On the Line: 2012 Annual reports of Caribbean Container Incorporated, Sterling Products Limited and Guyana Stockfeeds Incorporated

Introduction
To avoid getting caught up in a backlog of annual reports, Business Page today reviews the annual reports of three of Guyana’s public companies – Sterling Products Limited which held its annual general meeting on April 19, Caribbean Container Incorporated (CCI) which held its annual general meeting on April 30 and Guyana Stockfeeds Limited whose AGM is scheduled for May 23. It is perhaps co-incidental that these companies have some striking similarities: they are all public companies but with a dominant shareholder, and none is among the big league of Guyana’s public companies. Indeed CCI accounts for 1.02% of the market capitalisation of the top ten public companies, Stockfeeds 1.07% and Sterling Products 1.12%. Cumulatively the three companies account for less than 3.25% of the market capitalisation of the top ten companies.

In their annual reports, each of the three companies reported better results in 2012 than in 2011, a trend among all public companies. Stockfeeds reported an increase in year-on-year profit after tax of 3.2% while Sterling declared an increase in after tax profit of 39.3%. CCI appears to have transformed a loss into a profit but this is almost entirely attributable to a reduction in book entry depreciation because of a change in the estimated useful life of assets.

Continue reading On the Line: 2012 Annual reports of Caribbean Container Incorporated, Sterling Products Limited and Guyana Stockfeeds Incorporated

On the Line: Caribbean Container Incorporated and Guyana Stockfeeds Incorporated

Introduction
Today we continue our review of the annual reports of two more of the country’s public companies – Caribbean Container Incorporated (CCI) which held its annual general meeting last Friday and the Guyana Stockfeeds Incorporated (Stockfeeds) whose annual general meeting is scheduled for tomorrow. Both these companies are on the Secondary List of the Guyana Association of Securities Companies Incorporated (GASCI), popularly referred to as the Guyana Stock Exchange.

As a result of a challenge in the High Court of Guyana by the government company National Industrial and Commercial Investment Limited (NICIL), a shareholder of the company, the company is not permitted to issue any new shares until the outcome of this matter is fully settled. The regulator, GASCI has suspended trading of the company’s shares until the matter is settled. The shares of neither company, both of which have a dominant shareholder, are actively traded on GASCI with the last trade in the shares of CCI taking place on January 9 of this year while for Stockfeeds there has been no trade since October 27, 2008.

In the case of CCI, the dominant shareholder is a non-public company which goes by the name of Demerara Holdings Inc, which has some 129 million of the 152 million of the issued shares of the company, while in the case of Stockfeeds, Chairman and CEO Robert Badal owns some 35 million while an associate of his owns 25 million of the issued shares. Except for DDL and Banks DIH, the majority interest in all our public companies are held by a single shareholder with the minority shareholders playing a passive role. This raises the issue of the prospects of the survival of our public companies as they are supposed to operate.

CCI
CCI has had a checkered history with ownership changing hands from government to Ansa McAl to Rand Whitney and now Demerara Holdings Inc, which it is believed is in turn owned by CCI’s Executive Chairman Ronald Webster, who has been with the company for decades. In an era when recycling is becoming the buzzword, it is good to see CCI making some strides to sustainability. Its non-executive directors include Dr Elisabeth Ramlal and Mr Frank DeAbreu, one of Guyana’s younger breed of entrepreneurs.

Shares transactions
Shareholders were called upon to ratify the passing of two resolutions which had already received the blessing of the majority shareholder: one dealing with the cancellation of shares and the other with the issue of bonus shares. The first is to cancel 1,500,000 ordinary shares standing in the company’s name resulting from the reacquisition of the said shares. In 1992, these shares were allotted under an Employee Share Purchase Plan and were fully paid for on behalf of the employees via a loan from a financial institution. However, at the time of winding up the said plan, none of the shares allotted were taken up by the intended employees, nor had they settled the outstanding repayments in relation to those shares.

In keeping with the requirements of the Companies Act the directors of the company have decided to cancel these shares and treat them as part of the authorised but unissued shares. According to the company, the transaction should have no effect on the company’s equity but where I have some difficulty is the statement that the Revenue Reserve Account is credited and I doubt that shareholders would have been clearer.

