Business Page – August 17th, 2003

 

On the Line - Sterling Products Limited

Introduction  

The directors of Sterling Products Ltd, another of Guyana’s public companies presented its 2002 Annual Report at its 48th Annual General Meeting which was held at the company’s registered office at Providence, East Bank Demerara on July 26, 2003. The company joins the list including Banks DIH, DDL and Guyana Stock feeds to present late accounts and reports to shareholders without the courtesy of a prior apology or explanation. Shareholders have every right to expect prompt reporting by public companies which under the Securities Industry Act now have the added responsibility of issuing half-yearly reports.
Described as an “overall good one” by Chairman John Carpenter, the performance for the year reflected a substantial decline in after tax profits while sales remained flat even in nominal terms. Mr. Carpenter however asked shareholders not to take a short-term view of the company, since the year saw the completion and testing of the new margarine plant and the laying of the foundation for further expansion of better access roads, improved storage facilities and increased power generation. Over the past three years the company has expended over six hundred million dollars while its sales have increased by less than ten per cent, which reflects a deteriorating asset turnover, a not uncommon problem for our public companies as earlier articles by Business Page have noted. Like so many of our manufacturing companies, Sterling has seen its profit before tax fall since 1997 by sixteen per cent, which must cause some concern among shareholders, one of which is the Beharry Group owns some 58.1% of shares. On this note the directors report substantial interest - 10% - which for purposes of the Securities Industry Act is 5 per cent.
During the year the company lost four senior managers including the Chief Executive Officer, a loss of immeasurable proportions for a company whose executive management team comprises six persons. The brain drain is having a debilitating effect on the country and the loss of managerial and entrepreneurial talent is impeding growth in the private sector, but the entire country seems to have no idea of let alone strategy for dealing with the problem. It ought not to escape the decision-makers that with the pull-factor the situation is being exacerbated and that if we are to have any real future as a country we have to find a solution to what is clearly now a crisis.



Capital expenditure in plant and equipment should lead to greater efficiencies and profitability, but the opposite appears to have happened and both the absolute and relative gross profit fell even as sales increased, a situation not addressed in the Chairman or the Directors’ report. Profit before tax (PBT) has decreased by $77M or 41.40% (not 70% as stated in the Chairman’s Report) mainly as a result of the fall in gross profit and other income. Both gross profit margins and net profit margins fell as did return on equity and earnings per share. The reduction in other income was mainly from a decrease in interest income of $19.2M or 61.74 per cent, since interest-bearing funds were utilised to fund capital expansion. It must be a concern when an entity is better off investing in bank deposits than in plant and machinery as was the case this year.
The Chairman’s Report says that the company’s products are of internationally acceptable quality, and one has to wonder why there is only minimal value of exports ($3.8M) although he assures shareholders that the company is “working assiduously” to increase regional sales.

Despite the decrease in profit after tax of 62.60% the dividend payout of $3 per share (erroneously stated as a percentage by the Chairman) was maintained bringing dividends as percentage of profit after tax to 93.88% compared with 35.11% in 2001. While the dividend policy of the company is not immediately apparent there is nothing wrong in a company putting its surplus to shareholders (who can probably invest it more profitably than the company). Even allowing for the payment of the dividend, the company will have over $300M in cash and deposits with capital commitments of less than $10M. It appears therefore that the company may have overestimated its financing needs when it raised some $610.85M in equity capital in 2001.

By any measure, the balance sheet is sound. All the assets of the company are financed by shareholders whereas normal financial practice would suggest that short-term assets could be financed by short-term liabilities. For every current liability there is a current asset of $8.2 which is excellent when one considers a ratio of 1:1 to be acceptable.

Capital expenditure in 2000, 2001 and 2002 amounted to $105.96M, $355.5M and $301.8M respectively, and according to the Chairman “financed from internally generated funds” which is not quite correct since the funds came largely from the issue of shares in 2001. The Chairman’s report indicated that in 2002 the company constructed a new margarine plant and improved the quality of their soap and detergents through reformulation and addition of key processing equipment. The returns from these investments should surface at least by year 2003 to justify their significant cost to the company.

Improving the financial statements

The businesses of the company comprise manufacturing and distribution of edible fats, detergents, soaps and ice cream and distribution of ice cream lollies. The company’s risks and rates of return seem to be predominantly affected by differences in the products and services it produces, in which case IFRS 14 - Segment Reporting requires disclosure by product lines of sales, profits, identifiable net assts and liabilities, capital expenditure, depreciation, etc. The company merely discloses the income from its manufacturing and trading activities, hardly helpful to the reader who is left to speculate on the performance of the individual product lines and their contribution to overall performance.

The last actuarial valuation of the pension scheme was done in 1997 and a valuation due in 2000 was still in progress at the end of 2002, two years later - clearly unacceptable to stakeholders of the pension scheme and the company’s shareholders who may have to take up any actuarial deficiency. This is however not a problem unique to the company. The company estimates that there would be insignificant (if any) net benefit obligations after taking into account the fair value of plan assets and the current service costs (pension contributions), while adding that it is committed to accepting the actuarial recommendations which are expected in 2003.
The financial statements disclose purchases from Beharry Automotive Limited and Edward B. Beharry Confectionery, IT Service and Security Service which are listed as related companies without any indication as to the nature of the relationship among the companies or the balances outstanding at the end of the period as required by IAS 24 - Related Party Transactions. Interestingly GBTI in which the Beharry Group has a controlling interest is not listed as a related party and is listed last among the banks with which Sterling does its banking.

The company’s compliance with IAS’s approved by the Institute of Chartered Accountants of Guyana, including disclosure of the date the financial statements were authorised and by whom (IAS 10), accounting for dividends and provisions for stock obsolescence and bad debt provisions, could certainly have been better, particularly in light of the several months of inventory on hand. Employment costs increased by 8% but no comparative information is presented on the number of employees.
The company accounted for proposed dividends as a liability in contravention of IAS 10 which requires the disclosure by way of a note to the financial statements or on the face of the balance sheet as a separate component of equity.

Conclusion

There is no reference in the Report to governance and structures such as committees of the Board including internal audit. There is no reference to the Securities Industry Act with which the company now has to comply. The company has eight directors all of whom are non-executive, an unusual situation in Guyana where at a minimum the CEO enjoys board status. Business Page considers it very positive that while Senior Counsel Hughes of Hughes, Fields and Stoby is a director, that firm is not the company’s attorneys.
So far there has been no trading in the company’s shares on the Stock Exchange and it is therefore difficult to assess how the market perceives it. The underlying assets are quite substantial but the company has to produce better results pretty soon. Manufacturing excellence is about flexibility and the luxury of expending now and waiting five years to produce the results is no longer available. The rights issue in 2001 was sold at $100 per share and the dividend so far has been a mere 3% - not quite a stellar performer. The year 2003 is critical for the company.   (Back to top)
 

BP welcomes Investment Bill
The Investment Bill tabled in the National Assembly last Wednesday is a major step towards attracting investments. The BP contributor was part of the Private Sector Commission team to review the original draft which has now been substantially revised to take account of the Private Sector’s concerns. BP considers that there are a few areas in the bill which need further consideration and it therefore welcomes the referral of the bill to a select committee. BP will review the bill next week.