Business Page –  On the Line - Banks  DIH Limited 2005

Sunday, January  1st, 2006

Introduction:

Months after Chairman and CEO of Banks DIH Limited Clifford Reis reminded shareholders at the 49th Annual General Meeting (AGM) of previously repeated advice given to them not to sell their shares, the annual report sent out with the notice and the 2005 audited financial statements suggests that he and other key and well-placed directors appear to have ignored their own counsel.

This surprising development is likely to overshadow the lacklustre performance of the company for the year ended September 30, 2005 and will no doubt generate some interest among the shareholders at the company's annual general meeting to be held on Saturday January 21, 2006. Once again the company's subsidiary Citizens Bank Guyana Limited has outperformed by leaps its parent, in the process providing some comfort to the group. Citizens' reported an 18.9% increase in pre-tax profits compared with an 11% decline in the company, on which this review has chosen to focus. A separate review of Citizens' will be done later.

A grossly ambiguous statement by the directors that 'Changes in Directors Interests from the Interim Report partly reflect a revised presentation of jointly held shares and changes to the parties classified as associates' adds to concerns about the significant decline in Directors' Interest as disclosed in their Report and reported from other sources. The Securities Industry Act 1998 requires that the interest of directors, chief executive officers and their associates, whether held beneficially or non-beneficially be disclosed, although it does not require that comparative data be presented.

Since the level of permissiveness allowed under accounting rules for reclassification does not apply to a legally defined term, the only possibility that I can think of that would allow such a reclassification is a change in the circumstances of a previous associate which would include spouse, children under eighteen years and associated companies. Anything else would seem to constitute a disposal.

'All in the report'

The Act defines an associate of a Director or Chief Executive as a spouse, children under eighteen of the person or his/her spouse, any company in which the person has a substantial shareholding and that company's subsidiaries and holding company. An examination of the interest of directors and their associates (whether held beneficially or non-beneficially) showed Vice Chairperson Kathleen D'Aguiar with the most significant decline since March 31, 2005 of over 10 million shares (7.6mn. by associates and 2.7mn. directly) and representing approximately seven out of every ten shares previously held. Next in significance was the Chairman himself whose interest and that of his associates declined by some 1.3 million shares (directly 759,188 and associates 527,493) or 3 out of every ten previously held, followed by Finance Director Azam Ali Khan whose interest and that of his associates declined by a net of approximately 1.6 million shares or one out of every six held six months earlier.

The disposal of shares by directors is always a bad sign and in an effort to ensure that what had taken place could be clearly understood, the Editor-in-Chief of this newspaper wrote to the CEO enquiring whether the reduction in the shareholdings was as a result of sale of shares by these persons. In response the Chairman advised that the answers 'are all contained in the Banks DIH Annual Report'. Not only was the response unfortunately and uncharacteristically terse but it was also misleading. How can the words in the report that the changes 'partly reflect a revised presentation of jointly held shares and changes to the parties classified as Associates' unambiguously answer the question whether actual sale of shares took place?

The information on Directors' Interest is statutorily required under the Securities Industry Act but there is no requirement for the directors to disclose any particulars of the disposal including dates, parties or price. While there is no suggestion of any link between the disposals and the comparatively disappointing performance of the company for the year, significant disposals within the same reporting period by key directors cannot reinforce confidence in the advice offered by directors to shareholders (including myself) that they hold their Banks shares.

Poor judgment:

But even worse is information corroborated from several sources that the Finance Director sold over ten million shares on September 8, 2005, three weeks before the end of what was a disappointing year compared with the preceding year. At best that was poor judgment on his part and reflects adversely on the entire Board and since that transaction does not appear to have been reflected in the Report, there must be some doubts about the accuracy and reliability of critical information contained in the Report, which cannot be explained away by some theoretical possibility or unreasonable technicality. The big question now is whether the directors have reversed their earlier and repeated advice?

Performance:

Last year, benefiting from some entirely permissible book-keeping involving depreciation, the company proudly boasted a 47% increase in operating profit on increased sales of less than 10%. By contrast, this year while the increase in revenue is even greater -12% - operating profit has declined by 9% and alarmingly the operating margin has declined from 14% to under 11.5%. Last year when the company considered it was under threat of a hostile take-over, the dramatic turnaround from the preceding year was available to the press long before the annual report was available to shareholders. This year no such hype. Business Page in its review of the 2004 Report had drawn attention to the considerably improved performance as being in no small measure due to a book entry on depreciation contributing some $212Mn.

The Chairman still considers the performance of the company in 2005 'good', attributing this to increased physical sales of 6.7% and benefits resulting from the planned installation of a one megawatt generator, even as he mentions that steep increases in fuel price and severe floods reduced the company's net profits. No doubt shareholders would have expected that the increased sales with no increase in the number of employees and the huge expenditure on the generator would have produced the 'meaningful cost savings resulting in improved shareholders' value' predicted back in the 2003 Annual Report. That the huge annual capital expenditure is yet to be justified is borne out by the decline in returns on equity and assets since 2002.

Tale of two halves:

The company does not provide half-year figures for the company but the half-year results of the group (including the period of the flood) published in May 2005 showed an 11% increase in revenue over the corresponding period one year earlier and exactly 50% of full year 2005. However, operating profit as a percentage of sales for the first half of the year was 11.7% and for the second half 10.5%, suggesting that compared with the rest of the year and contrary to the Chairman's assertion, the flood did not adversely impact on either revenues or profits.