The second resolution is to authorise the issue of 1 bonus share for every 50 shares owned. Bonus shares are not paid for and at one time were very popular in Guyana, particularly with Banks DIH. They have fallen into disuse because they are a kind of artificial transaction with a mere book entry between equity accounts without any increase in the company’s asset value or earnings prospects. Accordingly, if there is one bonus share for every one share in issue, the price per share is halved. However, when the capital market was even less developed than now, the share price never moved, and the ‘bonus” turned out to be a real bonus. Maybe with a bonus issue of one share for every fifty held, there is not going to be much change in the market price.

Financial Summary

Source: Audited financial statements 2011

In 2011, turnover increased by 13.4% from $887 million to just over one billion dollars and earnings before depreciation (EBDA) by 3.3% from $115 million to $119 million. Gross profit at $172 million was up by 19% over 2010’s GP of $145 million. The loss before tax was reduced by 25% from $7 million to $5 million. Without any real discussion, the Chairman attributed the year’s improved performance to good sales and production efficiencies. Gross profit on sales remained constant at 30% and while finance charges fell by $7 million, administrative expenses rose by $14 million, mainly in staff costs.

The company has some $66 million in retained earnings out of which dividends could be paid and may have caused one shareholder to complain to me that as a group they have been receiving nothing by way of dividends from the company. The company also has $43 million in the bank and there must be some reason for the ultra-conservative decision not to pay any dividend. Maybe there is a belief that a bonus of one share for every fifty held will appease the shareholders.

Guyana Stockfeeds Incorporated
The company manufactures and distributes livestock feeds and related products including day-old broiler chicks to both the local and export markets. It also produces parboiled rice for the export market under its “Angel” brand. In the domestic market feed sales grew by 30% while baby chick sales grew by 5% but in the face of competition from Brazilian suppliers of parboiled rice, rice export sales declined by 16%.

Highlights are set out in the table below:

The annual report is not heavy on discussion. As a result the reader is left to scour note 4, Taxation to the financial statements, to determine why a $63 million increase in profit before tax should carry a corresponding $63 million increase in taxes with the result that the after-tax profit in 2011 is marginally less than in 2010. The explanation lies in a higher deferred taxation which in 2010 benefited from a lowering of the applicable tax rate.

The company pays a significant portion of its expenses through a related party ($852 million in 2011) and also pays the related party $30 million as a “reimbursement for costs incurred.” This was the same amount paid in 2010.

Expenditure on property, plant and equipment was $76 million and the overall decrease in cash was a substantial $240 million with the result that liquid balances declined from $304 million to $60 million. Faced with this situation the directors of the company are not recommending a dividend for the year 2011.
Minority shareholders in neither of these companies will be particularly happy.

On the Line: GBTI Half-year and Stockfeeds 2008

Introduction
In today’s Business Page we look at two reports – one on full year 2008 of the Guyana Stockfeeds Inc, published under the Companies Act 1991, and the other the half-year report of the Guyana Bank for Trade and Industry (GBTI) published under the Securities Industry Act, 1998. Because of the significantly different nature of the operations and the nature of the financial information and period ends of the two entities, no useful comparisons can be drawn and the appearance of the two reports in the same column is entirely co-incidental. Indeed, if any comparison can be drawn it is the poor quality of the editing that goes into these reports, leaving major errors, sometimes in the financial statements themselves, at other times in the narrative reports and yet others in both. For GBTI some of these were pointed out in a guest column in these pages by Robert McRae CPA on the 2008 Annual Report of the bank.

Such errors are often attributed to difficulties with printers but neither the management nor the auditors can absolve themselves from their duty to members and the public to have annual reports and accounts that meet minimum quality standards.

Guyana Stockfeeds Inc.

Highlights

2009.08.23_table1

Despite what the Chairman referred to as “enormous challenges” the company recorded an increase in turnover of some 38% with sales of rice doubling while feed sales and hatchery sales increased by a more modest 29% and 21% respectively. As expected the Chairman was particularly pleased about the performance of the company’s brand of parboiled rice ‘Angel’ on the export Caricom market.

Of the net income for the year of $123M, after allowing for deferred taxation, the company proposes $60M in dividends or 49%. Dividends of $96M in respect of 2007, of which 50% is payable in additional shares, remain outstanding. The payment of dividends by the issue of shares was not effected as a result of a court matter with the National Industrial and Commercial Investment Limited.

