Category: Publicly traded entities

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On the Line: 2010 Annual Report of the Guyana Bank for Trade and Industry Limited

Introduction
Last year when the Guyana Bank for Trade and Industry published its annual report for 2009 Business Page interrupted its series on the state-owned Guyana Sugar Corporation. GBTI’s 2010 annual report similarly interrupts a series of articles on the 2011 budget for the principal ministries of the government.

Another similarity this year is the remarkable growth of the Bank particularly in terms of after-tax income which in 2010 increased by a substantial 21.6%, easily surpassing the 5.3% growth in after tax income in 2009 over 2008.

The satisfaction with the results was writ large on the face of Chairman Mr Robin Stoby and in his enthusiastic and lofty prediction of the bank’s future as “luminous in the vein as our head office” and the realisation of the Bank becoming “the leading bank, not only in Guyana but also further afield.”

While there may be some over-enthusiasm in the Chairman’s predictions, they are understandable with net income before taxes increasing by 17.8% in 2010, 25.8% in 2009, 14.8% in 2008 and 23.9% in 2007, making for a cumulative increase since 2006 of 110.6%. Because of the tax effect, after-tax profits have increased cumulatively over the same period by 138.1%.

Highlights

Performance
Earnings per share for the year were $30.1 in 2010, a significant increase from $24.8 in 2009. With the last trade in the company’s shares happening on January 31 at $163, the P/E ratio would be 5.4 compared to 5.6 just under a year before. No offers to sell the Bank’s shares were reported by the local stock market last Monday while the best bid price was $180, theoretically giving a P/E ratio of 5.98.

Given that per-tax income actually grew at a slower rate (17.8%) than in 2009 (25.8%), the enhanced after-tax performance has to be attributed to the lower effective rate of corporation tax which in 2010 was 24.5% compared with 26.2% in 2009.

This of course compares with the nominal rate of corporation tax of 45% up to last year. No doubt the shareholders would have been happy with the announcement that the nominal rate of corporation tax on banks, commercial and telecommunication companies other than telephone companies is being reduced from 45% to 40% effective January 1, 2011.

Commercial banks also enjoy several shelters including on investment income arising in countries with which Guyana has double taxation treaties and certain categories of loans made by the bank.

The interest earned on the average of net loan balances declined from 13.1% to 12.2% while the average interest paid on deposits was 2.1%, compared with 2.2% in 2009. The bank also consistently enjoys a high level of non-interest bearing demand deposits which averaged more than $12 billion during the year. Exchange Trading Gains fell from $733 million or 19.1% of total income in 2009 to $639M or 14.6% of total income in 2010, which took such gains below the 2008 level.

Loans and deposits
Deposits grew by $7.5B from $45.8B to $53.7B, an increase of 17%. Major sectors with increases were State Entities ($3.1B) and Personal ($4.6B), Deposits by the Commercial sector showed no increase while those by non-residents actually declined by 11% to $2.4B. The bank’s deposits increased slightly ahead of growth in deposits of all commercial banks, thus allowing it to increase its market share by 0.29 percentage points to 21.66%. Its market share of loans however could not be reliably determined as the total loans and advances figure published by the Bank of Guyana at December 31, 2010 excludes Real Estate Mortgage Loans.

The strong net increase in loans and advances came mainly in the Services ($2.8B) and Household ($2.6B) sectors. Since Household is wider than housing, it is not possible to ascertain from the financials the extent of mortgage lending from this categorisation.

Once a very strong player in the agriculture sector, the Bank’s loan portfolio suggests that this sector in no longer being emphasised and its growth in 2010 was a mere $73 million.

The Bank’s financial condition remains very strong and shareholders’ funds have increased from $5.7 billion to $6.5 billion.

In addition to providing several tax shelters, government support also comes in the form of treasury bills issued by the government that is prepared to spend billions to mop up liquidity. The bank’s stock of such bills is now $19.2 billion, while its loan portfolio has risen from $13.1 billion to $19.4 billion, an increase of 48%. Empirical evidence is that a substantial share of this is in the form of mortgages but strangely, the financial statements do not show this figure.

