Category: Business and Economic Commentary

February 23, 2024

Banks DIH Ltd. and its challenges

Introduction

Today’s column reviews the Annual Report – including the financial statements – of Banks DIH Limited, a group of companies comprising the food and beverage giant and Citizens Bank Limited in which it has a 51% interest. A new addition to the group is Banks Automotive and Services Inc. which is a 99.99% holding of Banks DIH Limited. An old member of the group Caribanks Shipping Co. Ltd. is no more. Today’s Commentary will discuss both the company and the group but will be clear to distinguish between the references.

In the year ended September 2023, the Group recorded a Profit before Tax (PBT) of $14.509 billion, an increase of $1.111 billion or 8.29%. The Profit before Tax for the Company was $11.393 billion, which means that the company accounted for approximately 78% of the group’s PBT. The new company reports revenue of $170.9and Profit before Tax of $9.2 million. Those figures should be regarded with caution. The spanking new building across Thirst Park is actually owned by Banks DIH and the operational management is also conducted by the parent for a pepper corn charge – distorting the economic performance of the new kid.

Source: Annual Report 2023

Dividends and share price.

The directors recommended a total dividend for the year of $2.20 per share resulting in an overall cost of $1.870 billion. CEO and Chairman was keen to highlight that the dividend cost increased by 10 % but steered shareholders’ attention from the fact that the company has one of the lowest (about 20%) payout ratios of companies among Guyanese companies. The Chairman should not therefore be indignant that the company’s share price has slid recently. In a perverse way, a slide in the share price actually helps the dividend yield and makes the shares more attractive. Dividends have been a sore a point among shareholders for several years, both at annual general meetings and, I understand, in direct communication with the company.

Source: Annual Reports of Banks DIH and GASCI website

This stinginess is also reflected in two other numbers computed from the financial statements, which this columnist has found most interesting. Measured by retained earnings in relation to last year’s dividends paid, the company has 29 years of dividends locked in and out of the reach of shareholders. The company has a cash hoard of more than $19 Billion dollars and year after year has a positive cash flow, even with capital expenditure financed from current operations. Public companies are exploiting the lack of opportunities which is small shareholder has at her disposal for alternative investments.

The problem Guyana has with public companies is the incestuous relationship which the main institutional investors have with their main boards, a feature of the Banks, DDL and the Beharry groups. There is no way that the main shareholders of the DDL and the Banks Group will go against the wishes of the principal or controlling shareholders or personalities. For the record, the substantial shareholders are the Hand-in-Hand Group, Trust Company, Demerara Life and Banks Holdings of Barbados. In terms of personality, the Chief Executive has an interest in less than one third of one percent of the total shares but seems to enjoy a lifetime appointment, answerable to no one but himself.

Election of directors

Sharing a practice common to many of the local companies, only the non-executive directors are subject to reelection, which in my view is a violation of the Companies Act. In violation of good corporate governance, the majority of the directors of the Banks board our executive directors who are not subject to shareholders’ oversight. And even those who are subject to re-election can hardly be considered independent.

New direction

 The board has decided that the model which has worked for decades must be changed and has decided that this company will now become a subsidiary in which individuals and companies will own no shares. This is an absolutely logic-defying move and will have consequences for shareholders. The company with all the retained earnings will become a private company in which existing shareholders will have no interest or voice. It does not appear that this initiative was properly thought out and should be revisited.

Re-routing transactions through Florida

The Company’s and the Group’s purchasing policies have always generated interest, but one particular transaction has put these under microscopic review. It appears that for several years, the Company has unnecessarily re-routed business transactions through a small Florida operation with a share capital of less than US$10,000. The principal of the Florida company it seems has close to 600,000 shares in Banks. Banks Guyana sources alcoholic beverages from a manufacturer in Netherlands and by extrapolation, paid some G$562,123,894 or well over US$2 Mn. in commission to the Florida intermediary.

There is no doubt that Banks DIH is a blue-chip company but with major issues and concerns. Shareholders need to take both note and action.

