Category: Publicly traded entities

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On the Line: Demerara Distillers Limited Annual Report 2008

Introduction
In what Dr Yesu Persaud, Chairman of the beverage giant described as one of its most difficult and challenging years the group has experienced in recent times, the Demerara Distillers Limited (DDL) group reports a decline in pre-tax profit of 8.8% over 2007. For the parent company itself, the decline in pre-tax profit was 8.98% and is a measure of how significant its alcohol and soft drinks operations are to the group. In addition to the parent, the group comprises a mix of operating companies in Guyana, the Caribbean, Europe and India. It also has a 30% stake in BEV Enterprises Limited, 33.33% in National Rums of Jamaica Limited and 19.5% in Diamond Fire and General Insurance Company Limited. The parent company accounted for 73% of the group sales but 87% of profit after tax. Correspondingly, the subsidiaries accounted for 27% of revenue and together with the applicable share of profits of associated companies accounted for 13% of after tax profits.

The Chairman attributed the performance of the company and group to the problems facing the global economy and the impact on consumers “burdened by the Value-Added Tax introduced in 2007.” The directors of the company are however confident about the future and in June last year announced a $4.5Bn expansion programme extending into the first quarter of 2010, which has already caused a significant increase in the long-term debt of the company. In fact with the total debt for the company increasing during the year from $4.2Bn to $7.3Bn, its debt to equity ratio, a measure of a company’s ability to borrow and repay money, has jumped from 0.48:1 to 0.82:1. Capital expenditure in 2008 was $1.8Bn and much of the increased borrowings by the company went into financing a 17% build-up in inventory and a 75% increase in receivables. Such borrowings have come at a cost, and finance cost increased during the year from $490Mn to $561Mn. This equates to one out of every three dollars earned before interest and tax being used to pay interest. A further $56Mn of interest paid was not charged to the income statement but was capitalised as a cost of the related asset.

Falling returns
The further expansion in plant and machinery will of course lead to additional interest cost which has increased since 2002 when the Chairman announced a financial restructuring including a share issue to minimise financing cost. That has not materialized, and financing cost has continued to rise. In fact interest cover which measures the number of times interest is covered by profit before interest and tax is now 3, when at the time of the announced financial restructuring it was 5.6 times.

While the gross assets employed by the group have more than trebled in the past ten years, the return on those assets has fallen from 29.1% in 1999 to 9.4% in 2008 – the lowest it has ever been. Despite the decline in after-tax profits by 10.9% the directors are proposing to maintain a dividend of $0.40 per share, jarringly referred to as cents per share, which of course went out of existence in 1998. The total dividend payout for the year is approximately 39%.

‘What if’ reporting
An interesting and innovative inclusion in the Chairman’s report was what may be described as a ‘what if’ statement, in which the company suggested that had it not been for some global factors affecting fuel, net exchange loss movement and increase in provision for impairments the company’s profits would have been $903Mn higher, and that profit before tax would have been an implausible $2,585Mn, an increase of 14% on decreased sales of 10.38%. These are however real costs, and reflect the challenges which directors are expected to confront and mitigate.

The composition of the net exchange loss reflected in note 6 to the financial statements is itself interesting, as it is made up of Exchange losses of $488Mn and Exchange gain of $296Mn. This emphasises the inevitable risk of dealing in international currencies such as the euro and the pound sterling, which often move one way and then the other, the negative impact of which may be avoided by what is referred to as hedging.

Liquidity strains
The company and the group have also seen a substantial reduction in cash with the company’s cash resources reduced to $79Mn from $235Mn at the beginning of the year, and for the group from $298Mn to $107Mn. Current liabilities on the other hand, skyrocketed from $3.7Bn in 2007 to $6.7Bn in 2008, partly due to two major short-term loans taken as bridging finance for the capital expenditure in 2008. The position will abate in 2009 with the conversion of those loans into long-term facilities, but will continue to remain high with trade payables and bank overdraft exceeding $6Bn. Included also in Trade and other payables for the company is a huge amount of $2.242Bn, bringing total interest bearing borrowings to $8.354Bn. If this trend continues without compensating returns on investments, they will become a real drag on the company’s development.

One continuing concern about this company is the high level of its inventory and receivables. The company’s sales for the year declined by 11%, but its level of inventory which includes finished goods, raw materials and spares increased by 17%. And for the group the position was only slightly better. Revenue increased by 2.3%, but its inventory increased by 20%. Expressed another way, the company and the group have in stock at their written down value the equivalent of sales value of 14 months and 20 months respectively! Intuitively one would expect the company to have had a high level of inventory because of the aging of alcohol, but these numbers lead one to wonder seriously about the quality of the inventory held by the subsidiaries.

