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

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

Annual reports 2011: Guyana Bank of Trade and Industry and Sterling Products Limited

Business Page today continues its review of the annual reports of companies for the year 2011 by covering two of the public companies in the Beharry Group – the Guyana Bank for Trade and Industry and Sterling Products Limited. GBTI held its 24th Annual General Meeting on April 3, while Sterling held its AGM on April 18. Secure International Finance Company Incorporated (Secure) owns 61% of the outstanding shares in the Bank and 58.1% of the shares in Sterling. In turn, Secure is 100% owned by Edward B. Beharry & Company Limited, a private company. The reports show that the Bank recorded a 15% increase in profits after tax while Sterling’s profits after tax increased by 20%.

GBTI Highlights

The Bank has nine branches including one at Lethem, making it the first and only banking service outside of the cities and towns of Guyana. Over the past five years, GBTI has witnessed truly impressive growth winning the favours of the government in a number of foreign and locally financed lending schemes, some of which come with tax breaks. In 2006 it was awarded a contract “to carry out the implementation of a Financial Facility to improve the competitiveness of the Rice Sector in Guyana,” and in 2011 it entered into a contract with the Ministry of Finance in respect of “loans to non-traditional agricultural exports, aquaculture, fruits and vegetables and livestock.” Financing for this comes from the IDB and the interest on the loans is exempt from corporation tax. Taking advantage of a number of tax shelters the Bank’s effective tax rate is less than 30%, compared with the nominal rate of 40% on the profits earned by commercial banks.

Asset structure
The Bank’s total assets at the end of 2010 were $75B, reflecting a growth of $12.4B (20%) over 2010 and accounting for 23% of Total Commercial Bank Assets in Guyana. The Bank’s assets as a percentage of commercial bank assets grew by 2 percentage points over 2010. Of the Bank’s assets, some $8.3 billion, or more than 10% was held overseas “so as to benefit from more attractive returns from yet safe instruments.”

At December 31, 2011 loans and advances amounted to $24,051 million, a 24% increase over 2010. The report states that loans to all sectors of the economy increased in 2011and that lending to individual customers increased by $3.1 billion while lending to business enterprises increased by $13.6 billion, which in total exceeds the $4.7 billion increase in total loans and advances. There is a similar discrepancy in the information on loans in the Agriculture Sector which in one case is shown as increasing by $2.8 billion and in another by $1.1 billion. In yet another table, loans and advances to the Agriculture Sector are shown as $2.342 billion while in a narrative they are stated as $9.7 billion.

Income statement
Neither the Chairman nor the CEO discusses lending and deposit rates in the absence of which only very rough calculations can be computed. These show that the average rate paid on savings accounts was 2.03% and on term deposits 1.91%. Taking all deposits into account the average interest paid by the Bank is about 1.5%, compared with the average rate on lending of close to 12%.

GBTI has always earned significant commissions and foreign exchange gains and in 2011 the amounts earned exceeded the Bank’s entire salaries bill. As a consequence of the operating performance, earnings per share (EPS) rose by 5.3% to $34.59, encouraging the directors to increase dividends per share from $4.50 to $6.00 giving a payout ratio of 19.53%.

GBTI continues to be one of the country’s strongest banks and has several committees designed to enhance better governance and better results. Its high quality annual report is upbeat and positive, justified by the results it has been delivering. There are however some technical areas for improvement in meeting IFRS and other regulatory requirements.

Sterling – Highlights

Statement of Income

For the first time in the company’s history, turnover topped the G$3.0 billion mark, although this has come with a reduction of G$9.7 million in after-tax profit, down 5.6% to $162.1 million from $171.9 million in 2010. Chairman Dr Leslie Chin attempts to explain this as “due to sales and marketing expenditure directly associated with enhancing distribution of our products. With additional spending in the area of marketing and distribution the company saw the relative return on investment as a total business expanded,” which must have confused the shareholders in attendance.

The Chairman also reports that export sales grew by 5.5% or by G$9.9M over year 2010 sales without stating the level of export sales, which too is not shown in the financial statements. From note 22 dealing with credit exposure it is apparent that the company does business with Grenada and Trinidad and Tobago, with two of the top balances being with customers from those countries.