How the company intends to fund the cash portion of dividends totalling over $100M is, however, not quite clear as the company’s liquidity position has deteriorated with the bank overdraft more than doubling to just under half a billion dollars and current liabilities other than dividends increasing over the 12-month period from $597M to $1,069M. Interestingly note 12 of the financial statements indicates that the company had exceeded its overdraft limit of $440M by more than $40M.

As is so common with public companies in Guyana, there is no mention in the annual report or the Chairman’s Report on the performance on the Stock Exchange of the company’s shares, although this may be entirely due to the fact that there is practically no trading in the company’s shares and that the company is developing into a family company with three of the top positions – CEO, corporate secretarial and finance – being held by members of the same family, which also holds some 69 million of the 80 million shares issued. This company is evidence of the permanent failure of the government’s privatisation policy, driven more by maximising short-term returns than long-term economic democracy. In all the government’s boast about macro-economic fundamentals, it does not appear to recognise that it has divested some highly profitable entities and has little to show for the proceeds. It is too late now for it to review the Privatisation Policy Paper issued under the presidency of Dr Cheddi Jagan, although it was under his presidency that we first saw the departure from policy under then Finance Minister Asgar Ally.

Accounting weaknesses
An observer of accounting and other disclosure requirements would find much of interest in terms of the contents of the Annual Report and the quality of the financial statements, even ignoring an obvious error of $400 million on the face of the balance sheet, which some may regard as the most important of the financial statements. These relate to the dating of the auditor’s report before the financial statements were even approved by the board, inconsistency in particulars about who the company recognises as key management personnel, disclosure about shareholdings, actuarial valuations and tax reconciliations.

That the company continues to pay US$50,000 management fees to a similarly named Trinidad and Tobago company for the payment of expenses on its behalf has continued to attract negative comments, since the logic and business purpose is not immediately apparent. On the other hand, the low effective tax rate suggests that the Revenue accepts the charge as reasonable having regard to the company’s business.

GBTI
In contrast to the financial statements discussed above, those of the GBTI are unaudited and cover the half-year only. In addition, there is no requirement for an Accountant’s Review or notes explaining the policies and judgmental matters relating to key financial statement items, and it is probably these limitations that explain the apparent lack of interest by the public and the business community in such half-yearly reports. Such statements should not be disregarded, since it must be assumed that they result from the accounting records prepared, subject to the limitations identified, in accordance with acceptable accounting standards.

Highlights

2009.08.23_table2

The bank’s performance for the half-year continues a run of excellent results not only for GBTI but indeed for all the commercial banks over the past three years. As the table above shows the bank has increased both deposits and loans, but with a barely discernible increase in the loan to deposit ratio. Our banks are performing so well that any observer of our banking sector would be bemused if told about a global financial crisis, although the anecdotal and empirical evidence is that the non-financial sector is having a lean time. We should therefore be anticipating with interest the publication of the 2009 mid-year report by the Minister of Finance which is unfortunately again late.

Net income before taxes has increased by a whopping 26% over the corresponding period in 2008, while the amount of $164.8M stated as Corporation Tax is the equivalent of 23% of net income. This represents a significant increase in corresponding equivalent percentage for 2008 when it was less than 9% and in the low teens for full-year 2008. This increase is so significant both for the corresponding period in 2008 as well as full year 2008 that we can only wait on the audited full year for some more evidence of such a dramatic swing over such a short period.

Tax policy
Robert McRae, CPA who did a guest column on the bank’s 2008 annual report had drawn attention to the bank’s effective tax rate and how little our economic managers seem to know or care about tax policy. A significant part of the problem is the VAT, a tax borne not by businesses but by consumers of goods and services. Guyana is stuck with a hugely miscalculated VAT rate that has masked any other concern that the government may have had about revenue collection.

In his column McRae had also raised the ire of the bank and the Bank of Guyana when he drew attention to a transaction between the bank and the Bank of Guyana, particularly in the context that the bank had for a second straight year had a significant deficit on its statutory reserve with the central bank.

The Bank of Guyana with unusual speed and generalisation reacted to the column but significantly has refused to answer some specific questions raised publicly by McRae. While commercial banks are, and indeed every person is, entitled to responsible financial reporting, they have a duty to respond to legitimate questions from the public on issues touching on their operations.

GBTI’s Chairman Stoby was noticeably pleased with the results and is upbeat about the bank’s performance for the second half of the year. Those results will certainly be eagerly awaited, but before then we will have some of the other banks including Republic Bank which has a September 30 year end. It will be an interesting period.