|
On
the Line -J.P. Santos & Company Limited
Introduction
Today's
Business Page reviews the annual report and accounts of J.P. Santos &
Company Limited (JPS) for the year ended
December
31, 2003.
The report, austere both in appearance and content, is characteristic of the
lean and unostentatious style which has been a hallmark of its well-run and
some would say almost reclusive parent - John Fernandes Limited, one of the
oldest surviving businesses in Guyana. It presents the consolidated
financial statements of the company and Bryden & Fernandes, its subsidiary
in which it has 51% shareholding but whose business activities cannot be
deduced from a review of the report.
The
Directors' Report, except for a section on proposed capital expenditure
continues in the tradition of many other public companies in
Guyana
barely providing the minimum that is statutorily required even though the
trend in properly regulated and functioning capital markets is for more not
less information.
Profitability
During
the eighties and nineties the company almost went out of business because of
the rampant smuggling and pavement vending, both of which created an unfair
competitive environment and which had eroded its share of the retail market.
The company was on the brink of liquidation and was advised to consider
financial restructuring and the introduction of new capital. Chris Fernandes,
Chairman of John Fernandes readily saw the synergies that could be achieved
with the adjacent business with its strong but underperforming asset base
and took up the challenge buying control of the company.
It has
been a success story since with continuing gains in each year. The financial
statements report a 32% increase in revenue excluding other income (rental,
interest, dividend and miscellaneous income), while the group's revenues
increased by 25%. The Company cut its 2002 operating loss of $6.5Mn.by 93%
to $441k.while the Group had a 36% increase in its operating profit. However
the company's operating losses may be distorted as a consequence of the
significant volume of inter-company transactions which will be dealt with
later.
This
improvement is achieved solely through revenue growth because operating
costs of the company and the group increased by 23% and 31% respectively.
Before-tax profit for both company and group showed a 19% improvement over
2002 boosted by other income of $69Mn.and $57Mn.respectively and the returns
on equity and assets are a healthy 15% and 19% respectively. The company has
no long-term debt, assets of $390Mn and shareholders' equity of $301Mn.
The
taxable profit would in fact have been much higher but for a management fee
of $30Mn. (4.69% of turnover from retail activities) paid to Bounty Farm, a
subsidiary of the parent.
The
accounts suggest however that the fee covers staffing but one has to wonder
about the structure of the management fee when the company is making a loss
on its core retail operations. While the average overdraft is $20+ million
dollars, interest paid is less than half a million dollars, suggesting that
the overdraft may be a year-end phenomenon.
Earnings
per share have increased significantly from $2.32 in 2002 to $3.26 in 2003.
However in what is both confusing and unfortunate, the motion to be put to
the shareholders is for a dividend of $1.00 per share while the accounts
show a dividend of $2.00 per share, each of which has a book value of $16.
The payout of $2.00 per share represents 61% of the profits available for
the year, compared with 23% in the preceding year.
The
subsidiary which has made post-tax profits of $40Mn. proposes to pay no
dividends.
Taxation
According to the tax note to the financial statements, the applicable tax
rate for the year is 45% which on a pre-tax profit of $68.7Mn.would be
equivalent to approximately $31Mn. Yet, the corporation tax charge is shown
at $13.9Mn. which is even less than 2% of turnover, the minimum corporation
tax the company should pay. In fact, the net tax charge after taking account
of prior -year adjustment and deferred tax is $6.6Mn.which is an effective
rate of less than 10%. One can speculate that this may be partly explained
by the utilization of tax losses from earlier years although this is not
apparent from a review of the financial statements.
By
comparison, the subsidiary which made pre-tax profits of $38Mn. has an
effective tax charge equivalent to 44%.
Balance Sheet
The
balance sheet of the company is much stronger than that of the subsidiary
with the former having a ratio of current assets over current liabilities of
2.19:1 while in the case of the subsidiary the ratio is 0.56:1. While JPS
has just about fifteen days worth of inventory in stock, the subsidiary has
well in excess of three months but appears to have made no provision for
obsolescence. Similarly, while JPS has a net worth of $301Mn. and total
liabilities of $94Mn., the subsidiary has net worth of $23Mn. and total
liabilities of $193Mn!
Related Party Transactions
John
Fernandes Limited owns in excess of 90% of the shares of JPS and the parent
company or its shareholders have a controlling interest in Bounty Farm
Limited to whom J.P. Santos paid management fees of $30,000,000 in 2003. JPS
also made purchases valued at $265Mn.in 2003 from Bounty Farm Limited while
loaning it $71m.(2002 - $2Mn). JPS is also shown as having advanced Bryden &
Fernandes Limited some $20Mn. during the year to bring the total owed by the
subsidiary to JPS to $70Mn. In neither case are the terms of repayment of
these advances disclosed in the financial statements although the notes
indicate that interest of $3m.was charged for the year - clearly at
subsidised rates. The disclosure requirement for related party transactions
includes pricing policy but this is not stated.
The
inadequate disclosures in the financial statements do not allow the reader
to make an informed determination, but unless the interest charged on the
loan to Bounty Farm exceeds the interest charged on the company's secured
overdraft of $45Mn, then minority shareholders have good reason to question
whether this "investment" is in their interest if the overdraft situation
persists. Neither the assets pledged as security nor the interest rate are
disclosed as required by International Financial Reporting Standards (IFRS).
The same holds true for the company's $70Mn.investment in its subsidiary
Bryden & Fernandes Inc, a company, which based on the financial statements
is valued at G$1Mn. and which itself is running an overdraft of $89Mn.
Neither
the Directors' Report nor the accounts provides any insight into the
operations of Bryden & Fernandes and it is therefore not possible to
determine the rationale for such a sizable investment. Similar absence of
disclosure, except for the amount of income received, also surrounds the
company's lease of its investment properties with its parent John Fernandes
Limited and again the reader is unable to assess the benefits or otherwise
of the arrangements.
Statutory Compliance
The
absence of a reconciliation of the effective tax rate; information on
general and other reserves; details of lease arrangements with all parties;
statement as to number of employees; information on investment properties;
segment information, the date of and authority for approval of the financial
statements are among the omissions that render the financial statements
non-compliant with International Financial Reporting Standards contrary to
the assertion in the audit report.
It
should also be worth noting the notice of the Annual General Meeting is
undated and the AGM should have been held by
June 30,
2004
failing which special permission has to be obtained from the Registrar of
Companies. There is nothing in the Directors' Report to suggest that this
has been done. This omission is not only surprising after the recent
publicity surrounding this issue but in effect renders the meeting unlawful.
Conclusion
All of
the company's directors are non-executive though several are connected with
the parent company. The directors include Mr. Winston Tyrrel, a well-known
advocate of shareholders' rights who is also a director of another public
company and who recently criticized DDL for short-changing shareholders and
Mr. Chris Fernandes who is also a director of Banks DIH, a major public
company. One would have therefore expected more transparency in the
financial statements disclosure rather than the private-company approach to
its transactions with related entities.
Despite
the significance of the shareholding of the parent company, the directors
should not forget that the company is still a public company with minority
shareholders whose interests must also be protected. A key element of this
is the duty of full disclosure of information about transactions with
entities in which the directors have an interest.
(Back to top) |
