Banks DIH board made an error in buyback of shares

A letter by me published in the Stabroek News of December 11, 2016, on the decision by Banks DIH Limited to buy-back from Banks Holdings Limited, 150,138,464 shares in Banks DIH Limited provoked a four page response from Chairman and CEO, Mr Clifford Reis. As is usual for persons unwilling to deal with facts and arguments, Mr Reis went into the dangerous territory of questioning my integrity and understanding of legal documents and commercial law. He knows or ought to know me better.

Mr Reis pointedly refers to a Memorandum of Understanding entered into between Banks DIH and Banks Holdings Limited which he claims I do not understand. Forget for a moment that Banks DIH Limited has never released to shareholders a copy of that MoU. Mr Reis not only chooses to selectively and incorrectly refer to that MoU but faced with tough questions, he decided to speak of the “implied terms” and inserts into a simple, straightforward MoU words that are not there.

Mr Reis cites unnamed “legal and financial advisers” for what is a costly, damaging mistake by him and the Board of Directors he leads. The simple fact is that Banks DIH was under no obligation to repurchase any shares. Here is the relevant portion of the MoU governing the buyback of the shares.

“Banks Holdings Limited may not dispose of the shares it possesses in Banks DIH Limited as a result of this share transfer unless the first option to purchase those shares has been offered to Banks DIH Limited. The selling price of those shares shall be based on the net asset value of Banks DIH Limited as reflected in its most recent annual report or market value whichever is greater.”

It is not hard to understand that the MoU gave Banks DIH Limited a right of first refusal, not a duty to re-purchase the shares, and that the pricing formula for any possible transaction was set out in the MoU. This is no big science requiring the expertise of a major international firm; the numbers are easy to determine. The net asset value is the net book value divided by the number of shares, while the market value of the shares of a publicly traded company is the price at which the shares are traded on a recognised stock exchange, in our case GASCI.

An exception would be a case where there is a takeover bid with potential bidders trying to outdo each other for their own reasons, for example to get control of a competitor or access to backward or forward links. No such circumstance applied in the case of the Banks DIH buyback.

There was absolutely no reason for Banks DIH to buy-back the shares in the first place and worse, to engage in borrowings to pay for those shares, as Mr Reis has now admitted.

Mr Reis also admitted that the transaction was a Guyana dollar transaction and not US dollar transaction as the company had led the public to believe. He must now go the further step and tell shareholders and the public about the role, if any, of Banks DIH and its banking subsidiary in acquiring foreign currency for the transaction. Or whether Banks Holdings Limited, a Barbados company, came into Guyana, purchased twenty-six million United States dollars and transferred it to Barbados using one of the commercial banks. If that is so, those who were responsible for the purchase of US$26 million of currency either did not care or did not understand the implications of that purchase on the exchange rate of the Guyana dollar.

Finally, my response to Mr Reis’ snide remarks about misconception, seasoned commercial lawyer, misinformation, lack of knowledge and disguised reference to integrity is to recall an incident on March 5, 2003.

It arose out of a column I had done in the Sunday Stabroek (March 2, 2003) and my threat of legal action against Banks DIH Limited if it persisted with holding an improperly convened 2002-03 AGM. On March 5, Stabroek News published a letter by Mr Reis as Chairman claiming that Banks DIH had given proper notice of its AGM. Yet, during the very afternoon, I received a visit from two officials of the company offering inducements (not actual cash) if I withdrew my threat. I refused. The company then postponed the meeting, admitting improper notice.

I bear no malice or ill-will against Banks DIH Limited which I respect as an icon of the vision and entrepreneurship of Peter D’Aguiar. This share buy-back is a colossal blunder that stains the record of the company and drained it of liquidity. But I doubt the directors have the courage to admit their error.

Why was $36.79 per share paid for shares in Barbados Banks DIH when the publicly quoted price is $22.5 per share?

Banks DIH Limited has just disclosed that the 2005 Memorandum of Understanding for a mutual share investment agreement between itself and Banks Holdings Limited of Barbados has now been substantially reversed. Almost every year since 2005, the Chairman and directors of Banks DIH have touted the virtues of the agreement, the synergies from the relationship, and benefits in export sales to both companies.