Related party transactions
Loans and advances to group companies totalled $660 million compared to $507 million at the end of 2009. Interest income was however recorded at $33 million on these facilities, an average interest rate of 5.69%. With a much higher average earned from the loans and advances portfolio (12.2%), it is difficult to see how the “rates of interest and charges have been similar to transactions involving third parties in the normal course of business” as stated by the Bank. On the other side, deposits by group companies were relatively stable at $1.1billion and interest paid averaged 2.46%, compared to the average on the total portfolio of 2.1%.

Insurance policies placed with a group company more than doubled from $2.1 billion to $5.0 billion.

Another related party is the law firm of Hughes, Fields & Stoby of which the Bank’s chairman is a partner. As with so many financial houses in Guyana, the Bank seems to place much of its customers’ borrowing business with a single firm rather than give the customers the expressed option of independent legal counsel.

Share price
Only 1000 GBTI shares have traded since November 15, 2010 – a single trade on January 31, 2011. 251,500 traded between January 1, 2010 and November 15, 2010, more than half (140,000) of which traded on April 26, 2010 which is the week after the AGM. Share prices on January 11, 2010, April 26, 2010 and January 31, 2011 were $135, $160 and $163 respectively. The highest price for the year was $180 on April 12, 2010.

At $9.0 per share, total dividends in 2010 will represent 29.9% of the year’s distributable profits, compared with 30.3% in 2009.

Conclusion
The Bank is clearly on a growth mode and is so far the only bank approved under the small business amendment to the Income Tax Act; is the centre of the Women of Worth Scheme; and has started construction in Lethem, which will likely make it the first bank to open in that area. The Bank has also taken up an additional 10% shareholding in associate Guyana Americas Merchant Bank Inc. These are significant developments.

On the negative side, the Bank could be more forthcoming with information on its overseas investments and the various loan schemes it operates.

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On the line – The Banks Group

Comment

Ram & McRae has identified and announced as one of the activities and initiatives for its 25th anniversary being observed this year, an award for the best Annual Report by any Guyanese company. The selection will be made by a panel of independent professionals from the business community, academia, the Guyana Bar Association, consumer representatives and the media.

In deference to the firm and in order to avoid any appearance of, or in any other way influencing that panel, Business Page and this feature will restrict its analysis of the annual financial statements and reports of public companies in Guyana to matters contained and disclosed in those reports and accounts. It will avoid identifying, as far as is consistent with a proper analysis of those reports, any defects or deficiencies, and will be less judgmental in its evaluation and interpretation of those documents. A consequence of this approach will be that the column will not be offering any public recommendations for addressing any perceived or actual deficiencies.

I hope that this does not detract from the interest which readers have shown in this feature over the years, which has on many occasions caused the column to be at odds with some of the companies.

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 (‘Banks’), the food and beverage giant, Citizens Bank Limited, a 51% owned retail bank and Caribanks Shipping Company Ltd, a dormant company. 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. The financial statements of the group do not treat as an associate Banks Holdings Limited, a company in which it owns 8.6% of its issued capital, has a director on its board and with which it had transactions valued at $150 million during 2009. On the other hand, Banks Holdings which owns 20% of Banks and which has two directors on the board of the Guyana company, treats Banks Guyana as an associate in its books.

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 month – Citizens on January 19 and Banks four days later. The shareholdings in the two companies reflect an interesting contrast with Banks spreading 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 sixty smaller shareholders.

Banks will be presenting a regionally designed and produced high-quality, glossy report in which the Chairman and CEO waxes lyrical about the iconic role of the company in the landscape of Guyana. The report of the bank in contrast, is done with the standard cover in which only the year is different. One other issue of difference is the structure and contents of the reports of the two companies which have different governance structures, with Banks having an Executive Chairman, the American model, while Citizens has split the roles of Chairman and Chief Executive Officer, the European model.

Banks has eleven directors, five of whom overlap with the nine in Citizens. In both cases, all are male, even as this week’s Economist shows on its cover a blue-collar woman flexing her muscles and boasting “We did it!”