Sales too have come with hidden financing cost. While sales for the company show a decline of 10.4%, trade receivables went up by 46%, and for the subsidiaries the increase in sales of 67% was accompanied by an increase in their trade receivables by 34%. This latter position appears better than it really is because a major subsidiary – Distribution Services Limited – operates on a cash and carry basis.

Subsidiaries
The performance of the subsidiaries and associates was mixed, with Tropical Orchards Products Company Limited reporting after tax losses increasing from $6Mn to $50Mn. When the group announced a $500Mn investment in TOPCO in 2004 Business Page pointed out that based on a standard measure of investment appraisal such a level could not be justified. Regrettably that fear is being more than vindicated and since then TOPCO has returned a net loss to the group.

Another concern is the investment in India which continues to show losses, and it takes a certain level of faith to persist with this investment in the face of annual losses having to be carried by the rest of the group. China and South America with which the company flirted for a couple of years appear to have gone off the radar and already the company is learning what a difficult environment Jamaica is with its share of pre-tax profits in the Jamaican company declining from $56Mn in 2007 to less than $4Mn in 2008. On the other hand, bright spots are Demerara Shipping and Distribution Services locally, and the European, St Kitts and US operations.

Belatedly, the directors appear to have accepted that the purchase by the company of the controlling shares in Solutions 2000 was not a good investment after all. The company has lost its entire investment in annual losses and given the performance and outlook for Solutions, the company must consider itself lucky that it did not suffer a bigger capital loss. Interestingly it is only in the year of disposal that the company discloses that the controlling interest in the company was acquired from DDL directors Messrs Komal Samaroo and David Spence in 2000. The identity of the purchaser has not been disclosed.

Governance
One difficulty I have with some of the numbers presented for the subsidiaries is that all the subsidiaries are private companies subject to minimal statutory and governance obligations. In fact some of them operate in jurisdictions which do not require an audit and even locally the subsidiaries do not comply with the law requiring them to file annual returns and financial statements. It is unlawful and unacceptable that the local subsidiaries have not been filing their annual returns and financial statements, and the only financial statements seen in any of the files at the Deeds Registry are the annual reports of the group.

In preparing for the column I sent a note to fellow accountant Mr Loris Nathoo, General Manager, asking for the turnover and the names of the auditors of the subsidiaries. Since it relates to the subsidiaries of a public company this information should not be a matter of secrecy. However, the reply took the form of a letter from the company’s in-house attorney that did not respond to my request, but boasted of the “Company’s 2008 Report [being] incomparable to any other published accounts in Guyana and, indeed, in the region.” One has to wonder whether the writer is familiar with the annual reports of Neal and Massy or RBTT of Trinidad and Tobago or Grace Kennedy of Jamaica.

One might have expected awareness on the part of the directors that their note 22 on Segment reporting is not in compliance with paragraph 69 (a) of IAS 14, which requires that where a company chooses business segments as its primary reporting format it must disclose revenue by geographical location of the customers. That is where the risk lies and that is what segment reporting is designed to highlight.

One change in the financial statements is the inclusion of the insurance arm Diamond Fire and General Insurance Inc as an associated company in the results of the company. Dr Persaud claims that this change was based on the advice of the auditors and the Institute of Chartered Accountants of Guyana. Of course that does not reflect the fact that it was a ruling resulting from a formal complaint lodged by this columnist.

New Director
A related issue is that on the last day of 2008 the board appointed Mr Chandradat Chintamani, Chartered Accountant, as a director of the company. This appointment is considered coincidentally unfortunate since a committee of the ICAG headed by Mr Chintamani had very shortly before exonerated certain directors and the company’s auditors from my formal complaint that they had failed to account for a US$1.1Mn discount on a loan buyback from Hamilton Bank, which had gone into liquidation.

Conclusion
Apart from the announcement about the new investment the Chairman’s report is largely retrospective, and nothing is said about the outlook for the company and the group for the current year and beyond. Like with all the companies whose shares are traded on the local stock exchange, the company’s share price has remained steady, and with the recession in the developed economies appearing to have slowed, the group must be hopeful that it will return to growth in 2009.

