Tax reversal lifts Tea Smallholder Factories’ 3Q

Tea Smallholder Factories PLC managed to return to profits in the quarter ended December 31, 2019, due to the one-off tax reversal but the operating results of the firm were in the red. 
Tea Smallholder Factories, which buys green leaves from smallholders and leaf collectors to turn them into black teas, reported earnings of Rs.2.67 a share or Rs.88.4 million for the October-December period (3Q20), compared to the earnings of 38 cents or Rs.13.7 million reported for the corresponding quarter, last year.

The revenues rose by 11 percent year-on-year (YoY) to Rs.535.7 million but the cost of sales rose by a faster 13 percent YoY to Rs.531.4 million, reflecting the lingering challenges facing the tea sector. 

Significant challenges surrounding tea auction prices, which are yet to reach their former peak and the production cost stemming from the higher labour cost, have dampened the profits of many tea producers. 

Despite the higher top line, the company made an operating loss of Rs.3.9 million, compared to an operating profit of Rs.3.4 million a year ago. 

Amplifying the issues for the tea sector is the recent announcement made by the government mandating a minimum daily wage of Rs.1,000 for plantation sector workers, which the Regional Plantation Companies (RPCs) maintain that they are unable to pay.

The government is of the view that the recent tax cuts enjoyed by the corporate sector should trickle down to the grassroots level of the economy by way of higher wages, at least to those in the low-income groups. 

Tea Smallholder Factories, a unit of John Keells Holdings PLC, runs seven factories in Galle, Ratnapura and Nuwara Eliya.  The company sold its Pasgoda tea factory for Rs.75 million last May as it was singled out at the beginning of the year for disposing. Meanwhile, for the nine months ended December 31, 2019, the company reported earnings of Rs.2.71 a share or Rs.75.4 million, turning from a loss of Rs.15.1 million a year ago. 

The top line barely grew from Rs.1.56 billion to Rs.1.61 billion.  John Keells Holdings has a 37.62 percent stake in Tea Smallholders Factories while Akbar Brothers Limited and Central Finance Company held 24.39 percent and 22.85 percent stakes, respectively being its second and third largest shareholders.