February 16, 2024

The Stock market and mean dividend policy

Share Price

Many years ago, the PPP administration sort to make the issue and investment of shares in public companies an attractive proposition, exempting from capital gains tax the gain any transfer of shares. That is on top of a change in the law during the Desmond Hoyte administration when dividends paid on shares in Guyana companies were made nontaxable. We also saw the advent of the Stock Exchange in 2003.

This second Economic Commentary looks at the more recent performance of the Guyana Stock Exchange measured by what is called the Stock Exchange Index or in Guyana’s case the market capitalisation, measured by adding the total of the issued shares of each of the companies whose shares are traded on the Exchange times the unit price for those shares. By this measure, the market capitalisation at January 2024 was $795,207 million, down 25% from a high of $1,062 213 million at July 2022. As stock exchanges go that is quite significant, made worse by the fact that public companies, particularly the larger ones, have been reporting massive increases in profits.

Trying to put this into some kind of context is equally bewildering. Between January 2021 and July 2022, the market capitalisation had increased from $397,067 million, translating into an increase of $665,146 million or 68%. It is difficult, perhaps impossible, to identify let alone justify the circumstances accounting for this meteoric rise and Icarian tumble. What is not difficult is to understand the impact on those pension funds and other institutional investors, especially those which had adjusted their investments and calculated their actuarial assets and liabilities based on July 2022 balances.     

The six companies that mirrored these changes are listed in the Table below. As can be seen, the largest movement between January 2021 and January 2024 are Demerara Bank Limited by an unbelievable 301% followed by Demtoco and GBTI in treble digits, Banks DIH Limited (97%) by DDL (79%) and RBL 12%.

Source of Information: Guyana Stock Exchange Website and Public Companies Annual Reports. Stated in Guyana Dollars except for Percentages.

Between July 2022 and July 2024, the price of the shares in Demtoco and GBTI had a more terrestrial growth of 6% and of 9%. For the others, the slide was: DemBank was 28.7%, Banks was 39%; DDL was 48.8% and RBGL was 13.6%.

Because of the lack of investment opportunities, and the total absence of new shares over more than 25 years, shareholders tend to hold on to their shares and not many shares change hands. Had this not been the case, the logical thing for small shareholders especially to do would be to sell their shares while the price is still relatively good. One sympathises with those shareholders who did not cash in on the high prices at July 2022 and now see the value of their shares in many of the companies having fallen by significant percentages. The hope for a quick recovery is to expect more on sentiments than objective fundamentals such as higher dividends. .   

Dividend payout

I previously commented adversely on the low payout ratio of dividends to market price which in the case of the twins – Banks DIH and DDL – are some of the lowest in the country. There are two consequences of this stingy dividend policy: a low dividend yield and a high level of retained/accumulated profits. Of our top six companies DDL has the worst dividend yield (0.5%) with GBTI and RBGL – two banks at 1.6%, while Demerara Bank is 0.6%. A decent dividend yield should be around 2.5% – 4 %, depending on the maturity of the company, among other factors.

A low dividend yield should affect share price since the company is not an attractive proposition for persons hoping to earn dividend income. That’s the type of thing that no chairman does not ever raise at shareholders’ meeting or even want its small shareholders to know.

The other consequence is that the company does not ever need to raise by the fresh issue of shares or develop a good mix of financing from equity, long-term and short-term debts. There is a rule of thumb that the company can have debt equivalent to four times equity. But instead, our public companies use shareholders’ funds to finance capital expenditure. For example, DDL ten years ago, had $4.7 Bn in debt. Now it is nil. The repayment of those debts and subsequent capital expenditure have come from shareholders’ funds.

Let us take one other metric as a measure of a company’s dividend policy. And that is the number of years of most recent dividend cover measured by the distributable accumulated profits. Meaning that even if they make no profits for those years, they would still be able to pay a dividend. Again, it is DDL with the most dividend cover in reserve (35 years), followed by Banks DIH (29 years), Dembank (24 years) and GBTI (19 years).