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On the Line: Guyana Bank for Trade and Industry Annual Report 2008 – revisited

Guest business column by Robert V McRae, CPA

Background
Several weeks ago the Bank of Guyana (BoG) publicly and the Guyana Bank for Trade and Industry (GBTI) management privately in a letter to me, responded to a guest Business Page published in Stabroek News of April 12, 2009 under my name. Unfortunately, personal commitments precluded me from addressing this matter earlier and for this I apologise.

Of specific concern to both entities were two paragraphs under the caption ‘The blog and the BoG.’ The two paragraphs contained information derived from the Annual Report of the bank and merely raised legitimate questions over the original response to the blog, particularly why it did not acknowledge the overnight borrowing by the bank or the deficiency in the statutory reserve requirement of more than $4B at December 31, 2008. After the column had raised the matter the Bank of Guyana advised that the shortfall was “authorised,” a fact that was not evident prior to its public statement.

Overnight borrowing
While the BoG must be commended for its prompt dispelling of any doubt surrounding the bailout claim, it should have at the time acknowledged the approach for the overnight facility while asserting that transactions of a similar nature were not unusual. This was clearly an unnecessary and unfortunate omission that did little to help the cause it was seeking to promote.

In its direct response to me, the management of GBTI has correctly made the point that the BoG’s half year report 2008 reveals sixty-three trades in the inter-bank market with the value of funds traded totalling $20.4B. It is of interest to note that the average value of these trades is approximately $324M, so in terms of its magnitude, that specific transaction of $1.5B by itself must be considered unique and therefore warranting more explanation than was provided.

Reserve requirement deficiency
The second issue and the reference to the deficiency in the reserve requirement was that maintenance of this reserve is a statutory requirement and nowhere in the financial statements could the reader deduce from what date or why this shortfall had occurred, nor was there any indication whether the situation had been corrected, as was the case in the Bank’s 2007 annual report, (It has since been revealed by the BoG press release that the 2008 shortfall was corrected.)

Indeed, financial reporting standards which specify that, “if the quantitative data disclosed at the end of the reporting period are unrepresentative of the company’s exposure to risk during the period, an entity shall provide further information that is representative,” would seem to make such disclosures mandatory – another unhelpful omission.

Bank of Guyana press release
The press release also refers to discretion which the Bank of Guyana is allowed to exercise in these matters. As far as this writer is aware, discretion exists in the relevant legislation only with respect to the imposition of penalties for deficiency in the reserve requirement, and does not allow for authorisation of what is tantamount to a breach of law. Consequently it appears that the BoG acted without authority.

In the current economic climate the BoG must not only be seen to be acting promptly but it must also act impartially, and if it does engage in a public issue it must ensure it does so fully, fairly and completely.

It would have been extremely helpful and enlightening for BoG to have addressed the following:

1. The number of shortfalls in reserve requirements during 2007 and 2008 and the number of entities involved.

2. The circumstances in which BOG would “approve” a breach of the statutory reserve requirement by a financial institution.

3. GBTI management has indicated that the transactions resulting in the reserve requirement deficiency at the end of 2007 and 2008 were similar. The BoG should confirm whether it granted a similar “approval” in 2007 for the breach of the reserve requirement, and cite the specific authority for any such approval.

Conclusion
Nowhere in the earlier column was there any attempt to give credence to the spurious claim by the blog that the GBTI required a bailout, nor any question raised about the financial soundness of the bank.

As a public company, whether the management of GBTI disapproves or not, any member of the public is entitled to seek clarification of any matter on which there is inadequate or no information. Financial statements are only as good as the information they contain and the users can only draw conclusions based on what is disclosed. Rather than leave unanswered questions, the management of all public companies and most especially financial institutions should lean towards more helpful rather than less disclosure unless confidentiality or competitiveness will be compromised.

The questions raised in the article go to the heart of transparency, accountability and fairness. The BoG must avoid any appearance that it favours one institution over others and ought not to overlook, in matters of this nature, the implications for its role as an independent, supervisory watchdog over the sector.

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On the line: Guyana Bank for Trade and Industry Annual Report 2008

Guest business column by Robert V McRae, CPA

Come Tuesday afternoon the Guyana Bank for Trade and Industry (GBTI) will be holding its 21st Annual General Meeting at the Pegasus Hotel, a stone’s throw from where it is constructing a new multi-storey head office. The results of the bank for the year continue a trend of excellent performance by the banking sector during 2008 with GBTI’s profit before tax topping the billion dollar mark, increasing by 14% to $1.1B and profit after tax by 18% to $941M. The satisfaction in the results is reflected in the glowing reports by the Chairman Mr Robin Stoby SC, and Mr RK Sharma, CEO, as well as in the self-congratulatory Statement on Corporate Governance about the technical competence, time, communications skill and integrity of the directors.

