Tue | Dec 1, 2020

Carib Cement could save billions from asset buy-back

Published:Thursday | March 22, 2018 | 12:00 AMSteven Jackson
The Caribbean Cement Company Limited plant at Rockfort in Kingston.
Peter Donkersloot Ponce, general manager of Caribbean Cement Company Limited.

The Caribbean Cement Company, the sole manufacturer of the product in Jamaica, could reduce its associated costs by more than a third or about US$10 million (about J$1.27 billion) annually when it exits a lease agreement with its parent company, Trinidad Cement Limited (TCL), according to Financial Gleaner estimates.

Carib Cement General Manager Peter Donkersloot Ponce declined to say how much the company would save with the impending deal to terminate its operating lease with TCL on the ground that "I am legally constrained from responding" and that "my hands are tied."

Carib Cement is projected to pay roughly US$25 million as operating lease for 2017 for its core cement asset at Rockfort in Kingston, Donkersloot said, having paid the same amount in 2016 to TCL.

The company plans to eliminate that annual lease payment, but replace it with interest costs related to loans to buy back the asset and depreciation of the asset, Donkersloot told participants at Mayberry Investments monthly investor forum at the Knutsford Court Hotel, New Kingston, last week. The asset is valued at some US$118 million with up to two decades of useful life. Carib Cement continues to weigh various options to finance its acquisition.

"The finance costs would be in the single-digit region between seven to nine per cent, while the assets would be depreciated over 15 to 20 years," said Donkersloot.

"So you are going to have to calculate what those two expenses are going to be," he said during the question-and-answer segment of the forum. "I have my number what I think they will be but I don't want to speculate right now." However, he admitted that terminating the lease will have "a positive impact".

Using Donkerloot's guide, the Financial Gleaner estimates depreciation at some US$5 million annually and finance costs of about US$10 million. That equates to savings of about 40 per cent on a US$25-million lease. The annual lease figure, however, vacillates slightly annually.

While the figures are estimates, it still gives a general guide about the path that management wants to take in enacting its buy back of the asset.

The company will make further pronouncements within 90 days on the matter. While management declined to give specifics due to legal constraints, investors are already making their own assessments based on public information.

With news of the pending deal, investors are already queuing up seeking to sell the stock, currently valued at $34, for a minimum $44 on Wednesday. The company made $1.35 on its share during its full year ending December 2017.

Carib Cement made $1.1 billion in net profit on $16.5 billion in revenue for its full year.

On March 16, Carib Cement signed a memorandum of understanding with its parent company, TCL, agreeing to terminate an operating lease agreement originally dated July 2, 2010.

The three-pronged deal will see Carib Cement acquire US$118 million worth of assets on its books. The deal also involves the redemption of an aggregate 52 million preference shares issued by Carib Cement to TCL in 2010 and 2013 for some US$40.5 million to be paid over a nine-year period, starting in 2018. Such funds will be sourced from at least one-third of Carib Cement's profits available for distribution from the previous year. The financing options to fund the asset acquisition and the redemption are yet to be disclosed.

Carib Cement announced in mid-2017, through its then newly appointed general manager Donkersloot, that it planned to refinance its hefty operating lease for the Rockfort plant, which cost the company billions of dollars annually. Both CCC and TCL are now owned by Cemex of Mexico.