13 August 2013

JB Foods Posted Net Loss on 1Q 2014 Report

6M2013 vs 6M2012

Total revenue grew by RM35.2 million or 12.9% from RM271.6 million for the half year ended 30 June 2012 (“6M2012”) to RM306.8 million for the half year ended 30 June 2013 (“6M2013”) mainly attributable to higher sales volume mainly due to new trading activities and increase in production capacity. However, the Group registered a gross loss of RM10.7 million and net loss of RM23.1 million in 6M2013 respectively. This was due to the unusual market consolidation that significantly reduced the average selling prices of cocoa ingredients especially in 2Q2013. The Group made a provision of impairment of inventories amounting to RM13.1 million in 6M2013 to reduce the inventory cost of cocoa ingredients to the average selling prices immediately after the close of 6M2013. Other income decreased RM2.8 million whereas other expenses increased RM1.9 million mainly due to unrealized foreign exchange losses in 6M2013.

Review of Statement of Financial Position

Non-current assets increased by RM3.9 million or 3.5% from RM112.6 million as at 31 December 2012 to RM116.5 million as at 30 June 2013. The increase was mainly due to the capital expenditure incurred for the expansion project in Tanjung Pelepas.

The Group’s current assets decreased by RM3.0 million or 0.9% from RM318.3 million as at 31 December 2012 to RM315.3 million as at 30 June 2013, mainly attributable to a decrease in cash and cash equivalent of RM22.7 million partially offset against an increase in inventory of RM15.7 million, trade and other receivables of RM1.9 million and income tax recoverable of RM1.9 million. Inventories increased mainly due to increase cocoa bean and cocoa ingredients products. Trade and other receivables increased mainly due to higher sales in 6M2013. Income tax recoverable increase due to one of the subsidiary having to pay estimated corporate taxes in advance in 6M2013 based on its FY2012 profitability.

Current liabilities decreased by RM16.8 million or 7.3% from RM226.3 million as at 31 December 2012 to RM209.9 million as at 30 June 2013, mainly due to a decrease in trade and other payables of RM25.4 million, offset partially by an increase in bank borrowings amounting to RM8.6 million. Trade payables decreased mainly due to payment for raw materials. Other payables and accruals decreased due to progress billing payments relating to the expansion project in Tanjung Pelepas. In addition, the Group had paid the accrued bonuses as at 31 December 2013. Lastly there was a reversal in the provision of executive directors’ bonuses for FY2012 as the executive directors’ remuneration agreement was amended to take into consideration the losses in 6M2013. Bank borrowings increased mainly due to the increased utilization of trade bills for the settlement of cocoa beans at the end of the period.

Non-current liabilities decreased RM1.8 million or 12.5% from RM14.7 million as at 31 December 2012 to RM12.9 million as at 30 June 2013 due to the reversal of deferred tax in a subsidiary.

Cash Flow

Cash and cash equivalents decreased by RM22.7 million in 6M2013 due to net cash used in operating activities amounting RM61.1 million, net cash used in investing activities amounting to RM6.0 million and effect from exchange rate changes amounting to RM8.0 million, partially offset by the increase in net cash from financing activities amounting to RM45.2 million.

The net cash used in operating activities was mainly attributable to the increase in cash used in working capital amounting to RM57.8 million resulting from an increase in inventories of RM28.9 million and decrease in trade and other payables of RM28.4 million.

The net cash used in investing activities of RM6.0 million was mainly due to additional capital expenditure of incurred for the expansion project in Tanjung Pelepas.

Net cash from financing activities was largely due to net proceeds from placement shares proceeds of RM54.0 million and net increase in trade finance borrowings amounting to RM4.8 million which were partially offset by dividend and interest payments of RM11.8 million and RM1.8 million respectively.

A commentary at the date of the announcement of the significant trends and competitive conditions of the industry in which the group operates and any known factors or events that may affect the group in the next reporting period and the next 12 months.

Over the next 12 months, the Group expects that the business environment will continue to be challenging in view of the volatile global economic situation and possible continued consolidation in the cocoa ingredient industry.

Nevertheless, the board remains confident in the long term prospect of the business and will  continue to seek out new business opportunities.

My View

To battle in cocoa price volatility, I believe management would need to do more to diversify its business model so that it can get lesser impact in lower selling price in the cocoa ingredients. I believe that soft commodities market is now in the consolidation stage where the average selling price is normalized to a lower level. Nonetheless, I believe it is still a profitable business in long run, depends on how the management can cope with the lower average selling price environment. As what my ex-chairman Mr. Lim told us that, it is always a good time for us to consolidate our strength in the downtrend and be prepared for the good time to come.

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