Source: Annual Report 2009

As the Chairman pointed out in his report, the net profit of the company passed the significant one billion dollar milestone for the first time in its history, with a 32% increase over 2008. Those profits were earned on increased turnover of 5% which would be slightly ahead of the official inflation rate for the country. Net operating costs rose by a smaller 2.1% compared with an increase of 4.9% in 2008 over 2007, but with staff costs increasing by just under 10%, about double the rate of inflation. Costs for key management increased by 13.07% while for other staff the increases averaged 10.69%.

A significant contributor to the better performance reported in this year, however, is a write-back of $474 million arising from a favourable settlement of an excise tax issue between the company and the Guyana Revenue Authority. In 2007 and 2008, the company made provisions of $183M and $291M for potential excise taxes and the published half-year report at March 31, 2009 showed a cumulative provision of $617M.

Reflective of that agreement, the Profit and Loss Account for the year shows a reduction in excise tax of $268 million over 2008 or an effective rate of 11.7% of sales compared with 15%. If the write-back, which is a non-recurring benefit, is excluded from the current year’s profit the net after-tax profit for the year would have been $813M. When compared to a profit for 2008 of $1,039M (adjusted for the excise tax provision made in that year), the company would have reflected a fall in profitability of 21.72%, despite the increase in sales.

Partly due to the write-back, all the profitability ratios show increases over the preceding year, but so too do the other ratios which are less, or not directly affected by the write-back, such as activity, liquidity and solvency ratios. Both current as well as long-term liabilities have declined while current assets have increased as have cash resources which increased by $481 million or 37% over 2008.

The average rate of tax charged in the accounts for the current year is 39%, a marginal decline over the previous year. Current year taxation has jumped from 34% in 2008 to 43% in 2009, with property, withholding and capital gains tax accounting for a smaller percentage this year (11%) than in 2008 (16%). High rates of taxes and the non-deductibility of Property Tax have been a major concern of this group and the manufacturing sector for decades, but such concerns have largely been ignored by the government and such groups as the National Competitiveness Strategy Council, in which the private sector has significant representation without any apparent comparable influence.

As a result of the attempt by a regional group to wrest control of the company and the company’s defence strategy, the company’s share price based on transactions reported by the Guyana Stock Exchange, has shown a high degree of volatility. During the year, the company’s share price fell from $10 to $9.50, or by 5%, and is now at its lowest point since September 2008.

Share price

Source: Guyana Stock Exchange

Citizens Bank Limited
It has not been a good year for the banking arm of the group. While Republic Bank and Demerara Bank with similar year-ends have been reporting record profits, and with the Guyana Bank for Trade and Industry likely to follow suit, Citizens has seen its profit decline during the year from $438 million to $391 million, or by 11%. Contributing to this decline is an impairment provision of $170 million for investments in Stanford International Bank and Clico Trinidad Limited, the region’s two financial catastrophes for 2009.

Because of the difference in the governance arrangements referred to above, Citizens presents both a Chairman’s and a CEO’s report, the latter offering details and insights on some operational issues of relevance not only to members, but to depositors and the wider public who see strength in a financial institution being reflected in numbers and profitability.

Interest income increased by 5% and other income by 31% while operating expenses increased by 11%. Net customers’ deposits had a small decrease during the year with increases in savings deposits of 24% and demand deposits of 11% while the usually high-value term deposits declined sharply by 32%.


Source: Annual Report 2009

Share price
In 337 sessions since the Guyana Stock Exchange began trading in 2003, shares in Citizens have only traded on 9 occasions, 4 of which were in the last year. Given so few trades the price at which shares would change hands in usually limited volumes is not an indicator of what other transactions may fetch. The records of the Stock Exchange show a trade in the shares in Citizens in December 2009 at a price of $45 up from $18 in June 2009.

Next week we will look at the increasing abuse of the Contingency Fund as part of the deteriorating financial management of the public purse.

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Revisiting Corporate Governance

Introduction
Even accountants can benefit from a periodic encounter with history and as this column revisits the never ending journey to arrive at the Nirvana of Corporate Governance, it is good that we recall a few facts. For example, that the modern quest for good CG began in the UK in 1992. And that the reasons for that search are at least as important as the initiators of the Cadbury Report – the Financial Reporting Council, the London Stock Exchange, and the accountancy profession.

