Category: Business and Economic Commentary

March 8, 2024

A Table of a Chart and a Graph

Introduction

Today I will deliberately use the Chinese aphorism that “a picture is worth a thousand words” with great effect. So, with two pictures, we start with two thousand words which takes me over my word limit. Some weeks ago, the Government announced that two historic cricket grounds and green spaces in Georgetown are being handed over to its Middle Eastern friends from Qatar and their exclusive clientele for the paltry sum of $2 Bn, or less than US$10 Mn! Forget for a moment that the President and Vice President seem incapable of distinguishing between the State and the Government, or that selling in the absence of a robust valuation was their alleged ground for wanting to jail former Finance Minister Winston Jordan.

As dessert, VP Jagdeo, who is no stranger to tax holidays, indicated that the Qataris will have a 10-year tax holiday! We recall that about fifteen years ago, Jagdeo publicly insulted the late Yesu Persaud for being ignorant of the tax laws when the icon asked for equality and equity of tax concessions. Yet, any ignorance was on the part of Mr. Jagdeo who had extended concessions to his friend Dr. Bobby Ramroop, which the law did not allow. Mr Jagdeo showed no embarrassment or contrition over his error but rushed to change the law to accommodate Dr. Ramroop.

The wealthy poor

Let us look at the two charts. The first is by energy consultants Rystad Energy (which is duly acknowledged) showing that Guyana now has the highest per capita petroleum of any country in the world. And by far. Even if we estimate the population to be 800,000, it means that each Guyanese has a claim to 16,250 barrels of oil, the value of which at roughly US$80 per barrel, means that every man, woman and child is worth about US#1.3 Mn! For the moment, let us forget that Exxon and the Government are concealing several additional billions of barrels from Guyanese. Of course, these are gross values from which expenses have to be deducted, as they are for every other country on the chart. By any measure, however, that is a lot of money.

Sadly, these numbers seem to mean nothing to this Administration or to suggest to them that there ought to be a better revenue sharing between Guyana and the oil companies. Nor does It stir them that Guyanese are still queuing for freeness, teachers have to strike for better pay, and the working struggle to make ends meet even as the oil companies take a disproportionate share of the patrimony of the people and their officials live a life that would make the British Raj envious.

Tax to GDP ratio

Now for the second graph. It shows the tax collected by the central Government relative to the gross domestic product of the country. By this measure, Guyana has the lowest tax to GDP ratio across the entire Commonwealth Caribbean countries. It further tells us is that Guyana collects even less tax as a proportion of GDP than the near-tax free countries of the Caribbean. Guyana’s ratio is about a quarter of Dominica’s, a third of Grenada’s, and about half of Antigua and Barbuda’s, its nearest comparator.

Source: International Monetary Fund Website. All percentages are stated for 2022 except for Guyana which is stated for 2023.

It is difficult to accept that Guyana’s economic managers can believe that oil revenues displace the need for taxation and that we can go handing out tax concessions to any friend or flatterer. That is the President’s chosen role in the economy. He gave away huge tax concessions to the CPL cricket extravaganza – outside of the law – and continues to do so whenever he brings regional artistes to entertain the masses.  

But the VP will not be outshone. He has taken it upon himself not only to give away state land without any consideration of its implications for the national interest but also tax holidays to persons who have neither applied for nor are entitled to them. The Income Tax (In Aid of Industry) Act is clear – it must be for “new economic activity of a developmental and risk-bearing nature”. It seems that neither the Vice-President nor the President has any respect for the laws or resources of the country, or the intelligence of its people. 

Guyana recently entered into a Double Taxation Treaty with the United Arab Emirates that is all one-sided. That has not even made the news. But now, completely outside of a treaty, the Qataris enjoy exceptionally cheap land, irreplaceable resources, no taxes and the red carpet. This cannot be rational, responsible or reasonable. It is more like recklessness and drunkenness with power. Or is it the resource curse?

March 2, 2024

Time for Guyana to have a code of Corporate Governance

Introduction

For decades, the captains of Guyana industry – almost all men – have resisted the introduction  of a binding code of corporate governance. It has not been for want of effort. There have been numerous efforts at the establishment of a code of corporate governance including one by the Securities Council and another by the Private Sector Commission. Neither of these came to fruition and there is now a total void with companies limited to more narrow codes issued for particular sector, or to practices likely to get past a general body of unenlightened shareholders.