The Annual Report is once again well laid out with lots of pictures, charts and tables, although unfortunately some of the charts are unlabelled or the descriptions are incomplete; in one case the text has been partially over-written by a photograph while an important paragraph was cut midway in the Chairman’s report.

In his report for the year Chairman Stoby wrote about the second half of 2008 in the future tense while Chief Executive Officer Mr Sharma offers banking statistics that are several months out of date. Up-to-date information would have been so much more relevant and meaningful.

Highlights
Highlights

As Chairman Stoby points out the dividend of $6 per share proposed by the directors is the highest in the bank’s history. Yet this represents a mere 25.51% of the year’s distributable profits compared with 25.13% in 2007. Earnings per share grew by 18.25% over 2007 and a whopping 256.9% over 2004. With the company’s shares trading at $130, the P/E ratio, a popular investment measure, is an attractive 5.5. With increased profits, other measures such as Return on Average Assets and Average Equity have also improved over the year and the past four years.

Measured in terms of share price at the beginning of the year, shareholders receive a return of 41.7% in dividends and capital appreciation, while depositors of interest bearing accounts earned 3.5% (same as 2007) and the average interest earned by all depositors remained constant at 2.6%. With official inflation for 2008 running at 6.4%, the purchasing power of depositors’ funds was actually less than at the beginning of the year.

The interest earned on average loans held declined from 12.4% and 11.7% (15.1% to 13.4% if calculated on balance sheet values) and because the rate of interest paid remained constant, net interest cover declined slightly from 1.75 to 1.65. Once again a major source of income is Foreign Exchange Trading Gains which amounted to $663M or 25% of interest income, up slightly over the previous year. With an increasing share of its assets invested abroad interest earned on foreign bank deposits was $412M, up from $336M in 2007.

Distribution of assets
Of the total of $49.3B of assets, cash and cash resources accounted for 52%; loans and advances 26%; investments 12%; and the remaining 10% held in the form of fixed and other assets. The major borrowing sectors were trade and distribution (41%); agriculture (21%); household (15%); manufacturing (17%); and mining and quarrying (6%). The bias in the lending portfolio reflects the bank’s lending strategy based, as it states, on Quality Lifestyle and Commercial Loans. In fact the lending to the agriculture sector would have been less than half had it not been for a $1.8B facility from the European Union to improve the rice sector. In 2007, agriculture accounted for a mere 7.6% of the bank’s loan portfolio, down from the 9% in 2006.

Cash resources ($12B) are made up principally of deposits with other banks and investments ($11.5B). For what appears to be tax reasons, the cash resources are invested almost entirely outside of Guyana while the investments are mainly in Government of Guyana Treasury Bills.

The logic that dictates that insurance companies invest the bulk of their funds in Guyana while commercial banks are free to do otherwise should interest the country’s policymakers having regard to the new Caricom Single Market and Economy rules.

Effective tax rate
Two years ago the bank’s effective corporation tax rate was 33.1% but this fell to 16.6% in 2007. It has now fallen further to 13.6% in 2008. The reader would be forgiven for being surprised by the disparity between the nominal corporation tax rate of 45% and the 13% rate paid by the bank. The explanation lies in the opportunities offered by the tax laws, including the Caricom Double Taxation Treaty, to exclude from or significantly reduce the rate of tax on certain income. That treaty provides that the interest earned in any of the Caricom states by a resident of Guyana is exempt from tax in Guyana. The interest income which can be earned in the region ranges from zero per cent to no more than 20% so that the treaty made in 1994 and reinforced by the Revised Treaty of Chaguaramas actually rewards banks for taking Guyanese depositors’ funds and investing them overseas.

If Guyana would pay any interest to tax policy it would see how dysfunctional our tax system is. Not only does it reward such practices but adds to them by allowing additional types of interest earned by banks to be exempt from taxation − low income housing and rescheduled debts being the more common examples. Yet the law allows, without limitation, all the expenses incurred in earning tax-free interest to be deductible against the remaining taxable income.

