On the line: Demerara Tobacco Company Limited
Business Page
BUSINESS PAGE is dedicated to providing objective information an opinion on issued of interests to the business community and the public at large. The articles in Business page are prepared and contributed by CHRISTOPHER RAM. Christopher Ram is the Managing Partner of Ram & McRae, Chartered Accountants, Professional Services Firm. Introduction The non-executive Chairman of the Company, Mr Hector Casco, cited the merger as a positive one since DEMTOCO will benefit from a large portfolio of international brands of cigarettes and strategic business alliances. It will also benefit from one of the strongest advertising brands and perhaps the best advertisement currently seen on television - the Benson & Hedges "contrast" ad. This brief analysis deals only with the accounts of Demerara Tobacco Company Limited which is a subsidiary of the merged group. A feature to note here is that Demtoco is similar in structure to most of our public companies in that it is a controlled company i.e. one shareholder holds a controlling interest. Profit and loss account
In spite of the poor performance of the economy in 1999 and inflation of 8.6 per cent, DEMTOCO recorded a profit before tax of $623M, a 221 per cent increase over 1998. However, net sales of the company only grew by 16 per cent or $323M. Gain on the disposal of the company's principal fixed asset - freehold land and buildings - contributed some G$184.5M to the profits of the company. Turnover increased by 16.6 per cent, considerably less than the 44 per cent growth in the earlier year. Country Manager Christian Preuss reported that Bristol, the flagship brand of the company was supported by a number of activities and the international side of the business unveiled a new campaign in 1999. Despite these efforts there was a fall in the sales volume which according to Mr Preuss was compensated by "the reduction in the cost of imported goods and operating expenses, the optimisation of working capital the sale of the company's property. Neither the law nor accounting standards require gross profit to be disclosed and accordingly only net profit is disclosed. Using these to measure profitability we find the following:
Chairman Hector Casco attributed the 499 per cent increase in net profit after tax to "the sale of the company's land and buildings situated at Barima Avenue coupled with effective cost management measures implemented". The Net Profit Margin which is the relationship between net income to sales reflected this growth by increasing 15.06 per cent over 1998. Because of the higher profit margin, shareholders in 1999 received a special dividend in September of G$8.00 followed by a special/ interim dividend of G$7.00. The final proposed dividend was G$4.26 amounting to a total dividend payout of G$19.26 per share. This reflected a whopping 98.9 per cent of after tax profits. In other words the entire after-tax profits of the company were paid out as a result of which dividend cover (the number of times that dividends are covered by After Tax Profits) declined from 8.38 times in 1997 compared with one time in 1999. The payout though high may not be unreasonable given that the company has changed its nature from manufacturing to trading and will therefore require less net assets on which to operate. Balance sheet
By all conventional measures, the balance sheet is sound. Current assets are a healthy 1.54 times the current liability whilst the quick ratio (current assets less inventory over current liabilities) is just under 1.5, a good reflection of the company's liquidity. Trade debtors increased dramatically by 86% whilst sales increased by only 16 per cent. This suggests that sales are being realised only on generous credit terms which could in fact lead to bad debts in the future. The shareholder's equity declined significantly in 1999 by 29 per cent to $237M. This is reflected in the fall in reserves due to the sale of the company's land and building and a 1 per cent transfer from net profits. The asset leverage (total assets/ shareholders' equity) increased from 1.72 times to 2.35 times which is a good indication of the shareholders' coverage against risk. An even more impressive indicator is the complete absence of debts which further reflects the soundness of the company. Product service and quality has always been a focus of the company. New filters and sizes were introduced and a second Caribbean Journalists Seminar was held in Trinidad to present the company's position on smoking and health issues. According to Mr Preuss the company donated to the community through financial assistance to support culture, sports and education and was one of the contributors to the Camp Street 2000 project. Advertising Other issues The report is extremely well presented but the financial statements themselves can be made more user friendly if there did not seem to be a conscious effort to keep the size of the report to a minimum. It would for example be useful to know the ballpark sums donated to public causes, to health and to education generally. Revenue from the sale of Bristol as opposed to Benson and Hedges would have helped even at the policy level in the country. There is no reference to committees of the Board and whether for example there is an Audit Committee which is mandatory in the home country of the parent. Glowing tribute was paid to two of the company's and indeed the country's seasoned administrators - Mr Charles Quintin and Mr Vibert Patrick both of whom continue to be available to the company on a consultancy basis. Conclusion We urgently need a strategy for manufacturing in Guyana. 
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