Keen observers also noted enhanced procurement and governance practices with the presence of nominees of the Barbados company having a place on the Board of Banks DIH.

So it was with some surprise that the public learnt, even before the shareholders did, that in 2015 Banks DIH had sold its shares in the Barbados company. With no reason offered for walking away from the greatest opportunity to expand the export market for Banks DIH products, speculation circulated about the true motive of the Banks management.

At the time, a Brazilian company, through its St Lucian subsidiary SLU Beverages Ltd, and Ansa McAl of Trinidad and Tobago were engaged in a battle to gain control of Banks Holdings Ltd of Barbados.

A couple of days ago, in what was described as an Amended Press Release, the Executive Management of Banks DIH announced that it had repurchased 150,138,464 of its shares owned by the Barbados company. It was disclosed that the price of $36.79 per share was based on a valuation conducted by PriceWaterhouseCoopers (PWC) in December 2015.

The full page ad volunteered that throughout the “whole process” the management was guided by the company’s financial and legal advisors.

Under normal circumstances when logic and common sense are evident, my questions and comments would first have been about the failure of the Clifford Reis-led management and board to have alerted its shareholders to a number of matters.

First, why are shareholders only now learning of the proposed buyback since it was in process since December 2015; second, how can any adviser worth their fees overlook the foundational principle of company law that a change of shareholders does not have any impact on the rights and obligations of the company, in this case whether it be Banks Guyana or Banks Barbados; and third, why did the directors and management not think it helpful and necessary to advise shareholders that the money the company will be paying out on this share buyback transaction is $5,523 million.

But since the transaction defies both logic and common sense, my questions to the geniuses of Thirst Park are:

1. Why pay $36.79 per share to the Bajans for shares in Banks DIH Limited whose publicly quoted price is $22.5 per share, a premium of 64% and worth in dollar terms $2,145,478,650?

2. How do they justify handing a gain of $3.6 billion to the Bajans when the gain a year ago in the sale of shares in Banks Barbados was $1,147 million?

3. Are they aware that the $5,523 million they will pay out for these shares is more than two years of the company’s 2015 after-tax profit, more than 2.3 times the value of its share capital and about 90% of its revaluation reserves?

4. Can they indicate whether they propose to finance the transaction with borrowings? At September 30, 2015 the company’s cash reserves stood at $4,060 million, current liabilities of $4,155 million, borrowings of $585 million, and current year (2016) capital commitment of $4,607 million.

5. The currency of the selling price quoted in the Amended Press Release was Guyana dollars. Translated in US dollars, the total proceeds amounted to approximately US$26.3 million. Would the company disclose whether it paid Guyana, Barbadian or US currency?

6. Would they be willing to buy back shares held by other shareholders at the same price they paid the Barbados company? In fact, they should be willing to pay a price in excess of the $36.79 since the deal with the Barbados company had marketing and other benefits.

I am sure that all shareholders have a right to these questions being answered promptly.

On The Line – Banks DIH Limited 2012

Introduction
I have always been perplexed why companies in Guyana consistently ignore one of the most important considerations among their shareholders. This column has lamented, year after year and company after company, the absence of comments by companies‘ CEOs and directors in otherwise often very wordy annual reports on the performance of their companies’ shares on the stock market. Banks DIH Limited, the beverage giant has many things to be proud about with respect to its 2011-2012 performance and annual report – historic levels of profits, a strong balance sheet, good industrial relations, a stable management team and growth in share price of 37.5%.

We will get back to this shortly but let us consider first the financial statements.

Banks DIH is a company with two major institutional shareholders – Banks Holdings Limited of Barbados (20%) and Demerara Life Group of Companies (10.8%) – and one that is described as a substantial shareholder under the Securities Industry Act, Trust Company Guyana Limited (6.2%). Banks DIH is also the parent company of Citizens Bank Guyana Inc in which it has a 51% interest. Only two directors of Banks DIH (Messrs Clifford Reis and Errol Cheong) have any shareholding in Citizens Bank. The directors of the company presented their annual report and its audited financial statements last Saturday at a usually well-attended but usually uneventful meeting of its shareholders.