In addition, dividends are tax-free because of a popular assumption that the income out of which dividends are paid has already been taxed. Not only does such a misconception ignore the fundamental concept of source to taxation, but GBTI is one example of the extent to which practice can vitiate logic. Even if we assume that the company is a proxy for the shareholder then the shareholders of the bank would be enjoying an effective tax rate of 13% in 2008 while employees are taxed at 33.33% and a further 5.2% (subject to a ceiling) for NIS, and depositors pay a final withholding tax of 20% on interest earned. Unfortunately this and similar information are entirely missing from the sporadic debate on tax reform which is often shallow and easily dismissed by the government.

Governance
During 2007 the company appointed two new directors, Messrs Michael Cummings and Carlton James, about whom nothing is stated in the Annual Report, bringing the total to ten. The full-page Statement on Corporate Governance speaks of the bank’s sound exercise of corporate governance and identifies only a single committee considered necessary for this. This is the Audit Committee about whose operation during the year little is said. Of a board of ten there are only two executive directors, but only five of the directors are independent. In the case of the Chairman, his law firm is retained to do a range of legal work for the bank and its customers. It is time for this approach to legal work to be discontinued and borrowers be allowed to retain counsel of their choice using standard forms agreed by lenders and the legal profession.

The blog and the BoG
In late February a post on a blog alleged that the bank had applied for a billion-dollar bail-out. The Bank of Guyana reacted swiftly and “categorically denied” that it had been approached by the GBTI for liquidity support. In fact, the Annual Report states at page 55 that GBTI had overnight borrowing of $1.5B from the Bank of Guyana. Surely this could not have been done without an approach and makes the categorical denial by the BoG at best misleading.

In addition, the report shows that GBTI failed to meet its reserve requirement with the Bank of Guyana at consecutive year ends. A shortfall (described as a negative excess in the accounts) of $2.431B at 31.12.07 increased to over $4.078B at 31.12.08. This is a clear breach of the law, represents an unauthorised advance to GBTI by the BoG, is probably interest free and of course constitutes unfair competition. The reserve requirement is a form of insurance for depositors and its “negative excess” constitutes an arbitrary and unauthorised reduction by the bank which the BoG should not tolerate. It should have long instructed the bank to come into line, enforcing such penalties and interest as appropriate.

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Stanford 20/20 smoke and mirrors and an update on Clico

Introduction
The columns of Business Page have reported on far more financial scandals than it would have liked. Although it was soon overtaken as the biggest corporate scandal ever, Enron was covered in a series in February 2002 and remembered in a piece one year later to mark its anniversary. Parmalat too with a hole of billions on its balance sheet and Nick Leeson who brought down the 233-year-old Barings Bank, the Queen’s bank, were accorded their fair share of space. More recently it was Bernard Madoff of the US and B. Ramalinga Raju of Satyam Computer Ltd of India to add to the list of corporate fraudsters. Each fraud has had its own consequences, with Enron taking down with it Arthur Andersen, one of the world’s most respected accounting firms, as well as the investments of its employees’ pension scheme.

For the most part however the direct consequences have been felt by employees, creditors and shareholders, including pension schemes. And they have all had some common ingredients − a tale of lies, deception, smoke and mirrors, sleeping accountants and poor governance and weak regulators, all fed by frenzied greed in the name of capitalism. Each, however, took place in larger economies that could absorb a moderate level of stress and setbacks.

‘Sticky Wicket’
On the other hand, the fall from grace of cricket icon Sir Allen Stanford is in a different ballpark altogether. After the government, the Stanford group is/was the largest employer in its home base Antigua. It has its own cricket ground – named appropriately Sticky Wicket − with swimming pool, lighting and facilities that rival the government-owned stadium and the record-making Antigua Recreation Ground. It operates the Bank of Antigua which has a significant share of the retail banking in that country. It owns some of the choicest pieces of real estate on the island. It was, prior to its fall, planning to develop an area called Shell Beach and nearby Maiden Island, towards the end of the airport runway, with a marina, shopping and entertainment complex.

Stanford’s towering image, cosy relationship, influence and hold over Antigua simply cannot be under-estimated. The island’s Prime Minister, Baldwin Spencer, never a friend of Stanford, admitted that the charges brought by the SEC against Mr Stanford and two of his associates could have “catastrophic” consequences. He urged the public not to panic. It was like telling persons in a rainstorm not to take protective action – and such advice was quietly ignored by depositors who queued up to withdraw their money from the Stanford-owned Bank of Antigua. Seizing the political opportunity to crush Lester Bird, he has called general elections which he is certain to win.