The report came on the heels of the death of Robert Maxwell while cruising on the Canary Islands in 1990, which saw the spotlight coming down on his business empire. It soon emerged that like his modern day counterpart Bernie Madoff, he had been tampering with pension funds to service huge and expensive debt burdens. Like all Ponzi Schemes that one was doomed to failure and soon after, Maxwell’s companies filed for bankruptcy protection in the UK and US. At around the same time the Bank of Credit and Commerce International, at the time the 7th largest private bank in the world with assets of US$20 billion, went bust and lost billions of dollars for its depositors, shareholders and employees. Another company, Polly Peck, received a clean report from its auditors showing healthy profits one year only to declare bankruptcy the next.

Cadbury is sweet
The financial community and the accounting profession recognised that their reputation and that of London as a world financial centre was at stake. They had an interest to act – and so they did, initiating a report that by its very name – Financial Aspects of Corporate Governance – suggest this common interest. The name also confirms that the report was concerned only with the financial aspects of CG and it was left to others to take up the non-financial elements of corporate governance. That continuous effort has been taking place across the world from America to Africa and the most recent revision of the code on corporate governance is in South Africa with the King 3 Report on Corporate Governance.

Developments in Guyana have progressed far more slowly and some very fundamental issues remain to be addressed. We will deal briefly with these in today’s column, influenced by an event abroad which touches directly on an ongoing issue in Guyana – that of having the role of the chairman of the board and the company’s CEO being performed by the same person. But the search for an appropriate corporate governance model for Guyana is bigger and wider than this. There is no one-size-fits-all solution. The search has to be informed by and takes account of the social context and legal framework of the country.

One-man shows
Our very own constitution seems to feel that there is nothing wrong with combining a host of roles burdening us with an Executive President that chairs Cabinet but not accountable to the National Assembly or to the people other than by periodic elections. GECOM also has an entrenched Executive Chairman; while the private sector organisations have structures and chairpersons or presidents who for all practical purposes are also the CEO. To be fair, there is no hard evidence that splitting the functions automatically makes for a more successful company. As the Economist of October 17, 2009 reminds us, academics over the past two decades have produced more than 30 studies comparing the financial performance of companies that divide the two roles with those that combine them. Enron and WorldCom of which readers of this column are all too familiar both split the two jobs, and so too did the Royal Bank of Scotland and Northern Rock, which had to be bailed out in the 2008/2009 financial crisis in the UK.

Principle and pressure
The case for the splitting of the jobs which started with Cadbury is however based strongly on principle – some may even say theory – democracy, and widespread practice in Canada, Australia, much of continental Europe and Britain where 95% of companies in the FTSE 350 list have an outside chairman. The corresponding number among America’s Standard & Poor’s top 1,500 companies is 47%. Yet, the economic crisis that has hit and cost the US trillions has put the defenders of the joint role on the defensive. Earlier this year, shareholders forced Ken Lewis to surrender his second hat as chairman of Bank of America.

More recently, following on their success in persuading Sara Lee – the American global fast moving consumer goods company with one of the world’s best-loved and leading portfolios of food, beverage, household and body care products – to split the two jobs, the managers of (Norway’s) Norges Bank Investment Management which manages a state pension fund of $400 billion, are trying to persuade four American companies—Harris Corporation, Parker Hannifin, Cardinal Health Incorporated and Clorox—to do likewise. They may yet succeed.

Some companies are taking action rather than be pushed. One of the first things that some of America’s troubled banks, including Citigroup, Washington Mutual, Wachovia and Wells Fargo, did when the crisis hit was to separate the two jobs. It did not matter whether the losses they suffered could have been averted by separation or that their action may be purely cynical – something had to be done and the least cost option that offered up itself was the split.

A skit
Yet the theory or the logic cannot be dismissed and therefore bear repeating. It can well be demonstrated by a skit in which the chairman who instructs the company secretary on the contents of the Agenda, calls the meeting to order and soon calls on the CEO to present the report on operations for the preceding period. At that point the Chairman takes off one hat, puts on another and addressing fellow directors through the Chairman begins “Thank you, Mr. Chairman, …..”. Since the most informed and powerful person in the room is (also) the Chairman he then directs all the questions to himself. If the boss is chairing its meetings and setting its agenda, the board cannot discharge its basic duty under the Companies Act 1991, nor can it act as a safeguard against corruption or incompetence when the possible source of that corruption and incompetence is sitting at the head of the table.

