On The Line - Demerara Distillers Limited
Introduction
Today, Business Page reviews the 2000 Annual Report of Demerara
Distillers Limited (DDL), presented to the shareholders on June 29, 2001.
DDL is both an operating as well as a holding company. There are eight
wholly owned subsidiaries, one that is 95% owned and one in which it has a
40% stake. Four of these companies are overseas based, two in the Caribbean
and two in Europe. The company also has interlocking directorships with
Demerara Bank Limited and GA 2000, which recently went into receivership.
The Group
The activities of the companies include rum manufacturing, shipping,
construction, food processing and distribution. Unfortunately the Report
does not present information on these companies in a comprehensive or
consistent manner to allow for a proper evaluation of their performance. The
Chairman's Report in discussing the performance of the subsidiaries included
such comments as: "Sales grew by 36% to $71.4M while operating profits
increased by 80% to $9.0M" (Topco); "pre-tax profit was
$88.1M, an increase of 6% with no comment on sales" (Demerara
Shipping); "DSL had a remarkable year increasing its turnover by
22%. Net Profit before tax was $20.1M, an increase of 33%" (Distribution
Services Limited); Solutions 2000 Inc. (acquired in 2000) recorded
"a turnover of $72M in 2000 and $12.1M in surplus cash after operating
expenses and tax payments".
For the overseas subsidiaries (CSR Limited in St. Kitts and Superior
Distribution Ltd. in Trinidad) there was no comment on their financial
performance except that "they continued to show improved
performance". Last year's Annual Report had predicted the Trinidad
company "to make a profit at the end of 2000". For the European
subsidiaries no reference to sales volume to value was made.
The vague and varied descriptions of the performance of the subsidiaries
have the unintentional effect of confusing readers and making comparisons
impossible. This imprecision appears throughout the Report as in the case of
the acquisition of the old Guysuco Sugar Factory "at a cost in excess
of US$1M."
Under several jurisdictions the subsidiary of a public company must
itself be a public company. This is not so in Guyana and DDL has taken full
advantage of this situation. Business Page has previously commented on the
unexplained acquisitions and disposals by DDL. Some years ago in an Offer
for Shares document the company had listed Distillers Gas Co. Ltd. and
Demerara Contractors and Engineers Limited as wholly owned subsidiaries.
Have they just disappeared? In 1994, DDL announced a joint venture with an
Indian company to build and operate a distillery in India. Again, this
appears to have been long since aborted although in its expansion programme
included in the 2000 report, the company predicts establishing a
distribution network in India to serve the Asian market.
The company has also gone into the insurance business and has taken up a
19% interest in Demerara Fire and General Insurance Company while it has
acquired 70% of the shares in Solutions 2000 Inc. Unfortunately, there is
never an indication of who the minority players are or from whom the
interest is acquired.
Financial Highlights of the Company (DDL)
This brief analysis which follows draws entirely from information
contained in the financial statements which are included in the Annual
Report. In this review we focus on the results of the Company partly because
we do not consider that the Report provides information to allow a
sufficiently meaningful review of the Group's financial statements. It
should be noted however, that the Company's turnover accounted for 68% of
the Group's turnover for 2000 compared with 73% in the previous year while
profit before tax accounted for 81% compared with 86% in the previous year.
Profit and Loss Account
2000 1999 % Change
(G$'M) (G$'M)
Net Sales ($M) 4,887 5,013 (2.5)
Profit Before Tax ($M) 858 887 (3.3)
Taxation ($M) 327 263 24.3
Profit After Tax ($M) 531 624 (14.9)
Dividends ($M) 173 173 -
Earnings per Share 1.38 1.62 (14.8)
Because of a 24% increase in taxation due to an increased provision for
deferred tax, profit after tax recorded a decrease of 15%. The Company's
Chairman attributed this fall in profits to an increase in the cost of
production due particularly to the rise in prices of molasses and fuel. In
addition, there was a 20% decline in the Euro resulting in a $100M exchange
loss. The financial statements themselves do not show an exchange loss and
it is possible that the Chairman meant lost revenue instead. The Company's
Earnings per Share fell from $1.62 to $1.38.
The Chairman further stated that the Company's decision to diversify its
operations was the Group's 'saving grace'. He feels that "the Guyanese
economy's dependence on commodities is too overwhelming and that there is
absolute need to encourage investments in the value-added export-oriented
products". This foresight was the motivation for investments in such
initiatives as shipping and information technology.
The times interest earned ratio (the number of times that interest is
covered by Pre-tax Profits) has increased from 12.01 times in 1999 to 15.82
times in 2000.
Profitability
2000 1999 1998
Net Profit Margin (%) 10.86 12.45 10.41
Operating return on assets (%) 0.16 0.17 0.18
Return on equity (%) 0.20 0.23 0.25
The Net Profit Margin is the relationship between net income to sales and
the decline is a result of the weakening in the gross profit margin due to
high production costs and depreciation in the value of the Euro. As a
consequence of these circumstances the return on assets and shareholders'
funds have both decreased.
Despite the fall in after tax profits the directors have declared a
dividend of $173M, the same as in the previous year. Dividend cover (the
number of times that dividends are covered by After Tax Profits) has
decreased from 3.6 times in 1999 to 3.1 times in 2000.
Taxes paid to the government by the group increased from G$1,341M to
G$1,438M, an increase of 7.2%.
Balance Sheet
2000 1999 % Change
(G$'M) (G$'M)
Current Assets 3,383 3,327 1.7
Current Liabilities 951 1,123 (15.3)
Working Capital 2,432 2,203 10.4
Fixed Assets 2,186 2,071 5.6
Equity 4,484 4,127 8.7
By any measure, the balance sheet is sound. The company has loans
outstanding of $328M of which $196M is repayable in 2001 while bank and cash
balances amount to $146M. There is no indication of how much of the cash and
bank balances are held in Guyana (to indicate risk exposure) and whether
these are held in the Bank with which there is significant interlocking
directorship.
Significantly, the financial statements show no information on related
party transactions as required by International Accounting Standards which
are mandatory in Guyana.
Expansion Programme
The Company has announced a planned US$15M three-year expansion plan
beginning in 2001. This includes the purchase and erection of new storage
facilities and bottling lines, investment into the information technology
and cellular telephony sectors, and the establishment of a distribution
network in India. This expansion will be financed by way of a share issue of
230 million shares, a bond issue and bank loans.
Conclusion
In the context of such a large and leading company, one would have
expected some attention in the report on governance. While the Company has a
number of non-executive directors, there is no indication of the role they
play in its governance. The concept of an Executive Chairman has been
heavily criticised since it concentrates too much power in the hands of one
individual. One notes that the alleged abuses in Globe Trust were
facilitated by the combined role of Chairman of the Board and Chief
Executive Officer.
Non-executive directors are there to prevent excesses and both law and
good corporate practice requires that they direct the management of the
business and affairs of the company and play key roles in the major
committees of the Board including the Audit Committee, Nominations Committee
and the Compensation or Remuneration Committee. There is no indication
whether these committees even exist in the company reinforcing the culture
of excessive dominance by one or two individuals over the affairs and
resources of the company. Shareholders continue to look to the non-executive
directors to introduce to the company a different, enlightened culture of
governance.
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