He does however report that the company has seen “growth in some Caribbean Countries, whilst others present problems with respect to competitiveness.” Sterling is potentially one of Guyana’s manufacturing exporters and for years it has sought to “explore ways and means to have our products on the shelves of businesses in the Caribbean.”

Gross margin has declined from 25.3% to 22.6% while other income has also fallen, from $34.9 million to $22.3 million even as distributing and marketing expenses have increased by $25 million. Once again the company incurs finance costs from an overdraft, even as it holds more than two hundred million dollars in fixed deposits.

With the reduction in the tax rate from 35% to 30% the company’s tax charge has declined by $29 million, of which a significant portion is due to the tax effect of depreciation. Basic earnings per share increased from $6.18 to $7.42 while dividend per share has increased from $3.30 to $3.50. The increase is not reflected in the table above as dividends are only recognised in the financial statements when paid.

The balance sheet of this company is strong with both adequate working capital and healthy liquidity. One of the commendable features of this company is that it has maintained its defined benefit schemes for its employees while so many others are switching from defined benefit to defined contribution scheme. Hopefully, it keeps it that way.

Annual General Meetings generate interest

As the season for general meetings moves into high gear, members, or as some companies call them shareholders, have been showing some interest in these meetings, although not always for what might be considered the right reasons. One complainant in a letter appearing in the press this week went so far as to make the charge of meanness against the directors and management of one of those companies. For good measure the writer reported that there was a “deep groundswell of resentment against the directors and management.” One individual who takes a healthy interest in such meetings and is one of the younger breed of investors wrote me on a number of issues all of which he suggested indicate that the directors and management are generally insensitive to the convenience of their members, including the calling of meetings when most persons would be at work, the meetings of more than one company being held on the same day, and no facilities for the aged and infirm. The shareholder was so incensed that he suggested that despite the expense of putting out glossy annual reports, company management really do not want shareholders to attend, speculating that there must be “something to hide”.

That speculation seems both harsh and unjustified. Experience suggests that our shareholding public is not sufficiently informed to detect any “hidden truths” and questions at an AGM almost without exception come from a handful of persons and are less than pointed. Some people it seems go to meetings as a social event, for many the only time they are invited to a hotel. Others go for that peculiarly Guyanese phenomenon at which gifts are distributed to those in attendance. While the motive for this may be good, this is an unfortunate practice to which members have become so accustomed that I do not think any company would wish to discontinue.

Serious business
A shareholders’ meeting is a serious event at which searching questions should be asked of the directors particularly given the weakness of our financial press and the fact that none of the companies meets the press and gives them the opportunity to ask questions. Such meetings are not really the forum for long-service awards but for directors to allow questions about their stewardship.

The practice of gifts apparently developed as a goodwill gesture and is now used to encourage attendance at meetings. It is important to note shareholders’ entitlement is to dividends – not gifts – and that all holders of the same class of shares are to be treated equally. In other words if one shareholder gets a gift or a dividend, then all shareholders of the same class are equally entitled. It would be interesting to see how any of the companies would respond to a challenge to a charge of discrimination against shareholders who do not attend and are therefore told that they are not entitled to a gift.

On this note it is useful to note that the Institute of Chartered Secretaries of India – a country that has lots of experience with improper influences – says categorically that “No gifts, gift coupons, or cash in lieu of gifts should be distributed to Members at or in connection with the Meeting”.

Clash of meetings
In terms of timing of meetings, part of the problem is that several of our public companies have a calendar year-end and have four months within which to hold their annual general meetings. But to do so they need to have the company’s financial statements finalised and audited for inclusion in their annual reports which must be circulated three weeks before the annual general meeting. It is hardly any surprise then that most meetings are held in the fourth month following the year end. While the Securities Council cannot dictate the date and time when companies which they regulate can hold their AGMs, it may wish to consider discussing with them a schedule so that there is no clash and persons who hold shares in more than one company are thereby free to attend each of these meetings.

This coming weekend there are three meetings of public entities – the Demerara Distillers Limited and Sterling Products Limited (April 29) and the New Building Society Limited (April 28). All the reports offer useful opportunities for serious questions on policies, performance, shareholder relations, etc. which could be raised by some shareholder group with collective knowledge and some institutional memory. Before making some specific points about the companies here are some general questions which shareholders can raise.