Huge Personalities
There are only a handful of public companies in Guyana with a few of them having separated the functions of chairman and those of the CEO, mainly the commercial banks. Banks DIH, DDL, Stockfeeds and Guyana Stores have not, either because of history or in the case of the latter two because of the overwhelming stake the chairman and CEO has in the company. Messrs. Clifford Reis and Yesu Persaud are such huge personalities that it is hard to expect or imagine them other than as supremo, despite the potential dangers and obvious conflicts of interest. America has not ignored the problem and its boardrooms are now more democratic than they were when Jack Welch, described by Warren Buffett as the Tiger Woods of management, ran General Electric. To reduce the concentration of power and authority in one man (it is hardly ever a woman), more than 90% of S&P 500 companies have appointed “lead” or “presiding” directors to act as a counterweight to a combined chairman and chief executive. This person is invariably chosen from among the independent directors, referred to by Cadbury as Non-Executive Directors.

The problem for us is that there is no culture of independence and directors are more often than not selected rather than elected. If a vacancy arises on a board, the directors are empowered under the company’s rules and the law to fill it as a “casual” vacancy and on every case I know of, that person’s election is a formality at the next meeting of the shareholders.

And that selection is done under the majoritarian concept known in politics as winner takes all. In business once a shareholder controls the votes at the AGM, s/he has almost unfettered powers over the company, notwithstanding the minority protection mechanisms in the Companies Act. Better, or worse for the other shareholders, if the shareholder has 51%.

The independent director
Directors’ powers derive from section 59 of the Companies Act while their duties are set out under section 96 of the Act. This requires them to act honestly and in good faith with a view to the best interest of the company, including the interest of the employees in general as well as the shareholders. In a country where it appears that the President is unaware of the provisions of the Constitution, members of the National Assembly argue about basic procedures, and leading attorneys-at-law argue over whether a magistrate can hold a voir dire, it is not unlikely that the majority of directors may never read, let alone understand the Companies Act and the “fiduciary duty” the Act imposes on them.

Non-executive directors are mainly drawn from the shareholders’ other companies and the community to bring some particular expertise or even an element of acceptability to the company. Only the most sophisticated company encourages or tolerates real independence of its independent directors who are hardly ever known for engaging publicly in controversial issues.

The price of failure
Yet with a market for share trading that is far from transparent; a media that is generally not interested in or au fait with the jargon of investing; a consequently under-informed public and under-resourced regulators including in some cases professional bodies, the non-executive directors have an important duty and function to perform. Unfortunately conflicts of interest brought on by self-interest often mean that that function is not only not discharged but more seriously is often compromised. A most telling and very recent case of this compromising of the role and duty of the non-executive director involved a Chartered Accountant who one day after clearing key directors of a company of a complaint about financial impropriety, accepts a position on their board. That not only hurts the shareholders of the company but it undermines confidence in the company and loses further respect for the accounting profession.

There are of course other issues relating to corporate governance that will require attention. These include: their application to non-public companies and if so, how; whether or not corporate governance is better dealt with under principles or guidelines; whether the Companies Act and its administration will be improved by bringing into operation the Deeds Registry Act; the nature of sanctions given that they often hurt the small shareholders who are already victims; and whether there should be protection for whistle-blowers.

For us in Guyana, the dawn may have broken in 1992. We have made little progress since.

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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.

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On the line: Demerara Tobacco Company Limited Annual Report 2008

Introduction
The Annual General Meeting of the Demerara Tobacco Company Limited, the tobacco trading company was held on March 31, 2009 making it the first company with a calendar yearend to have presented its 2008 annual report to its shareholders. In fact its financial statements were signed off by the auditors within five weeks of the end of calendar year 2008, which is commendable, but with effectively one supplier and one customer the accounting workload is hardly demanding. The company saw sales increasing by 6.6% over 2007 and after tax profit increasing by 6.3%, an almost linear relationship. However, the rate of growth of sales has fallen over the past couple of years, when the increase in 2007 sales over 2006 was a more robust 16%.

