the Line - Sterling Products Limited
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
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
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.
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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.