Performance

2013.01.27_Table1

Source: 2012 Annual Report

The company recorded an increase in turnover (sales) of 15.5%, the best increase in turnover over the past five years. However revenue for export sales remains minimal, 1.49% in 2012 and 1.24% in 2011. No doubt the directors of the Guyana company would reflect that one of the intents expressed in the Memorandum of Understanding of 2005 under which Banks DIH and Banks Holdings Limited did some cross-investing in each other was to market and distribute each other’s products in their respective home markets. Guyana’s domestic market will remain small for years to come and the company must sooner rather than later focus on the export market. Where the directors have reason to be very satisfied is in terms of the profits earned: a 25% increase over 2011 and a 30.4% increase in profit after taxation.

Strong balance sheet
As we look at the balance sheet we see a company that by standard analytical tools is strong. Current assets have increased by 21% while the smaller figure of current liabilities increased by 13%. As a result of the combination of these two variables the net current assets position has increased by 26%.

As the company continues its capital renewal and expansion programme, the directors have opted for an increase in long-term borrowings of $750 million which are expected to increase in the current year due to planned capital expenditure of some $5,124 million on several key operating assets including equipment for the soft drink, beer, water and CO2 plants and ice cream facilities and the renewal of its distribution fleet.

2013.01.27_Table2

Source: 2012 Annual Report

Helped by a sale of capital assets that brought in some $461 million and borrowings of $750 million, neither of which is addressed in the CEO’s or the directors’ report, net cash inflow for the year was $101 million, compared with an outflow of $728 million in 2011. The directors would no doubt be keeping an eye on the cash and bank balances even as they recognise that the “company’s continued success will depend on its ability to respond to the needs of a rapidly emerging middle class.”

Shares and their returns
Now let us return to the matter raised in the introduction to this column. Here is why I believe that for the more discerning shareholder, a commentary on share price and performance is important. Five years ago the group had after-tax profits of $898.1 million and paid dividends amounting to $400 million. Analysts use these numbers to arrive at a pay-out ratio with a low ratio indicating a policy of retaining its earnings rather than paying out dividends. In 2012, profits had risen to $2,776 million but the directors recommended and effectively limited dividends to $560 million. The pay-out ratio for the two years is 44.5% and 20.2%. This apparent change in policy is hardly likely to operate in favour of the aging and retired shareholder who depends on dividends, bank interest and modest pensions for their life’s income.

The graph below shows three variables for the group: net profit after minority interest (ie profit available for distribution), dividends paid and dividend plus growth in shareholder value. Dividends remain low, despite significant increase in after-tax profits.

2013.01.27_Chart1

Source: Annual Reports and Guyana Stock Exchange

2012 provided a windfall for shareholders in terms of the movement in the share price. When examined over the period 2007 to 2012, however, a different picture emerges. Net profit after minority interest over this period was $9,902 million of which $2,810 million was paid as dividends.

The amount of available profits retained by the group was therefore $7,092,213,000 and which should be reflected in the market value of the company’s shares. This has however only grown by $5,600,000,000, a shortfall of $1,492 million. If measured against the growth in shareholders’ equity, the shortfall is $286 million.

It is to the credit of the directors of Banks DIH, with one major exception who is no longer with the company, that they have avoided any acquisitive tendency for shares in the company, either for themselves or their associates. Directors Errol Cheong, Christopher J Fernandes, Richard B Fields, George G McDonald and Michael H Pereira all still own the same number of shares they did in 2005. CEO Clifford Reis has 187,500 fewer shares now while Andrew Carto has acquired 71,312 shares since then.

It would be interesting to see whether those companies, the year-end of which is December 31 will comment on their market price performance when they issue their 2012 annual reports and financial statements over the next few months.

Barbados investment
It seems like history since in reaction to a suspected take-over bid by the Trinidadian company Ansa McAl, Banks DIH entered into a mutual investment agreement under which Barbados Holdings Limited (BHL) took a 20% shareholding in the Guyana company in exchange for Banks DIH taking a 6.7% interest in the Barbados company. BHL has two nominees on the Banks board while the Guyana company has one director on the board of BHL from which dividends received in 2012 were $39.4 million while dividends paid to Banks Holdings Ltd, Barbados were $112.1 million.

Despite what may appear to be financial returns that favour the Barbados company, consensus among observers is that the arrangement has helped Banks DIH in more than just putting the takeover threat to rest. The turnover of the company increased by approximately 75% since the investment agreement and the company continues to express satisfaction in its “dedicat[ion] to the Principles of Good Corporate Governance.”

