Business Page – On the line: Stock feeds and Sterling

Sunday, June 18th, 2006

Introduction:

Two of the country's public companies, Guyana Stockfeeds Inc (Stockfeeds) and Sterling Products Limited (Sterling), both manufacturing entities, are reporting modest performances for the year 2005. These results are contained in the annual reports of the companies sent out to shareholders for consideration at their respective annual general meetings, first Stockfeeds on June 21 (after re-scheduling), followed two days later by Sterling. In his report to shareholders, Chairman and CEO of Stockfeeds, Mr Robert Badal, has asked shareholders to note that despite the Government of Guyana being a "substantial" shareholder, it "continues to attempt to frustrate the company's investment" and cites as examples that it was only after an approach to the courts that the company was able to obtain its environmental permit, and that the Central Housing and Planning Authority is in contempt of a court order for the issue of a building permit. Whether this affected the building plans of the company is not clear since in his 2004 report Mr Badal reported that upon receipt of the ruling, "the company recommenced."

As the executing body responsible for protecting the interest of the Government, the Privatisation Unit headed by Mr Winston Brassington should surely clarify these issues without in any way being confrontational and exacerbating an already strained relationship and an unfavourable image.

Coming on the heels of the bauxite bonds debacle, such accusations are extremely harmful to the Government's investment image and surely require a response, particularly if they are a misrepresentation. Recall that two years ago, the Government passed the Investment Act 2004 amid much fanfare, and frequent court actions against the Government and its agencies, even on frivolous issues send unfortunate signals to potential investors. On the other hand, Sterling's non-executive Chairman Dr Leslie Chin's report is typically uncontroversial, even for his assertion of the reduction of consumer purchasing power. Dr Chin deals, if only blandly and superficially, with issues directly relating to the unremarkable performance of the company in 2005.

As principally manufacturing companies, the performance of these companies is a crucial indicator of the ability of the country to wean itself away from its dependence on traditional commodities. Along with Banks DIH and DDL, these companies serve the wide spectrum of consumers and the average performance of these four companies perhaps reflects fairly the state of the economy and the impact of the floods in early 2005.

Stockfeeds (See table 1)

Source: Annual Reports:

A profit decrease of 53% or $99M in 2005 follows a 140% increase in 2004, which the Chairman attributes to large increases in the price of local raw materials and the cost of electricity which the company self-generates. Poultry production decreased marginally from 54M to 53M pounds in 2004 but more worryingly, exports, already insignificant, fell further even as the company aims to meet its foreign exchange requirements out of export earnings.

The company reports significant increases in investment and plans to open its "state of the art" parboiled rice plant during the first half of 2006. Investment in property, plant and equipment at December 2005 amounted to close to $1.8B including $1.2B of work in progress on the rice plant. Manufacturing is all about capacity utilisation and from some of the glorious plans announced yearly by the Chairman, particularly for exports, it seems that the company is probably operating at well below capacity.

Despite lamenting the absence of "any clearly devised energy policy on our national agenda" and the consequent difficulty of foreseeing "any economic growth of Guyana's national economy within the framework of the CSME," Mr Badal expects 2006 to be a record year with the company being on the threshold of a rapid increase in sales and profitability - just where it was at the end of 2002! And among the reasons given for his expectation that 2006 will be a record year is the expansion of Caricom markets through the establishment of the CSME and strangely, the competitiveness of local rice production, which he earlier identified as one of the causes of the decline in 2005.

Mr Badal who owns/controls 85% of the shares - a matter that is also the subject of some controversy with the Government - is an extreme optimist and the minority shareholders would no doubt be hoping that this year will vindicate that optimism.

Sterling (See table 2)

Source: Annual Reports:

Net sales showed an increase of 11.47% over 2005, described as "substantial," mainly from growth in detergents and ice cream. Like Stockfeeds, Sterling seems to have a problem with plant utilisation with fixed assets of just $¾B, and sales of $1.6B. The restructuring of the board and executive management with a view to expanding its export markets is yet to produce positive results, and both sales and profit on operating activities in the export markets have fallen even as operating costs have risen.

Last year, Business Page noted that with Guyana's static population, the company needs to increase export sales substantially to enhance its prospects, and the small growth of export sales (in 2004) must be troubling the directors and main shareholders. The situation is even more troubling now. Last year we also commented on the dramatic increase in administration, marketing and general expenses by more than $100M; this has stabilised in 2005 but still consumes 81% of gross profit. With the bulk of these costs being fixed, the company's prospects depend heavily on its ability to increase (export) sales.

In 2004 the company paid a dividend of $4 per share which it is now reducing per share to $3.30, hence the reduction in dividend cost.

Majority control:

The two companies disclose the compensation paid to key management personnel differently, with one falling short of the requirements of accounting rules including whether directors should be included in the definition of key management personnel. They should. In addition, Stockfeeds' key management personnel including two full-time service directors are reported as receiving average compensation including short and long-term benefits of $134,673 per month. Sterling reports that the compensation of its key management personnel is a more credible average of $500,000 per month.

Both companies are majority controlled - in Sterling by the Beharry Group which owns 58% of the shares and in Stockfeeds by Mr Badal with 85% either directly or through associates. Practically, however, it does not seem to matter in Guyana whether the control is 51% or 99% - like our politics, the majority takes all. Instead of directors being elected they are nominated by the major shareholder. They are not accountable to stakeholders, and shareholders' meetings are largely meaningless with only basic questions put to the directors once a year.

An important element of accountability and good governance is timely and meaningful reports. That these companies stretch their AGMs to the deadline set under the Companies Act rather than the more rigorous Securities Industry Act does not help to foster a reputation for good corporate citizenship. Whatever the problems in Guyana - and we all know how pervasive they are - our few public companies need to do much better both in performance and governance, two not unrelated matters.