ON THE LINE - Sterling Products Limited
Today Business Page reviews the 1999
Annual Report of Sterling Products Ltd., a company engaged in the
marketing of edible fats, detergent, soap, ice cream and the
distribution of ice cream lollies. The report was presented to the
shareholders of the company at its 45th
Annual General Meeting held at the Georgetown Club. The meeting was held
at July 12, twelve days after the statutory deadline but no doubt the
Company would have sought and received an extension from the Registrar.
The Annual Report of Sterling Products
Limited for the year ended December 31, 1999 makes refreshingly pleasant
reading. And with much justification. Too often in the past annual
reports seem strong and long on rhetoric and platitudes and short on
substance. Sterling’s is just the opposite with the Chairman devoting
just two paragraphs of his Report to the results for 1999. The report
records not only sound financial achievement by the Company in 1999 but
more importantly a sense of direction and purpose of where the company
Note 1 to the Financial Statements which
deals with Accounting Policies states that Secure International Finance
Company Incorporated has a 32.58% holding in the company, though there
is no information on who exercises control and whether for purposes of
the Companies Act 1991, the Company is a subsidiary of any other
company. It gives no further information on related parties transactions
or other information which will assist the reader to understand more
fully the nature, status and operations of the company. Indeed there is
nothing to suggest that the company is a public company.
This brief analysis which follows draws
entirely from information contained in the financial statements which
are included in the Annual Report.
Profit and Loss Account
Before Tax ($M)
After Tax ($M)
per Share 1
At 11.9%, the increase in net sales would
have remained fairly flat in real terms but through better control of
costs the gross profit margin has increased from 24.0% to 26.6%.
Unfortunately neither the Chairman’s Report nor that of the directors
offers any information on operating issues and one is left to speculate
on the factors - negative and positive - which have impacted on the
results. Factors which normally contribute to improvement in profit
margins include operating efficiencies and better terms of purchase and
sale. BP’s Review of the accounts of Banks DIH had noted that neither
the law nor Accounting Standards require gross profit to be disclosed.
Sterling should therefore be complimented for going beyond statutory
compliance in relation to disclosure in the Income Statement.
Profit Before Tax (PBT) has increased
from 10.45% to 17.1% helped by an increase in other income from $26M. to
$39M. The rather impressive increase in PBT was due to a reduction in
absolute terms and in an even greater fall percentage-wise in
Administrative and general expenses. These fell from $143M. in 1998 or
16.5% of sales to $131M. or 13.5% of sales in 1999. Under the heading
Admin. and general expenses while employment cost rose by 10.4%
administrative expense fell by 23%. The Corporation Tax charge for the
year of $51.5M. is 31% of the accounting profit which is of course not
the same as taxable profits.
Using these to measure profitability we
find the following:
Profit Margin (%)
return on assets (%)
on equity (%)
The Net Profit Margin is the relationship
between net income to sales and the improvement is a result of
improvement in the gross profit margin as well as the fall in expenses.
As a consequence of these circumstances the return on assets and
shareholders’ funds have both increased.
Despite the more than doubling of after
tax profits the directors have taken a very prudent approach to
dividends which at $27.5M. was a modest increase of 20% over the
dividends paid in 1998. Dividend cover (the number of times that
dividends are covered by After Tax Profits) has increased from 2.3 times
in 1998 to 3.9 times in 1999.This is perhaps with an eye on the
rebuilding schedule which the Chairman admitted had not been met. The
company has authorised capital expenditure at December 31, 1999 of
$720M. and has already taken a decision on a rights issue to its
Earnings Per Share one of the key
determinants in the pricing of shares has doubled from $5.75 in 1998 to
$11.79 in 1999. If the directors were to apply this as the sole
yardstick in setting the price for the rights issue that price could be
substantial since a P/E ratio of 10 is not unreasonable.
By any measure, the balance sheet is
sound. The company is debt free and its bank and cash balances of $228M
exceed its total liabilities by 175%. This is a remarkable
platform from which to expand not only in its own future but in other
companies as well if the directors so choose. This statistic alone
renders any further discussion on other current ratios almost
superfluous. For example while a current assets to current liabilities
of 1 would be considered healthy Sterling’s ratio for both 1998 and
1999 is above 6 suggesting that this is not a one year phenomenon. In
the absence of information on credit sales it is not possible to compute
an accurate figure on accounts receivable turnover or what is sometimes
referred to as debtor days. However, despite the increase in sales the
amounts owing by customers declined by 39% from $54.2M to $33.1M.
Turnover of inventory has improved from 3.02 times to 3.29 times but in
absolute terms inventory increased by $54.6M entirely in the components
of raw materials and supplies and goods in transit.
In the absence of loans, the shareholders’
funds financed completely all the assets of the Company. Notwithstanding
the manufacturing nature of the business shareholders’ funds are 3.78
times the net value of fixed assets. By comparison, the figures for
Banks DIH and DDL are 1.4 and 1.99 times respectively.
The changes in the cash position of an
entity is another key angle from which the state of the company can be
assessed. Despite spending $63M on fixed assets, the Company increased
its cash position by $18M to close at a cash position of $228M. While
the Company proposes to expend some $700M on its capital renewal
programme, these funds will provide the bridge until new funds come in.
The shareholders have approved a rights
issue of 10M shares at a minimum issue price of $10. In view of the
consistently good performance of the Company with positive earnings per
share averaging $9.5 over the past four years, it is highly likely that
the shares subject to the rights issue will be considerably in excess of
the minimum issue price of $10. It is perhaps coincidental that one of
the resolutions passed on the recommendations of the directors was for
the issue of 9.2M of the new shares.
The Beharry group which a few years ago
acquired shares at $75 must be well pleased with the performance of the
Company in their role as controlling shareholders. For the minority
shareholders however, an over conservative dividend policy is a
discouragement to investment since they look to annual dividends rather
than retained earnings for their value.
Unlike many other companies which are
hesitant about the country’s future, Sterling is committed to further
significant investment not only in an expanded product range but
internationally as well. The Company has already received expressions of
interest from four Caribbean countries and there is every likelihood
that if it can get its marketing right, its product quality will compete
favourably and positively with similar products available in the Caricom
countries. The Company recognises the value of a skilled management team
and has brought back some qualified Guyanese to head the operations.
There is every likelihood that the company will continue to do well.