Threat
There is also a wider, regional threat to the Eastern Caribbean Dollar – one of the most stable currencies in the world and which is managed by the Eastern Caribbean Central Bank, the monetary authority for eight OECS island economies including Antigua. The bank in a statement reportedly handed to people queuing to get their money said its “liquidity position is sound.” It was careful to note however that that the bank’s ability to meet customer requirements applied “under normal circumstances” and that if individuals persisted in rushing to the bank in a panic, they would precipitate a collapse. The consequences of massive withdrawals and conversion into and flight of foreign currency is going to test the stability of the EC dollar over the coming weeks.

But the image Mr Stanford cultivated was even bigger than the assets or his plans. For example, the helicopter in which he landed at Lord’s to announce his “20/20 for 20 million” deal with the England and Wales Cricket Board was not, as the gold-plated Stanford name and logo emblem on its body indicated, corporate property but one rented for the day. Nor was the $20 million jackpot in the treasure chest shown to the world at the launch real money – it was at most about US$100,000 standing atop wads and wads of paper. It was one big con. The press, fascinated by the Texan billionaire, was too dazzled by the dollars to see the game at work and to ask questions.

Dazzled by wealth and….
Stanford was flamboyant, ambitious and most importantly for the gullible, including most of the region, fabulously rich. But contrary to his tale of a family heritage and inheritance associated with Stanford University, Stanford’s real wealth had its source in the early 1980s when he and his father James Stanford bought distressed properties in Texas during the oil industry bust and the S&L crisis, rehabilitated them and sold them at huge profits when the market got better.

But Texas was too big for the man who had visions of grandeur and royalty. He wanted to be king and chose first Montserrat to base his operations before moving to Antigua where he became a real force during the rule of the Bird family, the father-and-son dynasty that held power for more than 40 years. It was during that period that Stanford helped the Birds turn Antigua into a tax haven and soon made him into a billionaire. With his personal wealth estimated at more than US$2 billion, he was bigger than the economy of Antigua and so Stanford could get whatever Stanford wanted. He demanded and received the trappings of royalty that Texas could not give him – a knighthood without the need to bow in front of the Queen. In fact that knighthood was granted to him by the Birds. He ran his financial empire from the island’s airport office park which was the most iconic landmark to greet any visitor to the island. While his empire extended to Latin America his colossal status derived from his tryst with West Indian cricket of which he was seen as the saviour following years of the most pathetic management by a succession of the most pathetic Board of Directors ever to have ruled the game anywhere in the world. With the glitter of millions, he redefined West Indian cricket into a game of fast paced entertainment, money and image, particularly appealing to the lucrative television market.

Criminal charges likely
The details of Stanford’s fall are still unfolding but what seems to have emerged so far is that the company was selling investors high-yielding certificates of deposit on the basis they were safe and liquid investments. According to the US Securities and Exchange Commission (SEC) Stanford’s investment portfolio was an opaque “black box,” including holdings in illiquid real estate and private equity. Following investigations that had been going on since last summer, the SEC has filed charges against three entities, Antigua-based Stanford International Bank, and its affiliated Houston-based investment advisers, Stanford Group Company and Stanford Capital Management.

Unlike Kenneth Lay or Madoff or Raju, Stanford has not been charged with any criminal offence – at least not yet. The action brought against Stanford is a civil action although the word fraud has been used by the SEC involving somewhere between $8 and $9.2 billion. It has been reported that the FBI is carrying out its own investigations but that it does not want to lay charges until it has been able to find sufficient evidence to secure a conviction. Should it move too early it will have set in train a schedule that would force criminal investigators to charge, indict and construct a trial within a tight time-frame. Whether it is criminal or civil fraud is the kind of fine distinction that does not interest depositors and investors who have been rushing to all locations where Stanford operates demanding the return of their money.

Impact
It has been reported that some of our cricketers have invested money in Stanford while the Ministry of Finance has confirmed that one major institutional investor, which Business Page suspects is either a commercial bank or an insurance company, has placed funds with the Stanford group. The Ministry has told the press that it is “monitoring the situation” although quite what this means in the light of its handling of the Clico issue is hardly reassuring. We must not forget that there are thousands of Guyanese living in Antigua and it is a fair guess that many of them would have had their savings in Stanford’s bank. If the government is truly monitoring the situation it should immediately send a high-level representative to Antigua to represent the interest of those persons.