In a column I did several years ago, I wrote that the international quest for a modern corporate governance code began in the UK in 1991. Then Pime Minister John Major appointed a committee headed by Sir Adrian Cadbury following a number of high-profile corporate failures which were attributed to poor governance, poor accounting and inadequate disclosures. The most significant corporate failures were the Maxwell Communications Corporation scandal in 1991 which surfaced after chairman Robert Maxwell died in the most unusual circumstances, revealing that he had fraudulently misappropriated hundreds of millions of British pounds belonging to the group’s pension schemes. Then there was the failure of the Bank of Credit and Commerce International which collapsed after an investigation revealed that it had been engaged in fraud and money laundering.

As its formal name implies – the Report of the Committee on the Financial Aspects of Corporate Governance published in December 1992 – the Cadbury Report really had a fairly narrow focus. Its principal recommendations emphasised improving corporate governance and accountability in public companies in the United Kingdom. There was more to follow. South Africa in 1994 saw the King Report on corporate governance, now recognised internationally as perhaps the leading code of corporate governance of any country of the world. Germany published its code in 2002 with Japan following some years later. A code for the US followed the debacle of Enron and WorldCom failures and took the legislative route with the passing of the Sarbanes-Oxley Act (2002).

Particularly in the UK and South Africa, there were iterations and additions in subsequent years with the UK now having a full corporate governance code embodying several other reports while in South Africa, the King Report is now in its fourth iteration.

Guyana’s Experiences

A Business Page I authored years ago had reported that the Council of the Private Sector Commission (PSC) of Guyana on 7 April  2011 had accepted a Code on Corporate Governance which could have some transformational effect on the way Guyana companies are managed. Like the draft Code published by the Securities Council, the PSC’s code did not get far, effectively killed by officers of the PSC itself. As I wrote then, the then Chairman of the PSC was Mr Ramesh Dookhoo, an executive of Banks DIH while Mr Chintamani (DEMTOCO) had been a member of the executive of the PSC. They could not persuade their own companies to adopt the PSC’s Code, with Chintamani pouring scorn on the idea of a mandatory code.

So here we are, decades later with no Code and a PSC that has become no more than ceremonial and largely inactive. What the absence of a code does is allow for poor governance with directors handpicked by an all-powerful chairman who reports to himself and a compliant set of directors. Directors’ turnover is minimal, and it is striking that since their formation, both Banks DIH Limited and Demerara Distillers Limited have been firmly controlled for decades under hereditary fiat by four men – Peter D’Aguiar and Clifford Reis at Banks DIH Limited and Yesu Persaud and Komal Samaroo at DDL. Independent directors are almost invisible and ineffective, serving at the will of the Chairman while the executive directors are not subject to election or re-election. The shareholders with any real voice and influence are the Institutional investors but these operate as cartels, even at the cost of their own interest.

Guyana’s Failures

Guyana too, has had more than its fair share of failures with Globe Trust and CLICO as standouts, but Guyana Refrigerators, Stockfeeds and many state-owned companies have also suffered. Yet, no meaningful action has been taken to strengthen corporate governance and to prevent a recurrence. These are not simply issues for the seven days’ news cycle. Companies will fail because of the type of industry they are in, because of technological advances and because of particular unique circumstances. But good corporate practices, careful planning and open communication do help in anticipating and preventing failures.

Boards have made too many costly blunders because of directors’ failures such as DDL investing in facilities in a dry state in India and Banks DIH making some costly strategic and tactical blunders, all with total immunity. This should not continue. There is a complete disconnect between a country determined to take its place among the richest in the world, tolerating corporate government practices that are backward, ineffective and which stifle growth and development.

Conclusion

A code not only sets the minimum standards of governance in companies but also requires them to report on how they apply relevant corporate governance principles, and also to be responsible enough to give an explanation to the shareholders of the reason(s) if they deviate from the code – the ‘comply or explain’ principle. The code also calls on companies to provide information on their corporate governance policies and principles at the request of shareholders for further evaluation, the very things DEMTOCO said they would only provide if the law so required it.

None of the senior members of the government have any corporate experience and would seem ill equipped to appreciate how the absence of a corporate governance code retards the development of the country. Yet, it is a great opportunity for the Minister of Business to convene a meeting of the Private Sector Commission and the securities council asking them to set up a  committee with the express purpose of formulating a code of corporate governance. Let the Private Sector explain why it is not supportive of such a code.

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.