Governance
This column can be accused of a crusade in so far as advocating better demographic representation on boards of public companies in Guyana is concerned. A look at pages 4-9 of the company’s annual report shows the youthful vitality and the gender, age and ethnic diversity which make up Guyana. The personalities in the very attractive advertisements are nine women to seven men; in higher and tertiary education women outnumber men as they do (marginally) in the population as a whole. And no doubt women also make up a large part of the company’s employees and customers, yet as shareholders turn the pages, they enter a different world, where the average age of the population is north of 50, from which women are excluded and none of whom is an Indian, even among a band of eleven. The last time this company had a woman director was in 2006 when the wife of the founder of the company died. In fact the 2005 Annual Report lists twelve directors, including Mrs D’Aguiar, so it seems possible that the company can address this limitation without the need to amend its articles or retire any director.

Conclusion
The Board of Directors Report is well laid out and contains the basic information required by law except with respect to section 168 (g) of the Companies Act which requires the directors to state the directors’ proposals as to the application of the company’s profits, including its revenue reserves. This common omission of companies in Guyana is perhaps because directors consider that it is implied.

While neither the Chairman/CEO nor the directors have much to say about the future, an expenditure of over $10 billion over a three year period is testimony to their confidence in the future of the company.

On the Line – The Banks Group

Comment
Co-incidences are rarely easy to explain. At the time of launching an award for the best Annual Report by any Guyanese company as one of the activities and initiatives for its 25th anniversary observed last year, this column carried a review of the financial statements of the two operating companies of the Banks DIH group: Banks DIH Limited (‘Banks’), the food and beverage giant, Citizens Bank Limited (‘Citizens’), a 51% owned retail bank and Caribanks Shipping Company Ltd, a dormant company.

This coming Tuesday – and regrettably belatedly – Ram & McRae will be announcing the winner of the award for the 2010 annual reports. That is as much as I am permitted to say at this time.

Introduction
Today’s Business Page looks at the financial statements of the two operating companies of the Banks DIH group. The group comprises Banks DIH Limited, the food and beverage giant, Citizens Bank Limited, a 51% owned retail bank, and Caribanks Shipping Company Ltd, a dormant company. Banks and Citizens are both public companies whose shares are traded on the Guyana Stock Exchange. The financial statements of the group also include as an associate company B&B Farms Inc, a Guyana private company, and BCL (Barbados) Limited in which Banks holds a 25% interest.

Both the public companies in the group have as their accounting year-ends September 30 and will be holding their annual general meetings later this week – Citizens on Tuesday 17 and Banks four days later.

The shareholdings in the two companies have changed little over the past year with Banks spreading just over 60% of its shareholdings among a vast network of private individuals while in the case of Citizens, four shareholders own 82% of the shares with the remainder spread among about seventy smaller shareholders. The Boards of Directors of both companies are chaired by Mr Clifford Reis, CCH, who is also the Managing Director of Banks.

In a Corporate Governance Code published last year, the Private Sector Commission boldly called for a clear division of responsibilities at the head of the company. The Code makes it mandatory that the positions of the Chairman and Chief Executive Officer (CEO) be held by separate persons. It also requires that the division of responsibilities between the Chairman and CEO be clearly established, be set out in writing, and be agreed by the Board.

Some observations
Another contrast between the parent and the banking subsidiary is evident in their annual reports; Banks’ high-quality, glossy report is designed and produced by Ross Advertising and printed by Scrip-J of Trinidad and Tobago while Citizens’ is on flatter type paper and produced by KRITI whose address is not stated.

There has been no change in the gender composition of both boards, each remaining steadfastly all-male, despite the constant chorus from progressive women like Stella Ramsaroop and Andaiye for more recognition to be given to women in Guyana. What makes the situation even more remarkable is that both entities have a large number of women staff and in the case of Citizens, six of the seven principal officers are women!

In any case, there can be no doubt that at both entities women make valuable contributions to the “exemplary growth in revenue and profit over that of previous years” reported by Chairman Reis in his report on the group. He had every reason to exude satisfaction: group profits from operations increased by 32% on a turnover increase of 16%. On the other hand, benefiting from the five per cent reduction in tax rates announced in the 2011 Budget, taxation increased by 10%, mainly from the banking subsidiary.

