Business Page Banks DIH 2004 Review

Sunday, January 9th, 2005

 

For almost two months, Guyanese of all walks of life have been chanting the praises of Banks DIH Limited and its Management. Cotton banners have appeared around the country proclaiming Banks DIH Guyanese and not for sale. Full page advertisements have appeared in the press and television/radio hosts have had something to talk about. A major public corporation in Guyana was under threat of take-over by a company from another Caricom country. Guyanese nationalism was on proud display. The irony was that under the Investment Act passed in 2004, the potential bidder is deemed a domestic investor. That law won the backing of the Private Sector Commission (PSC), whose Deputy Chairman at the time was no other than Banks DIH executive Mr. Ramesh Dookhoo, who was the key player in the Committee set up by the PSC to review the draft legislation. Purely coincidentally this writer as an adviser to that Committee had opposed such a provision unless there was reciprocity! Clearly no good deed ever goes unpunished in Guyana while no one is ever held accountable for thoughtless or courageless acts.

The theme of the 2004 Annual Report for the year ended September 30, 2004 "Continuing the Legacy" was not dissimilar to the public campaign in which company personnel had taken to the streets of Georgetown. Just another of those ironies so common to life is that the Ad campaign is managed by a Trinidadian company and the Annual Report is printed not in Guyana but you know where. This week Business Page examines the annual report which will be tabled to the company's shareholders at the Annual General Meeting scheduled for January 15, 2005 which is roughly two months earlier than it has been held in the past three years. Timely reporting it seems is more a matter of corporate convenience rather that good accountability.

The Annual Report includes the financial statements of the company as well as the group which is made up of the company, Citizens Bank Guyana Inc., a 51% subsidiary, Caribanks Shipping Co. Ltd., (100%) and an associated company B.B Farms Inc. (40%). Caribanks was again reported as being a dormant company but the directors have given no indication of its plans for this subsidiary.

Good accounting practice requires that companies provide shareholders with information to show the profitability of the business segments but the directors have chosen three segments for reporting, namely Food and Beverage, Commercial Banking (obviously Citizens Bank) and Others representing less than 1/2% of the group's revenue. Given that the Annual Report of Citizens Bank is publicly available, the Directors are doing an injustice to its shareholders by not providing proper segment information for the company's "Food and Beverage" business.

Once again the Annual Report excludes a cash flow statement of the Company, denying members the opportunity to ascertain how funds are managed by the directors.

The Results

The Chairman in his report states that "considering the challenging economic environment within which all businesses operate, the Group's excellent performance is highlighted by the fact that Profit before Taxation increased by $481.3 million or 46.5% from $1.036 billion to $1.518 billion." To the untrained eye and those familiar with the half-year results published by the company earlier in the year, this was a dramatic turnaround from the sluggish performance of the past five years or more. Indeed in what appears to have been an effort to forestall any take-over action, these dramatic numbers were released to the press long before the Annual Report was available to the shareholders and not surprisingly the Report was anticipated with some eagerness and not a little skepticism.

The skepticism was not without some merit. During the second half of the year the company changed its depreciation policy which resulted in lower depreciation charges while revaluing its assets at the year end with the result that profits relative to previous periods were better and net assets increased. The change was mainly with reference to Plant and Machinery and Furniture, fittings and equipment. Note 27 states "the effect of the change on the current year results is a reduction of expenditure of $202,016." The total for the Group reduction is in fact $202,016,000 but readers may not interpret the narrative information in the same way that they would interpret financial information.

Profits without accounting for the change in depreciation are illustrated below:

 

 

The decrease in depreciation is almost equal to the increase in profits. The reality is that the loudly touted improvement of 46% in profits has nothing to do with better performance but the simple matter of changing the company's policy on depreciation.

It must be a measure of the company's situation that an 8% increase in net revenue only translated to a 1% increase in real and sustainable profits. By comparison, profits after tax of Citizens Bank Limited increased by 43.8% on a net income increase of 10.8%. Next week we will examine the Annual Report of the Bank in more detail.

Share price, valuation and market capitalisation

At the January 8, 2005 session of the Guyana Stock Exchange, shares of Banks DIH Limited were priced at $8, up by close to 100% in just over two months when the price was $4.20 - less than the $4.80 price which Business Page had calculated as the effective price following a one-for-four bonus issue. A bonus share is another of those book entries and like a stock split does not alter the performance of the company.