Table showing changes in Retained Earnings and Dividends Paid Performance Summary

Source of Information: Guyana Stock Exchange Website and Public Companies Annual Reports. Stated in Guyana Dollars.

Shareholders have to demand more from their directors and the so-called independent and institutional directors must show some regard for the small shareholders.

Next week, we do a detailed analysis of Banks DIH Annual Report for 2023.

February 9, 2024

The Stock Market Share Price Mystery and Conflict of Interest

Beginning with the exchange between the Chairman and a shareholder at Banks DIH Limited Annual General Meeting held on 27 January 2024, there appears to have been much interest in the share prices of public companies. In fact, this writer holds the view that because of a quirk in how prices of shares are determined on the Stock Exchange; the terrible illiquidity in the marketplace for shares, the awful and inexplicable dividend policy of companies and the lack of investment opportunities, the demand for the few shares offered for sale, the prices of the shares of several of the companies cannot be easily justified.

Here is a picture of the share price movements of eight of the public companies over the period January 2019 to December 2023. With an acknowledged anomaly in the shares of Caribbean Container Inc.(see S/N letter column of 8 February, 2024, I consider it prudent to exclude the figures for that company.

Source: Guyana Stock Exchange website

Expressed another way, according to the Stock Exchange website the overall capitalisation of the stock market between the two dates moved from  $301,412 Mn. to $819,884 Mn. or 172%. What is clear is that for some reason the market has begun an adjustment moving from a  $1,062,213 Mn. in July 2022 to  $819,884 Mn. in December 2023, a decline of 23%.

If in fact, this trend continues, the consequences can be severe for pension funds and insurance companies which would be undesirable. The people who are best placed to bridge the gap between what might be a realistic price and the traded price are those companies which have been hoarding profits instead of rewarding shareholders for their loyalty and who have been funding their capital programmes out of retained profits, such as DDL and others who have large liquid balances, including with their banks, such as Banks DIH. 

Another possibility is for companies to buy back their shares as permitted under the Companies Act, a practice largely unknown in Guyana. Another possibility is for the commercial banks to pay a more economic rate of interest on deposits. Currently, if shareholders were to take advantage of the share price bubble and sell their shares, there are few alternative saving or investment opportunities. It was part of the PPP/C mantra that commercial banks should start narrowing the spread between the interest they pay and the interest they charge as the Bank of Guyana has had some success with trading in foreign exchange. 

This column will be monitoring developments over the next few months as public companies publish their financial statements and shareholders and the public get a better understanding of their operations. For now, I will do a brief overview of the framework in place for the regulation of public companies.

The most basic of these is the Companies Act under which local companies are incorporated here while foreign companies can either incorporate in Guyana or register as a branch.  The Bank of Guyana is also the regulator for both the banking sector and the insurance sector. All public companies must also comply with the Securities Industry Act which creates the Securities Council to exercise oversight over them.

Then there is the Guyana Stock Exchange which provides a platform for the trading of shares in public companies. The Stock Exchange is a private company which operates through a handful of member firms – Trust Company (Guyana) Ltd, Guyana Americas Merchant Bank Inc, Beharry Stockbrokers Ltd and Hand-in-Hand Trust Corporation Inc.   

This seems to pose an immediate conflict of interest, something that is anathema in the financial world but all too familiar and widely accepted in Guyana. Trust Company has a very, very close relationship with DDL, Hand – Hand Trust with Banks DIH and Guyana Americas Merchant Bank Inc, Beharry Stockbrokers Ltd with the Beharry Group which includes two public companies – GBTI and Sterling Products Limited..

The apparent conflict does not end there. Trust Company and Hand – in – Hand Trust also manage pension funds which hold significant investments in public companies. If there was a major realignment in share prices, they would have some serious questions to answer.

Next week, we will look at the dividend policies of these public companies and why we think they companies can pay mush higher dividends.