the enhancement of its plant and machinery and in upskilling its workforce. Some of these costs would not reoccur in 2022. The entertainment industry should start coming online as we have seen news of a “normal” Carnival for 2023. Schools are reopening meaning more adults would appear on the roadway and likely spending more money as a result. These activities bode well for improved sales domestically and in the region.
What we would like to see:
Strong ownership interest of the stock by Directors and Senior Management
Stricter clamp down on illicit trade by the relevant authorities
Why we like the stock:
The operating outlook is improving. It appears that lockdowns are behind us.
The company invested in operational efficiencies during2021. This should improve performance going forward.
The stock is trading at 16x earnings per share, the lowest we have seen it in many years. WITCO has traded at levels above 20x pre-pandemic.
The stock offer a trailing dividend yield of 5.9%. Dividend per shares should improve as earnings improve.
We believe the upside offer an attractive reward versus the downside.
Contact a Wealth Manager at Maritime Capital Limited to see if this is a stock that should be added to your portfolio.