With the higher book profits and possibly with a view to influencing shareholders' decision on the possible takeover bid, the company is boosting dividends to $0.40 per share compared to $0.22 in 2003 and $0.27 in 2002. The challenge facing the directors is sustaining the new level given that in future they will have to charge depreciation on the revalued amount of the fixed assets.

Having revalued the company's assets, the directors find a significant deficit between the assets of the company and the current market's view of the company. At $8 per share, the market values the company at $7.054B while the value of the shareholders' equity at September 30, 2004 was $11.055B, a shortfall of $4.001B or $4.5 per share.

Governance

Regrettably, the Governance Disclosures made by the company fall short of the prior year as information on the Code of Conduct and Ethics has disappeared from the report. One would have expected the company to increase commentary on its governance practices given the adverse comments of the prior years.

It is disappointing to note that the company's governance also falls short of the requirements of Guidelines on Corporate Governance issued by the Securities Council set up to bring efficiency and transparency to the market for company securities.

Last year we criticised the presence of the Chairman/Managing Director on three sub-committees of the board and commend the company for taking corrective action. One would hope that executives do not have standing invitations to participate in the full meetings of the committees.

Related Parties

Such positive change does not however extend to all aspects of the company's business. Last year BP broke the news of the use of facilities owned by the Chairman/Managing Director without adequate disclosure. Since then the company has made no effort to rectify the situation or even offer a denial.

In the September 2004 newsletter of the International Financial Reporting Interpretations Committee (IFRIC), it was noted that IAS 24 (Reformatted 1994) required the disclosure of the remuneration of key management personnel. While two companies including Demerara Bank Limited made the disclosures in their 2004 reports, Banks DIH and Citizens Bank have not done so. Similarly, transactions with entities such as the Demerara Life Group and the John Fernandes Group once again get no mention.

Markets

Market information indicates that the company continues to lose market share for its flagship product Banks Beer and as if to rub salt in the wounds, the Government has announced an increase in the consumption tax from 50% to 60% from January 1, 2005. This may be counteracted however if those who had deserted Banks Beer now return to it in their show of patriotism.

One must continue to worry about the company's Food Division which in the prior year the Chairman reported as not performing to expectations. His report this year makes no mention of this Division.

Revenue from sales outside of Guyana amounted to $75.5M compared to $74.2M in 2003, an increase of less than 2%. Excluding revenue from subsidiaries since the product of Citizens Banks Limited is not exported, overseas sales represent less than 1% of the sales of the Company. This could be contrasted to the DDL Group which reported 40% of their sales as export sales in 2003.

Who owns the Banks name?

It appears that under agreements which certainly require explanation, the company cannot export Banks Beer to the Caribbean but what about the rest of the world? What about its other products? The company's strategy in the wake of the harsh effects of globalisation is worrying.

A Google(r) search for Banks Beer reveals two websites on the top of its list for Banks Barbados and Banks Canada with the Banks DIH website not even making the first page. The Banks Barbados website reports that "the brand Banks Beer is not currently available outside of the English-speaking Caribbean because of ongoing negotiations regarding the trading name." Who are they negotiating with? Banks DIH Limited in Guyana? The Directors locally have not reported any such negotiations.

The Banks Canada website notes "Banks Canada now has the exclusive rights to distribute to the US & Canadian market." The website also states "Banks Canada would like to introduce ourselves as the "Proud new West Indian Owners of Hart Brewers Canada in Carleton Place, Ontario, located just a short drive west of Ottawa" and "for more information on our Company Directors and Corporate structure, please click on www.banksdih.com."

When did this happen?! Banks DIH Limited never reported that it has a subsidiary in Canada so who really owns this company and what is its relation to Banks DIH Limited. A little web research found that the website is registered in the name of Alicia Harrison of Banks Canada Limited and Harrison Holdings Inc.

Conclusion

The ultimate irony of the possible take-over bid is that it diverted attention from specific concerns about the company's performance to the more general and noble issue of what is our heritage. At least for now, no one seems to care about the real performance of the company; or the independence of non-executive directors; or such a large body of executive directors who at the board level are equal but in practice are accountable to the MD as their effective employer; or about the lack of information on the efficiency and profitability of the units of the company; or about conflicts of interest which may operate to the detriment of the shareholders.

Last year this column wrote "The reversal of the company's fortunes will require a radical rethinking of the company's strategy and processes. It needs to make major decisions about the businesses it will divest and those it regards as core to its being. The problem shareholders face is how to solve the riddle that those who for years have been part of the problem will suddenly be transformed into solutions."