Demtoco is a subsidiary of the British American Tobacco, plc of the United Kingdom, and its ultimate parent company is British American Tobacco plc, also a UK company. Several years ago the company closed down its manufacturing operations in Guyana and its products are distributed almost exclusively through Edward B. Beharry and Company Limited. The company’s operations are managed by a small team of a dozen persons headed by Chandradat Chintamani, an accountant by training.

Financial Highlights
20090621_table1

Despite its ever present concerns about smuggling, the company manages to produce gross returns on sales of 57% which is high by any standard, and its after-tax return on sales is an enviable 19%. The company enjoys a monopolistic position with none of the controls usually associated with monopolies, and it can and does increase prices at will. Because the company has very little in the way of assets and investments in this country its earnings per share of $39.67 represent 139% of its average net asset per share, or expressed another way, for every dollar of net asset the company has, it earns $1.39! And of the net assets of $510 million, a net amount of $136 million is lent to related parties! Compare that with a DDL, for example, where the earnings per share compared with average net asset per share for 2008 was 8.9% and for the Guyana Bank for Trade and Industry it was 21.0%.

New laws, old practices
Unlike earlier years the company no longer discloses its volume sales or changes in the level of volumes, which is probably due to the sensitivity of the tobacco industry to the serious health effects of the use of tobacco. Indeed just one week ago the indefatigable consumer rights advocate, Ms Eileen Cox, in her column drew attention to a public consultation on “Specification for the labelling of retail packages of tobacco products” hosted by the Guyana National Bureau of Standards (GNBS). According to Ms Cox a decision was expected on the new and improved Guyana standards for the packaging and labelling of tobacco products in Guyana.

Guyana is a signatory to the World Health Organisation Framework Convention on Tobacco Control, but as the Minister of Health admitted in 2005, while smoking has been an issue in Guyana “for years nothing has really been done about it.” The company’s stated marketing strategy is to meet the “preferences of adults.” It would have been good to believe that nicotine abuse is a juvenile problem.

Here are some statistics to prove otherwise.
• Tobacco use not only reduces life expectancy but also the quality of life
• The death rate is 2-3 times higher than among non-smokers
• It is estimated that it will cause 10 million deaths per year worldwide by 2020 (WHO website)
• 1.2 million deaths in Europe (The European Heart Network)
• 1.2 million deaths from smoking in Europe (The European Heart Network, 2000)
• 400,000 deaths annually in the US (Mayo Clinic)

What is worse is that as tobacco companies in the developed countries are faced with more stringent regulations at home, they focus their attention on the poorer developing countries, particularly in Africa. Strikingly noticeable is that many of those engaged in the production or distribution of alcohol and cigarettes – elsewhere as in Guyana – would not think of themselves using those products but see no inconsistency or irony in promoting their use by others. And while the industry faces restrictions on advertising the company still expended some $113 million on advertising in 2008.

To compensate for the restriction on advertising the company routinely carries out sales promotions for both retailers and consumers. The company’s marketing campaign is more subtle, and for it the Kick the Habit is in relation to energy conservation and the promotion of a low carbon economy, the newest bandwagon in town.

Returns
During the year the company paid three interim dividends totalling $22.27 per share and a special dividend of $15.00 per share. A final dividend of $15.85 dollars per share was approved by the shareholders at their March AGM bringing the total dividend per share to $53.12. The emphasis of a special dividend suggests, however, that this will not be a recurring feature. As usual the group gets more from the Guyana company than just its share of dividends, healthy (no pun intended) though these are and worth $873 million or 55% more than in 2007.

Management services, royalties and technical and advisory services have increased from $615 million to just over $700 million, an increase of 14%, more than double the increase in sales.

Share price
After an increase in the share price in the first half of 2008 the price actually reflected a small drop, but has been steady since August 2008. Despite this persons who see in the company’s performance only dollars and not the severe health risks would consider that they have done very well indeed.

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Source: The Guyana Association of Securities Companies and Intermediaries Inc., weekly trading reports

The government too would have been pleased with the amount of taxes collected with duty and excise taxes paid increasing from $1,608 million to $1,716 million or 6%, and corporation and property taxes of $960 million. The person who said that sin does not pay could clearly not have been referring to cigarettes and alcohol.