Business Page – July 14th, 2002


On The Line DDL - 2001 Accounts

Introduction

Demerara Distillers Limited among the top four public companies in Guyana will be holding its postponed Annual General Meeting next Friday July 19,2002. This meeting was originally scheduled to be held on June 28 which would have brought it within the statutory deadline but owing to the late availability of the Annual Report the company’s directors decided to revoke that notice and summon a new AGM by a full twenty-one days. Business Page today reviews the Annual Report to be presented and approved by the shareholders at that meeting.

The activities of the group include companies involved in rum manufacturing, shipping, construction, food processing, information technology and distribution. As this column pointed out last year the Report, “does not present information on these companies in a comprehensive or consistent manner to allow for a proper evaluation of their performance”. This column has lamented the strategy of the company to embark on a number of ventures via private companies outside of the vision of the shareholders of the public company. Companies need to demonstrate that transparency is not only an issue for governments but for the private sector as well.

We summarise below the financial results of the company and its subsidiaries which are extracted from the audited accounts included in the Report and offer some indicators which may be useful to readers.

 

Profit and Loss Account

                                                   Company                                      Subsidiaries

                                            2001       2000         change          2001          2000         change

                                      (G$’M)  (G$’M)                 %     (G$’M)     (G$’M)                 %

 Net Sales                           6,194      4,824                 28         1,793         2,355               (24)

Profit Before Tax                   873         858                   2            274            196                 40

Taxation                                248         327               (24)            105              76               (38)

Profit After Tax                     625         531                 18            169            120                 41

Dividends                              231         173              33.5                 -                 -                    -

Earnings per Share (in $)       0.81          .69              17.4                 -                 -                    -

 

 Profitability

                                                   Company                                      Subsidiaries

 

                                           2001       2000             1999          2001          2000             1999

                                              %           %                 %              %              %                 %

Net Profit Margin (%)         10.09      11.00            12.45           9.41           5.08              3.59  

Return on assets (%)             0.13        0.16              0.17           0.15           0.14              0.16

Return on equity (%)             0.21        0.20              0.23           0.24           0.21              0.26

 

Balance Sheet

                                                   Company                                      Subsidiaries

                                           2001       2000         change          2001          2000         change

                                      (G$’M)  (G$’M)                 %     (G$’M)     (G$’M)                 %

Current Assets                    4,633      3,383                 37         1,041            835                 25

Current Liabilities                1,973         951               107            638            480                 33

Working Capital                 2,660      2,432                   9            402            355                 13

Fixed Assets                       3,187      2,186                 46            379            366                   3

Equity                                 4,878      4,484                   9            966            829              16.5

 

The turnover of the entire group i.e. the company and its subsidiaries increased by 12.68% while pre-tax profits increased by 10% from G$1.05Bn. to G$1.15Bn. However while the company’s turnover increased by 28% the turnover of the subsidiaries fell by 24% which unfortunately did not earn a mention in the Chairman’s Report. Instead of making up for this by more detailed information on the operations of the subsidiaries in the Annual Report, that Report continues to carry very inconsistent summaries of the performance making intelligent analysis impossible.

Despite the 28% increase in turnover of the company, its pre-tax profit increased by a mere 2% while the subsidiaries whose turnover decreased had increases in pre-tax profit of 40%! And to add to this situation, despite the nominal increase in profit of the company, the tax charge of the company declined by 24% while the tax charge borne by the subsidiaries increased by 38%.

While the profitability indicators have all shown slight decline the major indicators are still favourable both in absolute terms and when measured against those of other entities in Guyana as well as public companies in the region.

Balance Sheet

The balance sheet remains strong but there are some concerns as well. While the company’s current assets have increased by some 37%, its current liabilities have increased by 107% with the result that working capital has increased substantially less than the increase in business volume might warrant. Adding to this concern is the high level of receivables from group companies which at the end of the year remained at a stubborn level of close to $3/4 Billion. While this has fallen since 2000 the company must now consider whether these balances are as short-term as they are being classified.

Currency Risk

There have been significant increases in borrowings and the costs associated therewith largely at the level of the company. Management must ensure that the cost of borrowing is justifiable relative to the return the expansion will provide to shareholders. Owing to the inadequacy of the loan disclosures the reader can only surmise on the details of this financing. This information is necessary to inform the reader whether there is significant currency risk associated with funding growth of local operations with foreign financing and whether measures have been implemented to minimise those risks.

Governance

There is no reference in the report to issues of corporate governance such as compensation and internal audit.  Questions with respect to the existence of an Audit Committee, a Compensation Committee, the composition of these committees and their role with regard to governance issues are left unanswered. Inclusion of this information would provide shareholders with some level of comfort that the company adheres to the Principles of Good governance and Code of Best Practice (“the Combined Code”).  This omission is further compounded by the non-disclosure of information relative to Directors remuneration as is required under the Companies’ Act 1991 and International Accounting Standards.

Related Parties

Only limited information on balances with Demerara Bank are disclosed in this section of the financial statement notes. The fact that the cash flow indicates that there is movement in balances with subsidiary companies is an indication that there are other transactions with related parties which the notes omit. In addition there is once again no disclosure of transactions if any between the company and any of its Directors. Solutions 2000 one of the subsidiaries was a company in which certain directors of the parent company held a significant interest some time ago, a relationship not disclosed when that company was acquired.

Segment Reporting

The segment information disclosed is inadequate and does not comply with the requirements of the applicable accounting standards. Since the operations of the company are relatively complex it is crucial that the shareholder can evaluate management’s operating and financial strategies with regard to specific lines of business. The incompleteness of these disclosures limit a potential investor’s ability to evaluate the company’s entire operations.  

The Report has brought to the fore two other issues of some national significance. The Report indicates that on an investment of $14.6M in BEV Processors Inc. the company earned pre-tax profit of $82.9M while its share in that company’s accumulated profits amount to $162M at December 31, 2001.

Despite this, in 1997 the then Finance Minister waived with immediate effect export tax on the fish and shrimp industry- reinforcing the view that concessions are not given on a needs basis but are related to politics and the power of the lobby.

The second issue related to national statistics. In supporting the announced 2001 growth in GDP in the 2002 Budget Speech, the Minister had highlighted a 43.8% growth in rum. The published accounts of Banks DIH and DDL do not appear to confirm this.

Conclusion

While DDL as a company and group remains profitable, the concerns about disclosure, governance and strategy are real and the Directors have a duty to respond to these. And more generally, in order for the proposed stock market to gain credibility, it is critical that shareholders raise questions on the reports presented to them in order to bring about change. Shareholder activism is the primary means of ensuring that companies operate in accordance with the dictates of those who have invested their hard earned dollars.