Introduction
The Annual General Meeting of the Demerara Tobacco Company Limited, the tobacco trading company was held on March 31, 2009 making it the first company with a calendar yearend to have presented its 2008 annual report to its shareholders. In fact its financial statements were signed off by the auditors within five weeks of the end of calendar year 2008, which is commendable, but with effectively one supplier and one customer the accounting workload is hardly demanding. The company saw sales increasing by 6.6% over 2007 and after tax profit increasing by 6.3%, an almost linear relationship. However, the rate of growth of sales has fallen over the past couple of years, when the increase in 2007 sales over 2006 was a more robust 16%.
Demtoco is a subsidiary of the British American Tobacco, plc of the United Kingdom, and its ultimate parent company is British American Tobacco plc, also a UK company. Several years ago the company closed down its manufacturing operations in Guyana and its products are distributed almost exclusively through Edward B. Beharry and Company Limited. The company’s operations are managed by a small team of a dozen persons headed by Chandradat Chintamani, an accountant by training.
Financial Highlights
2007 2008 Change
G$ M G$ M G$ M %
Gross Turnover 4,574 4,875 301 6.6
Cost of sales (1,906) (2,074) (168) 8.8
Gross profit 2,668 2,801 133 5.0
Other Operating Income 20 16.8 (3.2) (16)
Admin. & Marketing (920) (930) 10 1.1
Expenses
Profit Before Taxation 1,768 1,887 119 6.7
Taxation (895) (959) (64) 7.1
Profit After Taxation 873 928 55 6.3
Ordinary Shares 23,400 23,400 – –
in issue (‘000)
Earnings per share 37.29 39.67 2.38 6.4
(in dollars)
Dividends declared 37.23 53.12 15.89 42.7
per share
Despite its ever present concerns about smuggling, the company manages to produce gross returns on sales of 57% which is high by any standard, and its after-tax return on sales is an enviable 19%. The company enjoys a monopolistic position with none of the controls usually associated with monopolies, and it can and does increase prices at will. Because the company has very little in the way of assets and investments in this country its earnings per share of $39.67 represent 139% of its average net asset per share, or expressed another way, for every dollar of net asset the company has, it earns $1.39! And of the net assets of $510 million, a net amount of $136 million is lent to related parties! Compare that with a DDL, for example, where the earnings per share compared with average net asset per share for 2008 was 8.9% and for the Guyana Bank for Trade and Industry it was 21.0%.
New laws, old practices
Unlike earlier years the company no longer discloses its volume sales or changes in the level of volumes, which is probably due to the sensitivity of the tobacco industry to the serious health effects of the use of tobacco. Indeed just one week ago the indefatigable consumer rights advocate, Ms Eileen Cox, in her column drew attention to a public consultation on “Specification for the labelling of retail packages of tobacco products” hosted by the Guyana National Bureau of Standards (GNBS). According to Ms Cox a decision was expected on the new and improved Guyana standards for the packaging and labelling of tobacco products in Guyana.
Guyana is a signatory to the World Health Organisation Framework Convention on Tobacco Control, but as the Minister of Health admitted in 2005, while smoking has been an issue in Guyana “for years nothing has really been done about it.” The company’s stated marketing strategy is to meet the “preferences of adults.” It would have been good to believe that nicotine abuse is a juvenile problem. Here are some statistics to prove otherwise.
• Tobacco use not only reduces life expectancy but also the quality of life
• The death rate is 2-3 times higher than among non-smokers
• It is estimated that it will cause 10 million deaths per year worldwide by 2020 (WHO website)
• 1.2 million deaths in Europe (The European Heart Network)
• 1.2 million deaths from smoking in Europe (The European Heart Network, 2000)
• 400,000 deaths annually in the US (Mayo Clinic)
What is worse is that as tobacco companies in the developed countries are faced with more stringent regulations at home, they focus their attention on the poorer developing countries, particularly in Africa. Strikingly noticeable is that many of those engaged in the production or distribution of alcohol and cigarettes – elsewhere as in Guyana – would not think of themselves using those products but see no inconsistency or irony in promoting their use by others. And while the industry faces restrictions on advertising the company still expended some $113 million on advertising in 2008.
To compensate for the restriction on advertising the company routinely carries out sales promotions for both retailers and consumers. The company’s marketing campaign is more subtle, and for it the Kick the Habit is in relation to energy conservation and the promotion of a low carbon economy, the newest bandwagon in town.
Returns
During the year the company paid three interim dividends totalling $22.27 per share and a special dividend of $15.00 per share. A final dividend of $15.85 dollars per share was approved by the shareholders at their March AGM bringing the total dividend per share to $53.12. The emphasis of a special dividend suggests, however, that this will not be a recurring feature. As usual the group gets more from the Guyana company than just its share of dividends, healthy (no pun intended) though these are and worth $873 million or 55% more than in 2007.
Management services, royalties and technical and advisory services have increased from $615 million to just over $700 million, an increase of 14%, more than double the increase in sales.
Share price
After an increase in the share price in the first half of 2008 the price actually reflected a small drop, but has been steady since August 2008. Despite this persons who see in the company’s performance only dollars and not the severe health risks would consider that they have done very well indeed.
The government too would have been pleased with the amount of taxes collected with duty and excise taxes paid increasing from $1,608 million to $1,716 million or 6%, and corporation and property taxes of $960 million. The person who said that sin does not pay could clearly not have been referring to cigarettes and alcohol.