Board of Directors
With each of the three companies having only one woman director, the questions should be asked about the steps the company is taking to attract qualified women and minority shareholders for board membership. They may also wish to enquire about any mandatory retirement age for directors; whether there is an ethics committee; the perquisites paid to executives, the basis on which these are valued, whether executives reimburse the company for the fair value of personal benefits received and whether executive perquisites are checked by internal auditors and reported to the audit committee.

Audit and controls
The number of internal auditors the company has; whether they report to a sufficiently high level of management and have ready access to the audit committee; the regularity with which they visit each operating location, including foreign operations; the standards and performance of the internal audit department and whether these have been evaluated by an external review; whether internal auditors have full, unrestricted access to all company functions, records, property and personnel; and the actions taken on any material weakness in internal control reported by the independent accountants.

In the case of a company with several subsidiaries, if the annual report does not provide the information, shareholders should enquire whether all of the subsidiary companies are independently audited and the names of the audit firms. Too many auditors are not necessarily a good sign, while no auditor for any of the subsidiaries casts doubts on the financial integrity of their financial statements.

Political and Economic Environment and Taxes
Shareholders should be asking whether the company has maintained its competitiveness in terms of sales and earnings in the markets in which it operates; the cost to the company of compliance with governmental directives and regulations and the risks of operating in some markets and industries; the conditions for investment and expansion; taxation and efforts to lobby government on various issues.

In an election year, shareholders may wish to enquire whether the company plans to make any contributions, loans or other support to any political candidate or organisation including lobbies and if so to ask for details.

Financial and Liquidity and Capital resources
Against the background of their own personal liquidity and to formulate their savings and investments, shareholders would need to hear from their company of its plans to pay cash dividends and issue cash or bonus stock. With financial statements and annual reports growing in size and complexity, the shareholder should be enquiring why financial statements and footnotes in the annual reports are not more intelligibly written so that the average shareholder can understand them.

This list is by no means exhaustive and would have to be tailored to the specific circumstances of the particular company. Serious shareholders should keep a file containing past annual reports and the questions asked since even directors sometimes need to be reminded of earlier commitments.

Let us now turn to some specific issues which could be raised at this weekend’s AGMs.

This company operates in several countries, the economies of all of which did not perform as well as Guyana’s. Yet of the group companies, those in Guyana performed less well than those abroad. Indeed the parent company (DDL) reported a 12% decline in after tax profit, while the other local subsidiaries including its trading company Distribution Services Limited, TOPCO, Demerara Shipping and Demerara Contractors all came in with disappointing results. The company’s financing strategy has been questioned in these columns before and one wonders at the logic of financing costs over the past five years nearly double the returns to shareholders. If it has not already done so the company needs to consider why with all the investment TOPCO is still making losses. The company’s investment in India continues to cost the company significant sums while St. Kitts and North America remain marginal after several years of efforts and expenditure. On the other hand the investment in National Rums of Jamaica Limited is producing good returns.

Overall the return on assets and shareholders’ funds, has dipped slightly.

Sterling Products Limited
While turnover has increased, profit after tax has declined and therefore so have measures such as return on assets and return on shareholders’ funds. Chairman Dr Leslie Chin attributed this to higher deferred tax which was not completely compensated for by a decline in the corporation tax charge. In order to maintain the same level of dividends paid in 2009 the company will be paying out 53% of its after-tax profits.

New Building Society
The notice convening the meeting excludes from the right to attend the meeting, mortgage account holders, who under rule 21 of the Society’s Rules are described as advance members. While a similar exclusionary note was included in the 2009 annual report, such persons have always been allowed into the meetings and the basis of the decision to exclude them is questionable.

The other three major issues of note are: 1. the Society has been finally brought under the Financial Institutions Act although it has a four-year transitional window; 2. it is still in breach of section 7 of the Act, an issue I have pointed out before; and 3. the Society actually lent one billion dollars less in 2010 than in 2009.

Indeed, despite the housing programme in which it should be playing a major role, the number of loans at the end of 2010 was a mere seventeen more than in 2009, a clear indication that the Society lost significant market share during the year.

While the report acknowledges the mutual nature of the Society’s ownership it not only repeats the word “profit” ad nauseam but the directors appear not to understand the meaning of the concept. No wonder then that they have ignored rule 23 relating to rebates, an issue which the directors agreed at the last meeting to review following a question from the floor.

For those attending the meetings, enjoy your gifts.