Banks DIH Limited

Source: Annual Report 2011

The company’s turnover (sales) increased by 15% from $16.3 billion to $18.8 billion, and its profit from operations increased by 27% while taxation at $868 million was a mere $4 million increase over 2010. As a result, net profit after taxation increased by 42%. Profit from operations as a percentage of sales which was 13% has increased to 14.3% while taxation as a percentage of net profit before tax decreased from 38.8% in 2010 to 30.9% in 2011.

Chairman Reis attributed the improved results to revenue garnered from the increase in physical sales, efficiencies derived from plant and machinery upgrades and an improved presell and distribution system. The performance was also attributed to capital expenditure of $3,142 million on major plant and machinery for the beverage, alcohol and water plants. The modern soft drinks plant which is expected to be put into use early in 2012 is expected to continue the trend of increasing productivity and profitability.

Growth
To get a clearer picture of how the profitability has changed one only has to go back to 2007 and 2008 when the profit before operations was 9.7% and 9.9% respectively, while the net tax effective rates in 2007 and in 2008 were 38.9% and 40.1%. Most impressively, two years after the company passed the $1 billion profit-after-tax mark, it is aiming to double that figure. Without taking anything away from the Guyana directors, it is perhaps more than merely coincidental that the company’s growth trajectory has been accelerated following the accidental partnership with Banks Barbados, aimed to repel an attempted take-over by Ansa McAl of Trinidad.

What is also significant is that the entire increase in the revenues of the company came not from exports but from domestic sources. Note 20 to the financial statements which gives a broad geographical breakdown of revenue, shows sales of goods and other services increasing by $2,478 million or 15% while revenue from exports actually declined by 24% to $233 million, down from $305 million.

Whether the company is satisfied with its domestic sales is not clear, but with the reputation of Guyana rum internationally, the company may wish to expand its horizons, a feature of the group since its launch in 1957, and indeed the theme for the 2011 report – the next level.

Source: Annual Report 2011

The balance sheet for the company and the group shows net assets increasing by $1,438 million and $2,149 million respectively. Payables and accruals included under current liabilities in the table above have increased from $1,538 million in 2010 to $2,625 million at September 30 last year.

Citizens Bank Limited
After a poor year in 2009 when the Bank had to make an impairment provision of $170 million for investments in Stanford International Bank and Clico Trinidad Limited – the region’s two financial catastrophes for that year – the results for 2010 were encouraging, while for 2011 they are impressive.

Profit after taxation in 2011 increased by 50.5% from $534 million to $804 million. Net Income for the year ended September 30, 2011 was $1,949 million compared to $1,469 million, an increase of 26.7%, double the increase in 2010 over 2009. Profit before Taxation was $1,279 million compared with $887 million in 2010, an increase of 44%.

Interest income increased by 32% and other income by 7.8% while operating expenses increased by 8.8%. Net Customers’ deposits had a significant 30.3% increase while interest expense increased by a more modest 8.5%.

Conclusion
The Banks Chairman was careful not to encourage too high expectations about the future. He avoided any comments about the future in the Banks DIH report while all the CEO of Citizens Bank was prepared to say – unhelpfully – was that 2012 “[would] bring both challenges and opportunities.”

It is my strong view, and indeed that of the Private Sector Commission, that companies need to enhance their communication with their members and the public. I noted a few weeks ago that Demerara Bank Limited had refused to release its 2011 annual report “until after their AGM.” I was met with a similar response when I sought a copy of the Citizens’ Bank Annual report. That is not a practice that should be encouraged by any institution, and certainly not one that has its sights firmly fixed on the next level.

Half-yearly reports show increased turnover

Introduction
Caribbean Containers Inc, a public company in the paper recycling business has reported turnover for the first half of 2011 increasing by 9.3% over the same period last year. This follows a 10.3% reported turnover increase by the DDL Group of Companies and a 13.8% increase in the Banks DIH Group, the only one of the three with a September 30 year-end while CCI and DDL have a December 31 year end. The increases in turnover are of course considerably higher than the rates of inflation in the economy. Banks DIH in explaining its improved performance cited higher dollar sales, a term usually used in contradistinction from volume sales.

