Sunday, June 14th, 2005

Introduction:

With pre-tax profits more than doubling in 2004, Guyana Stockfeeds Inc. has had what its Chairman and Chief Executive Robert Badal described as excellent results, but falling short of what he had predicted in September 2004 would be a 'record year'. Even as he basked in the company's performance, the Chairman noted that 2004 was a good year for the poultry industry with poultry production increasing from 48m pounds in 2003 to 54m pounds in 2004 as many new small farmers entered the industry lured by higher prices while enjoying a reasonably stable market. These results would be presented to the shareholders at the company's 44th Annual General Meeting to be held on 25th June, 2005, five days before the statutory deadline.

Pre-tax profits for the preceding three years were moving in a southerly direction having fallen from $264M in 2001 to $123M in 2002 and $78M in 2003 and the turnaround must have been welcome. Once again, the quality of half year unaudited financial statements issued by public companies under the Securities Industry Act have come into sharp focus and following the debacle at Sterling Products Limited is likely to further discredit such statements.

The company's full year after tax profits are less than the half year results issued in September when the Chairman was predicting a record year. It all seemed to have gone awry with interest charges which in the second half of the year were six times that of the first half of the year. Similar miscalculations appear to have been made in the half-year provision for taxes which in the first half was calculated at 21% but for the full year this jumped to 40% made up significantly of deferred taxes which arise because of the different rates of depreciation allowed for tax and accounting purposes.

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., El Dorado Restaurants, holder of the Popeyes franchise in Guyana and Guyana Stock feeds Limited (Trinidad and Tobago) which was set up when the company had threatened to take its investment to that country.

Despite a set back in its exports to Suriname following the death of the principal of the company's leading distributor and a decline in export sales of 66%, total sales increased by 28%. With exports now accounting for just over 1%, it is hard to understand the company's optimism about its access to lucrative export markets. What our manufacturing companies need to recognise is that the Caribbean Single Market and Economy (CSME) offers both a threat and opportunities. The company recognises and laments the cost of electricity, rapid migration, a stagnant economy and small market. It would be no easy challenge for its exports which would have to include freight costs to compete with manufacturers in countries which are less affected by these factors. One option which companies in this situation may pursue is price differentiation but this is hardly likely to be successful in a stagnant economy.

On a year by year basis, the performance justified the Chairman's description of the results as excellent and gross profit percentage over the year was a constant and healthy 16.2% of sales. The questions really arise when the results into two six months period are dis-aggregated. Sales in the second half of the year were 28% over the first half but the net profit percentage fell from 10.7% to 3.3% which is strange given that a few months earlier the Chairman was predicting a record year.

Despite the increased sales inventory, which constitutes a significant part of current assets, has declined by more than 21% which can place the company under pressure to meet market demands. A bank balance of more than $35m at 2003 was fully utilized in 2004 and at December 31, 2004 the company was again in an overdraft position. Last year the company was in default of its tax payment obligations and while this has now been addressed for 2003, it appears that its 2004 installments have not been paid. The company it seems continues to rely on trade and other creditors to provide it with its short term financing needs.

Part of the pressure on the company's cash flows is due to capital expenditure of more than $1.2B over the past four years. However with the parboiled rice plant now expected to begin operations in 2005, the company is counting on a major increase in sales and profits for the future and as the Chairman notes, the Board considered the plant 'too important' for future growth and profitability. It is a major bet.

Conclusion:

Business Page was particularly harsh in its comments about the company's 2003 performance, critical of the governance, late holding of annual general meetings, the treatment of the State as a shareholder and the quality of its reporting. There have been some improvements but many of those concerns including the non-disclosure of the legal issues between the company and the Government remain unidentified and the company has failed to meet some disclosure requirements. The structure of the group and the otiose manner of some of its inter-company transactions must lead to questions. Why for example does the company need to have its Trinidad's related party make its overseas payments when there are no exchange controls in Guyana?

The Chairman and dominant shareholder is nothing if not optimistic. He is placing great store on the potential for the parboiled rice plant which he seems to assume would be the silver bullet for the company, producing $2.4B in revenues and $240m in profits.

The market has shown no interest in the shares of the company and it would require more than one year's good results to convince the public that the company is finally and irreversibly on a higher trajectory.

Not too long ago the Chairman, even exceeding Jack Welch's boast about sales, had predicted the doubling of dividends each year. He has resiled from that position and after no dividends in 2003, the directors have announced a dividend of $48m, without stating the dividend per share! That is most unusual if not unlawful and it is surely unfair to expect the minority shareholders to calculate the dividend per share which incidentally is $0.68 per share.