At some time we will have to confront the threats to small countries by rich investors and oligarchs who can bribe, cajole and threaten to get what they want. The view that these people are here to save us must by now be surely mistaken. So too is the view that we are insulated from the world economic crisis. Our own politicians need to stop feeding us with their own form of garbage.

Clico update
Chairman of the National Insurance Scheme has told the press, more than a month after the news of the failure of Clico Investment Bank in Trinidad and Tobago that he is uncertain about the extent of the exposure of the NIS to the local Clico company. That is amazing and dangerous when in the same breath he estimates that the exposure can be as much as $6 billion.

Business Page has for two weeks been trying to obtain confirmation from various members of the NIS Investment Committee of the value of the exposure and has written to the acting General Manager of the Scheme seeking confirmation. By arrangement the Commissioner of Insurance has also been written to with a list of several questions the answers to which would form the basis of next week’s Business Page. If Dr Luncheon is right and the exposure is around $6 billion, then potentially we could have some really serious problems since the Scheme’s viability will depend on the continued success of Clico Guyana. The consequences of a failure are simply too frightening to contemplate.

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On the line: Banks DIH Annual Report

Introduction
Banks DIH, the giant food and beverage company will be holding its 53rd annual general meeting on Saturday, January 17, 2009, close to four months following the end of its financial year of September 30, 2008. As a public company Banks is a reporting issuer for purposes of the Securities Industry Act, 1998 although like other domestic public companies in Guyana it is listed not on the Stock Exchange’s official list but on its Secondary List which consists of those securities that have not sought admission to the official list. Such securities are eligible for trading merely by virtue of being registered with the Guyana Securities Council.

Inclusion on the Official List on the other hand, according to the Stock Exchange website, indicates that that the, “stocks and shares that are listed are freely transferable and validly issued – not non-transferable, or forged, or otherwise tainted; it also means that the issuer meets the requirements of law and regulation in the management of its business and in the disclosure of adequate, timely and accurate information about its business to investors.” This distinction seems harsh, although companies’ silence on the reasons for their unwillingness to seek admission on the official list clearly does not help their cause.

The Barbados connection
The annual report to be put to shareholders at the meeting includes the financial statements of the company as well as the group. The group is made up of the company as the holding company, Citizens Bank Guyana Inc, a 51% subsidiary, and a dormant subsidiary Caribanks Shipping Company Limited, which appears to have little or no assets or income. The company also has two associated companies, ie companies in which it has significant influence but not control. The two such companies are BCL (Barbados) Limited and B&B Farms Inc.

BCL is owned equally by Banks Barbados, Valley Manufacturing Company Limited of Belize, Banks (DIH) Limited in Guyana and Blue Waters in Trinidad, all of whose export development needs BCL seeks to promote. Readers will recall that the Guyana-Barbados link-up was a defensive move by the local company reacting to a perceived hostile take-over about four years ago by the Trinidad conglomerate Ansa McAl. Under the deal the Barbados company was given 20% of the shares in the local company in exchange for 8.59% of the shares in the Barbados company, based on the respective book values of the shares at the time of the share exchange. Two of the directors of Banks Barbados sit on the board of Banks DIH while Mr Azam Khan represents the Guyana interest on the Barbados board.

Note 29 to the financial statements indicates that DIH purchased finished goods valued at $53 million from the Banks Holdings but made no sales to it. On the other hand sales to BCL amounted to $45 million and purchases amounted to $30 million.

Improvements
The group accounts include mainly a manufacturing entity, a financial services institution and less significantly, laundry and hotel services, a combination which does not make the group accounts easily understandable to the ordinary shareholder. While the company is separately accounted for, any member wishing to ascertain exactly how the very significant banking arm has performed would need to refer to the bank’s annual report which unfortunately is not posted on its website.

One criticism that this column has made of the company’s financial statements – that it does not include the very important statement of cash flows for the company – has been addressed and this is now contained on page 26 of the annual report. This is commendable. Also commendable is the greater level of disclosure about corporate governance although one has to wonder why an enlightened company like Banks DIH cannot have at least one female director in a board of twelve. Where is the gender-consciousness in a company of which perhaps a majority of the employees in the food division are female, as are many of its customers and shareholders?

