Business Page – August 6, 2000

ON THE LINE - Sterling Products Limited

Introduction

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 is heading.

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

  1999   1998 % change
Net Sales ($M)    970 867 11.9
Gross Profit ($M)    258 208 24
Other Income ($M)    39 26 50
Profit Before Tax ($M)    166 91 80.4
Taxation ($M)    58 38 52.6
Profit After Tax ($M)    108 53 103.8
Dividends ($M)    27 23 17.4
Earnings per Share 1   1.79 5.75 105

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.

Profitability

Using these to measure profitability we find the following:

  1999  1998  1997
Net Profit Margin (%)    11.13 6.08 5.05
Operating return on assets (%)    0.25 0.15 0.10
Return on equity (%)    0.29 0.18 0.11

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 (existing) shareholders.

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.

Balance Sheet

  1999   1998 % change
Current Assets ($M)    521 469 11.1
Current Liabilities ($M)    83 75 10.7
Working Capital ($M)    438 394 11.2
Fixed Assets ($M)    157 120 30.8
Equity ($M)    582 501 16.2

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.

General

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.