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On
the line: Guyana
Stockfeeds Incorporated 2003 - the slide continues
Introduction
The annual report
of the Guyana Stockfeeds Incorporated presented to the 43rd Annual General
Meeting of the company yesterday shows dramatic slippage from the early
promise of this formerly state-owned company.
There was
considerably less hubris from the usually confident Executive Chairman and
majority shareholder Robert Badal even as he reported that the company
"enjoyed reasonably good performance in 2003 despite an extremely difficult
year for many companies in the livestock feed business" - almost a direct
repeat of his opening statement one year ago. But this could not disguise
the fact that the company's profit before tax has fallen from $264M in 2001
to $123M in 2002 and now $78M in 2003, which in real terms is even more
substantial.
Earlier bold plans
to double dividends each year have come to an abrupt end much earlier than
expected and none is now proposed for the current year. Added to this is the
fact that the company was unable to meet its tax liabilities for both the
preceding as well as the current year.
The activities of
the company include the manufacture and sale of poultry and livestock feeds,
hatching of baby chicks and processing of crude coconut oil. It is part of
the business interests of the controlling shareholder that involve National
Edible Oil and Fats Inc, El Dorado Rice Mills Inc and El Dorado Restaurants,
holder of the Popeye's franchise in Guyana.
Empty seat
Over the past two
years, this column has lamented the poor quality of corporate governance in
the company, a situation that appears to continue without any obvious
attempts at change despite the election to its Board of Mr David Yankana and
Mr Fred Meredith, two persons with a long association with the private
sector, though not within any public company. It is perhaps co-incidental
that Mr Badal's place at the recently held seminar on Corporate Governance
was empty. The directors' report and financial statements for the current
year show how much this company can benefit from the application of the
principles of good corporate governance. The seminar's theme was 'Corporate
governance is good business. Good business is development.'
It is also
noteworthy that there is not even a cursory reference to any issues of
governance including the Securities Council's Draft Guidelines on Corporate
Governance in either the Chairman's or Directors' reports. Yet only one year
ago, the Chairman was hectoring the government about the acceleration of the
Stock Exchange. While some companies with egregiously bad governance may
still do well in the short term, the literature shows that sound practices
including good accounting and accountability, transparency and
responsiveness are the key requirements for long-run success.
Late again
Once again, the
company's AGM is being held outside of the statutory deadline, the second
time in three years. Fortunately for the company, this `red flag' is not
being penalised by the market only because there is no trade in its shares
on the Stock Exchange. Despite having a clean opinion from its auditors, the
financial statements fall far short of professional standards and include
some elementary mistakes which do nothing to enhance the image of the
accounting profession.
One bit of good
news reported by the Chairman is that following the legal battle the company
has had with its corporate neighbours, the Chief Justice has ruled that no
environmental impact assessment (EIA) is required for the long-delayed
construction of the Parboiled Rice Mill which is now expected to be
commissioned in October 2004. It is a bit surprising that even as the
construction was halted, the company spent $42M on the mill in 2003 and the
"major part of $107M" in 2002. Would the voluntary undertaking of an EIA on
such a major project not have been the sensible way to go, given the
possibility of litigation if environmental problems do develop later and
would that not have been good corporate conduct?
Financials
We summarise below
the 2003 financial results of the company which are extracted from the
audited accounts included in the report and offer some indicators which may
be useful to readers.
Profit and Loss Account
2003
2002 2001 Change
2003/2002
(G$’M) (G$’M) (G$’M)
%
Sales 2,230
1,984 1,873 12
Profit before Tax 78
123 265 (37)
Taxation 31
48 95 (34)
Profit after Tax
46 76 163 (38)
Dividends ---
48 24 (100)
Earnings per Share (in $) .66
1.07 2.31 (38)
Profitability
2003
2002 2001
Net Profit Margin (%)
2 4 9
Return on assets (%)
7 10 19
Return on equity (%)
12 18 36
Once again, we see
every single indicator of profitability, other than the less relevant item
of turnover, comfortably ensconced in what financial writers refer to as
negative territory. Yet the Chairman describes this as "good performance'
and "good results" and speaks proudly of the company's position as market
leader in the feed business. There can be no rational long-term benefit in
increasing sales at the expense of profits. That a market leader faced with
cost increases of 100% in the price of one of its main ingredients is unable
or unwilling to increase prices simply defies business logic.