Caribbean Containers Inc.

CCI reported a gross profit increase over 2010 of 14.3% but its losses before tax increased from $21.8 million to $23.8 million. The report shows Earnings before depreciation as having declined in the first half of the year by 31.3% and that margins were severely affected by the rapid escalation in global fuel prices which resulted in the company’s fuel bill going up by some 40%.

The company’s performance in the third quarter ended September 30, 2011 improved strongly with an 18.3% growth in Earnings before depreciation compared with third quarter 2010. The result was a modest profit before tax of $2.7 million compared with a loss of $10.2 million for the third quarter of 2010. The overall result was a sharp decline in loss before tax for the nine months from $32 million in 2010 to $21million in 2011. The report explained that over the last four years, sales in the second half of the year averaged 13% more than in the first half.

CCI has had its fair share of financial problems over the years with a number of ownership changes and substantial debt restructuring. As at June 30, the company had liabilities of $365 million including trade and other payables of $116 million and loans repayable within a year amounting to $69 million. Cash resources amounted to $37 million but this had gone down to $25 million three months later.

In what can be described as Guyana’s principal LCDS private sector company, survival is still the challenge as the company’s aging technology has high running and maintenance cost, placing cash management at the centre of management focus.

Yet the company deserved commendation for being the only private sector company other than Republic Bank (Guyana) Limited to publish quarterly financial reports. The Bank of Guyana had published and recently withdrew Guideline # 10 requiring all banks to publish quarterly statements.

Banks DIH Limited

The half-yearly report is a consolidated report of the food and beverage giant and its subsidiary Citizens Bank Guyana Inc. Given the disparate nature of the operations and business of the two entities such a consolidated report does not allow any easy informed analysis of the two businesses.

The company had unaudited profit after tax in the half-year of $689.5 million compared to $594.1 million in 2010, an increase of $95.4 million or 16%. Chairman and Chief Executive of the group explained in the report that the improved results came mainly from increased dollar sales, efficiencies derived from Plant and Machinery upgrades and the benefits obtained from the installation of Capital Equipment.

The subsidiary Citizens Bank achieved an unaudited profit after taxation of $364.6 million compared to $261.0 million in 2010.

Total group profit after taxation for the half year was $1,025 million compared with $836 million, an increase of some 22% and a resulting increase in Earnings per Share from $0.71 per share to $0.85 per share.

A meaningful cash flow commentary is not possible as the cash and bank resources of the company cannot be distinguished from those of the banking subsidiary. Inventories, the bulk of which would be for the company stood at $4,367 million, increasing from $4,069 million one year earlier. For the type and nature of the operations this seems reasonable, particularly when compared with DDL to which we now turn attention.

Demerara Distillers Limited

This group comprises several local and overseas companies in the region, North America and Europe as well as a joint venture in India and associated companies in Guyana and Jamaica. In his Chairman’s Statement Dr. Yesu Persaud reported that the group’s pre-tax profit for the half-year of $769 million had increased by 6.4% over 2011, attributed to the performances of the European subsidiary, Demerara Shipping Company Limited and Distribution Services Limited.

When account is taken of increases in the fair value of investments and exchange differences on consolidation, the total comprehensive income for the year – a measure of the sum total of all operating and financial events that have changed the value of an owner’s interest in a business – is $627 million compared with $437 million in 2010. The group may have a challenge however in exceeding the full year reported profits for 2010 of $1,139 million. The profits for that year were augmented by a $151 million “share of profit of associated company.” In the first six months of 2011 this profit was only $8.4 million compared with $3.4 million in 2010 half-year, suggesting some major development in the second half of that year.

Earnings per share (EPS) have increased from $0.65 in half-year 2010 to $0.69 in 2011.

The balance sheet continues to be fair with current assets exceeding current liabilities by a ratio of nearly 2:1. The problem lies however in the composition of the two balance sheet components. Trade payables have climbed to $4 billion, bank overdraft is $2.8 billion and loans repayable in the next twelve months is close to half a billion dollars.

Share prices
None of the reports bother to speak of one of the most important issues for shareholders and that is the performance of the companies’ shares on the Stock Exchange. A comparison of recent prices is shown below: