Business Page – October 20th, 2002


On The Line - Guyana Stockfeeds Incorporated

Annual Report 2001

Introduction

In today’s Business Page we review the Annual Report of Guyana Stockfeeds Incorporated which held its 41st Annual General Meeting on September 21, 2002 at the Hotel Tower. It is the fourth full year of operation as a privatised entity and the company’s Executive Chairman Robert Badal, ACCA, MBA, described the company as having performed ‘extremely well despite a most difficult year for the economy”. The company began exports of feed to the Suriname market and the report indicates that the company had secured a market share of 25% although it is not clear whether this is of that market or the Guyana market. The Chairman also reported the purchase of the edible oil assets of the Government-owned NEOCOL and a state-of-the-art parboiled plant.

The entity has shown tremendous dynamism since its privatisation and its growth has been remarkable. This as however been overshadowed by serious problems of governance and the company is now in court as a result of action brought by the Government for two share issues – a bonus issue and a rights issue - that has raised eyebrows in legal and business circles. The effect of these transactions has been the strengthening of control of the company by Mr. Badal. It is perhaps a little ironic that the Chairman lamented the non-implementation of several “crucial” sections of the Securities Industry Act. He notes that “those sections of the act (sic) which place responsibility for the for regulating capital issues have been deliberately of brought into effect, leaving this function within the purview of the Minister of Finance” It is widely believed in knowledgeable circles that had these sections been brought, the company would have had not been able to act in the manner in which it did. For the records, the entire Act has now been brought into force but without any retroactive effect.

Governance

The Companies’ Act requires companies to hold their annual general meetings not later than six months after the end of the accounting year but the Annual Report did not give any reason or apology for the delay or indicate whether the requisite approval had been received. The financial statements did not disclose as is required under the law and relevant International Accounting Standards, the remuneration of the executive directors including the Chairman, a problem not uncommon in Guyana.

Among the company’s directors are attorney-at law Andrew Pollard and Chartered Accountant Mr. Noel Narine, head of PKF Barcellos, Narine& Company. The report for the year is a considerable improvement on that of the preceding year which had so many glaring errors that it should not have been presented to the shareholders. It is also unfortunate that respected professionals should lend their credibility to such bad governance practices.

The Business

The activities of the company include the manufacture and sale of poultry and livestock feeds but it is also part of a group that involves National Edible Oil and Fats Inc., El Dorado Rice Mills Inc. and El Dorado Restaurants who major shareholder is the company’s major shareholder and CEO.

We summarise below the 2001 financial results of the company 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                                                                                                            

                                           2001       2000         change                 

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

 

Sales                                  1,873      1,337                 40                 

Profit before Tax                   258           75               244                 

Taxation                                  95           28               239

Profit after Tax                      163           46               254

Dividends                                24           12               100

Earnings per Share (in $)       2.31        0.67               244

 

Profitability 

                                           2001       2000                    

 

Net Profit Margin (%)           8.72        3.45                    

Return on assets (times)        0.19        0.08                    

Return on equity(%)                 33             8                    

 

The turnover of the company increased by 40% (the Annual Report says 46%) while pre-tax profits increased by 244% from G$75M. to G$258M. The Chairman reported that this was due mainly to the increase in prices of imports and the commencement of exporting Kaituk feeds to the Surinamese market during the year. Despite the increase in sales (and operations) the operating/administrative expenses of the company decreased from $207M to $163M. The Chairman attributed this to stringent cost controls and cost-reducing investments in 2000. This has had a direct impact on the bottom line with profit after tax increasing by an equally impressive 254%.

Dividends per share increase from $0.17 per share to $0.34 per share and consume 14.7% which allows for a reasonably high retention to finance the company’s ambitious expansion project. In the preceding year dividends of $12Mn. represented 26.04%.

Balance Sheet                                                                                   

                                           2001       2000         change

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

 

Current Assets                       323         232                 39

Current Liabilities                   497         122               307

Working Capital                  (174)         110             (258)

Fixed Assets                        1053         545                 93

Equity                                    734         591                 24

 

The balance sheet remains strong but there are some concerns as well. Current assets have increased from $231Mn. to $322Mn. but the bulk of this increase is in inventories and receivables. While the company’s current assets have increased by some 39%, its current liabilities have increased by 307% with the result that working capital has decreased substantially more than the increase in business volume might warrant. While trade creditors increased only modestly from $39Mn. to $52Mn., other creditors increased by almost 900% although the financial statements do not give any kind of explanatory information for this very significant increase.

Subsequent to the year end the company entered into a credit facility agreement for a term loan of approximately US$700,000 mainly to finance an acquisition made in 2001. This can further exacerbate the company’s liquidity situation unless the new borrowed funds are designed to pay some of the short-term other creditors. The issue of 70.12Mn.shares in 2000 and 2001 brought in a total of $37.55Mn at an average $0.54 further supporting concerns that the issue was financial engineering to give the controlling shareholder a more dominant position.

Fixed Assets increased by 93% due mainly to the purchase of a state-of-the-art Parboiled Rice Plant which the company expects to result in increased sales and profits by US$8M and US$1.2M respectively per annum. Given the increased competition as a result of the entry into the market by Didco Trading, these expectations seem over-optimistic and failure to achieve them may lead to overtrading.

Conclusion

The company’s performance has been impressive and the entire team deserves credit for this. The prevailing political situation can however affect the company’s future particularly if interest rates start to rise. The big problem is one of governance which investors will not ignore. It is a problem which needs addressing by the non-executive directors in particular. If they do not, the market might be unforgiving. Meanwhile, the cloud of impropriety and illegality over the share issue will continue to hang over the company.