The key indicators
which any good manager uses to measure performance are drifting into
dangerous territory and show that something is clearly wrong with the
strategy the company is pursuing. If the optimism of the Chairman is
justifiable, the commissioning of the Parboiled Rice Plant will be the
realisation of a dream - doubling of revenue and returns of ten percent of
sales. Sobriety would caution however that such margins have never been
achieved by the company while earlier statements by the company have not
been consistent with the results. (See Business Page of October 20, 2002 and
July 27, 2003).
Balance Sheet
2003
2002 2001 change
2003/2002
(G$’M) (G$’M) (G$’M)
%
Current Assets
240 256 323 (6)
Current Liabilities
340 277 449 (23)
Working Capital (99)
(21) (126) 364
Fixed Assets
1,176 1,067 1053 10
Equity 808
761 734 6
The balance sheet
situation is no better with a deterioration in the working capital levels,
an increase in short-term payables of more than $63M (or 23%), and as
mentioned earlier, unpaid tax liabilities not only for the current year but
the preceding year as well. It cannot be lost on the company's directorate
that unpaid tax obligations attract substantial penalties for which no
provision has been made. The decision not to pay taxes due therefore must be
one into which the company has been forced rather than chosen.
Part of the
company's liquidity situation has been brought about because of the payment
of almost $80Mn. owing to related parties and the continued expansion
programme which is yet to produce any results after four years. The better
cash flow performance in 2003 was due almost entirely to the delay in paying
trade debts which will have to be paid sooner rather than later. Once again
there is no information on total provisions for bad debts and inventory
obsolescence rendering any evaluation of the real strength of the company's
working capital position impossible.
Those related parties transactions
As stated in our
2002 review, for reasons which are far from apparent, the company continues
to transact significant volume and value of its transactions with companies
owned privately by its controlling shareholder without fully disclosing "the
types of transactions and the elements of the transactions necessary for an
understanding of the financial statements" (IAS 24). The reader is left to
wonder about the pricing policies affecting the transactions and the profits
that may be derived therefrom. Note 16 Related Party of the financial
statements reflects, albeit opaquely, how the activities of a public company
are interwoven into the personal business interests of the Chairman. Why is
it necessary for the company to arrange financing for the Chairman's
business and to give security therefor and what is the business about
`exchange rate advantages' referred to in 16 (a)? Does the company operate a
cambio for which it does not appear to have a licence?
The serious
disagreement between the company and the government referred to in the 2002
review has continued into the current year with a letter being sent to the
company by the Privatisation Unit challenging the pre-Annual General Meeting
of the shareholders which the company summoned for September 9, 2004. The
notice of this meeting - the first of a kind in the history of Guyana - had
no information on the business to be transacted and was not sent to the
Securities Council, the Stock Exchange or the Registrar of Companies.
Undisclosed
Once again, the
Annual Report has failed to acknowledge the issues between the company and
the government currently before the court, or about the title to and payment
for the land on which the Privatisation Unit alleges the company has engaged
on the illegal construction of a wharf. The court matter goes to the heart
of the ownership of the company. The Privatisation Unit which manages the
government's interest in companies is unhappy about a rights and bonus issue
of shares which marginalised the government's interest in the company.
Contrary to the requirements of the law and accounting prescriptions, these
matters are not disclosed in the financial statements.
Conclusion
The difficulties of
the company appear to be far too fundamental to be explained away by trite
language from the directors. It is wishful thinking to believe that a two
year slide can be reversed merely by the commissioning of the Parboiled Rice
Plant. The company's compliance with the requirements of the laws governing
public companies is wholly unacceptable and it should consider itself lucky
that the Securities Council, no doubt timid after the Chief Justice's ruling
in the DDL case, allowed it to proceed with its AGM despite the numerous
cases of non-compliance with the act which the council has a statutory
obligation to enforce.
The contents of the
financial statements are well below the standard which one would expect from
the associate of a Big 4 firm. With three complaints against Deloitte &
Touche still to be addressed by the local accounting body, it is now
perfectly legitimate and timely for the public and the government to
question whether the profession has what it takes to remain self-regulated
and yet serve the public interest.
As long as the
company remains a public entity, it has to show more regard for the minority
shareholders, the law and good practice. It has to be run as an independent,
accountable entity. It has a long way to go.
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