On the line: Guyana Stockfeeds Incorporated 2003 - the slide continues
Business Page
By Christopher Ram
Stabroek News
September 12, 2004
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.