Inadequate information
The unusually brief Chairman’s report on pages 8 and 9 of the annual report (including picture and graphs) gives very little information on the company’s operations and even in that limited space, Chairman Clifford Reis concentrates mainly on the group results with one paragraph reporting on the profits earned by the banking subsidiary and the longest paragraph dealing with the arrangement with Barbados. The annual report of the Barbados company presents a stark contrast with respect to the discussion which the management shares with its members. Significantly, in the Barbados company, the roles of Chairman and CEO are separate with both persons presenting separate reports to the members. There, the Chairman’s report runs to just two pages while that of the CEO covers more than ten. Structures and culture are different, but the amount and quality of information offered to Banks DIH shareholders is far too sparse to enable any understanding of the performance of the various divisions.

The company v the group

Source: Annual Report 2008

The table shows in the left half the performance of the company for the year ended September 30, 2008 with comparison for 2007. On the right hand side of the table are the group results ended on the same date, with H1 representing the first half of the year and H2 the second half. The first half numbers come from the unaudited half year report published under the Securities Industry Act while the second half numbers are derived from the audited financial statements.

The company’s sales for the year increased by 5.1% over 2007 to reach $13.565 billion. Profit from operations, ie before finance cost and other income including dividends received from Citizens Bank, increased by 6.4%, considerably less than the 27.12% for the group. As a percentage of sales, profit from operations increased marginally from 9.74% to 9.9% but it is not possible to determine how much of this is attributable to the company’s branded products, those it produces under licence and bought in products. After charging taxation of $570 million including a mix of property, withholding and capital gains taxes of $79 million, the company realised a net profit of $850 million (2007 – $793 million) of which dividends paid or to be paid amount to $420 million.

Profit from operations for the group increased by 27% over the preceding year to $1.922 billion with other income net of financing cost resulting in profit before tax of $1.968 billion. After taxation of $710.9 million of which property, withholding and capital gains taxes amount to $107 million, the profit for the group was $1,257 million, an increase of 22% over 2007. H1 accounted for 49% of sales but 55% of profit after tax, while in the second half of the year 51% of the sales produced only 45% of profit after tax. No explanation is given for this apparently anomalous situation but the unaudited first half would have included estimates while the second half of the year coincided with increased costs of raw material and fuel which the company may not have been able to pass on in higher prices.

Profits after tax of Citizens Bank amounted to $437.7 million, an increase of 66% over 2007. Of the amount of $437.7 million only 51% belongs to the group, the rest attributable to the shareholders who own the remaining 49% of the shares in Citizens.

The very important measure of Earnings Per Share for the group jumped by 16% from $0.90 to $1.04 but for the company the increase, which is not stated in the annual report, is a more modest 7.6% after accounting for dividends from its banking subsidiary. Perhaps this explains why the price of the company’s share was almost static throughout the year. Once again we note that there is no information or discussion on this vital factor.

Dividends
The company continues to honour a commitment it made to shareholders to pay three dividends, which of course carries an administrative cost but also allows for better cash flow management. Total dividends paid and proposed for the year are $0.45 per share compared with $0.42 per share in 2007 – an increase of 7.14%. The payout ratio which measures the share of after-tax profit paid to the shareholders was 49.41% compared with 50.44% in 2007.

The company’s balance sheet remains strong with cash resources of $1.3 billion, an increase of $1.2 billion in 2007 while net trade receivables, a function of sales and credit management increased by 24% on sales which increased by 5%. Total assets of the company grew by 5.53% while those of the group increased by 6.63%.

Outlook
Mr Reis is one of the private sector voices that can still command attention, and he was known to advocate fearlessly on behalf of his company and the private sector. At this time, his reasoned and constructive views on issues on direct and indirect taxation including VAT would have been particularly useful above the din of often uninformed rhetoric and opinion that seems dominant. The company should be leading in the advocacy for the zero-rating of bottled water (at least locally produced) – one of life’s greatest necessities and what some may even consider a public good. Water from GWI which few would want to drink without boiling is zero-rated, but that of the private producers is taxed at 16%. That policy certainly needs revisiting and offers an opportunity to the company to join with consumers to have the tax removed. This I should add is only one of several areas that need reform sooner rather than later.

Like the other commercial banks, Citizens has had a very good year and its results have embellished the group’s performance. But even banking can be cyclical and the core business of the company – particularly its beverage arm – needs to become more dynamic and be positioned to take up any downturn.

Chairman Reis in his report titled ‘Building on Traditions of Strength’ did not address the future prospects of the company. He referred briefly to the impact of the global financial crisis on remittances and the economy and expressed a commitment to be “optimistic, proactive, and to pursue a vigorous approach towards maintaining and improving the performance of the business.”

The group may need more than just commitment as the world enters the most challenging year of the company’s illustrious history.