The interim report also indicated that volume sales had increased by 6% while restaurants had increased turnover by 33%. The directors seem to have an ambivalent view of the restaurants which according to them performed below expectation in 2003 but yet seem to attract significant capital investment. While the performance of the restaurants was emphasised in the half-year unaudited report it gets no mention in the full year, audited, longer-format report. Business Page continues to call for more detailed discussions by the company of its sectoral performance. A request for information by the editor-in-chief on the performance of the restaurants for the full year evoked the response that this was contained in the annual report.

Similarly, Business Page continues to view with dismay the absence of a statement of cash flow for the company which would have shown that had it not been for borrowings of over G$600Mn., the company would have had some difficulty to meet its short-term obligations including dividend payments. Despite this, however, the company has a very strong asset base and its debt to equity position is enviable even if the $4.7Bn of revaluation reserve is excluded. I remain convinced that the combining of the cash flow of a bank with a principally manufacturing company is unhelpful and in a more open and responsive environment would not be acceptable.

The company and its auditors have not corrected previously identified deficiencies including related party disclosures, which incidentally has been completely excluded in 2005.

In 2003 the company won the Monde Selection Gold Medal, regarded at the time as 'testimony to the .... enduring loyalty of Banks Beer lovers around the world'. Yet the company has failed to maintain the level of the 2004 export sales even as Demerara Rum remains popular among the Guyanese Diaspora and the whole idea of the Banks Holdings liaison was to promote regional market penetration. It is regrettable and short-sighted that the principal international linkages entered into by the company have been as a distributor of products of internationally recognised companies rather than in arrangements that allow the company to export its products and retain its position as a manufacturing and service company.

Promise kept:

In keeping with a commitment made to shareholders earlier last year when the spectre of a takeover was considered a real possibility, the company is paying three dividends totaling to $0.40 per share of which $0.28 has already been paid. The total cost of the dividends is $400 Mn. representing some 60% of the company's after tax profits, double the percentage only two years ago. With net financing cost to the company rising from $2Mn. to $23 Mn. because of the significant increase in borrowings, the performance of some sectors not justifying the substantial capital expenditure incurred annually and the absence of any positive cash flows, the company would be hard pressed to continue paying this level of dividends unless it produces enhanced profits and cash flows.

During the year the company borrowed some $650 Mn. from other licensed financial entities while its borrowing from its banking subsidiary actually reduced from $62Mn. to $24Mn. Whether this signals a change in policy or concerns about regulatory matters is not apparent, but the financial implications cannot be underestimated particularly as the company/group continues to expend substantial sums often well beyond what the directors signal as authorised. For example the 2004 Annual Report indicated that authorised capital expenditure was $627.9Mn but the accounts show that $1.1Bn was expended of which only $75 million related to the banking subsidiary.

Banks Holdings Limited:

During the 'take-over' episode, the company (Banks DIH), without seeking the approval of shareholders, entered into an agreement with Banks Holdings Limited for an exchange of shares based on book value of net assets. That agreement provided for Banks Holdings to acquire 118.3 Mn. of the company's shares but the annual report shows that at September 30, Banks Holdings had increased its holdings to 159 Mn. with the 41 Mn. shares acquired from other undisclosed shareholders. Since then this writer has ascertained that Banks Holdings has acquired additional shares which increased its holdings to 20% of the issued share capital. It seems clear that Banks Holdings was a major factor in the unusually active share dealings witnessed over the six month period accompanied by a steep increase in the share price which appears to have ended abruptly. Those who sold their shares to Banks Holdings Limited clearly picked the right time.

The Memorandum of Understanding (MOU) between the two companies which was released to the public not by the company but the Guyana Securities Council also provided for one representative of each company to sit on the other's Board. Although that is unusually vague for an agreement between two major companies, the annual report does not disclose that Banks Holdings has a director on Banks DIH's Board. A request for information on this evoked the response that it is stated in the annual report. However, this writer has learnt that since mid-December when the report was sent out Banks Holdings appointed two persons to the Banks DIH Board.

Given that the objective of the share exchange was to facilitate the marketing of each other's products and not the prevention of a takeover, it is hard to understand why the Bajan company would have pursued additional shares in Banks DIH so aggressively and yet not taken up the first seat on the company's board as soon as the right crystallised. It is not reported whether Banks DIH has taken up its seat on Banks Holdings Board and whether Banks DIH intends to increase its holdings in Banks Holdings beyond the figure stipulated in the MOU. It must also be asked whether Banks Holdings intend to purchase any more shares in Banks DIH.

Conclusion:

It is clear that in this its 50th anniversary year, the company faces quite a few challenges. Citizens' Bank, a 51% subsidiary remains a bright and successful spot but shareholders may have to wait a while for the realisation of the confident and optimistic statement by the Chairman in his 2004 Report of 'new growth records in the years ahead.' Sustained efforts and sound judgment are required and the appeal to raw nationalist emotions and the constant harping back to the past may be good shareholder politics but will not deliver to them value or results(a return of $0.40 on a $12 investment is equivalent to 3%). Peter d'Aguiar's outstanding contribution is in the history books of Guyana not the future of the company.

The writer of this analysis was part of the team retained by Ansa Mc Al in 2005 to explore the possibilities of a bid for the issued shares of Banks DIH Limited.