Berger holds dividend, NCB cuts

Berger Paints Jamaica Limited | Advised that at a meeting of the Board of Directors held on April 24, 2013, the Directors passed a resolution that a Final Dividend payment of $0.13 per ordinary stock unit payable on July 9, 2013 be recommended to the stockholders on record as at June 21, 2013 in respect of the year ended March 31, 2013. The ex-dividend date is June 19, 2013.

Last year, the company paid dividends of a similar amount of $0.13 per share in July. This suggests that the profit to be reported for March 2013 is most likely flat.

National Commercial Bank | Declared a dividend of $0.16 per share payable on May 24. The ex-dividend date is May 8, 2013. The 2013 payment represents a decrease from $0.21 paid in May last year and is in keeping with an unpredictable dividend policy the company has been executing even after repeating a previously announced policy. The dividend payout ratio for the 2012 financial year to September amounted to 27% and for the 2011 financial year 25.7% compared to 42.2% for September 2010.

PreferenceStock150x150Dividend policy | As per the  2011 annual report: “The Board of Directors of National Commercial Bank recognizes the importance of capital in meeting the needs of shareholders, investors and the business. To this extent, a dividend pay-out rate has been determined.

The Board of Directors will declare, at its discretion, dividends to shareholders. These dividends will be paid from the realised earnings of NCB. The dividends will be subject to a maximum of 50% of the ordinary realised profit earned each year and will be applied after taking account of all transfers. In the event that the pay-out is less than 50% in any one year, the Board of Directors reserves the right to increase future distributions proportionately. Further, the Board, at its discretion, may distribute to its shareholders the full amount of any and all realised gains arising from non-recurring or extraordinary transactions.

“The Dividend Policy is consistent with the Capital Management Plan and is reviewed annually or more or less frequently as determined by the Board of Directors.”

Access Financial defying IPO critics

Access Financial Services, after reporting a successful 2012 when it clocked up earnings of $238 million from revenues of $661 million, reported a 47 percent increase in earnings for the first quarter of this year, which took it to $61.5 million from revenues of $173 million, up $19 million over 2012 first quarter.

The company’s growth is emanating from very strong growth in loans which increased from $643 Million in March 2012 to $758 million at the end of March this year. The company also reports maintaining costs at a low increment, which was another factor in the increase in earnings. Access is primarily involved in payroll lending at high interest rates amounting to about 60 percent per annum. Investor’s Choice projects $1.37 per share earnings for 2013 and recommends the stock as a good BUY.

Access, the first junior market company to hit the Jamaica Stock exchange in 2010, was slapped by the most scathing criticisms of any public issue to come to the market. There were few persons who publicly recommended the offer. So scathing were some of the critics that a number of institutional investors who were committed to buying in the issue opted out.

Three years after the issue, what is the outcome? The company has increased profits in each year and the stock has grown from $18.30 to the equivalent of $70 each (the stock was split into 10 units for each 1 owned and now trades at $7 each). Investors would have received a dividend in each year since listing, amounting to 65 cents based on last year’s earnings, 45 cents for 2011 earnings and 31 cents per share based on 2010 earnings. Not bad for those investors who backed the issue.

20/20 Hindsight: Click here to read my BUY recommendation of the Access Financial Services IPO published in the Jamaica Observer in October, 2009 and reader responses finding fault with my stock analysis.

Talk back | Did you buy this IPO? What were your reasons?

Performance chart

20/20 Hindsight: Access Financial IPO

Your decision to invest in a company should be based on a full assessment of  all the facts. Case in point, the Access Financial Services IPO offer. Below is the full text of my response to an article published in the Jamaica Observer in October, 2009 that I felt was flawed in its valuation of the IPO offer. Rather than the stock being overvalued, the facts indicated that the stock had an above average growth potential that could “far exceed any other stock on the market.” Needless to say, my BUY recommendation was not greeted favuorably by readers.

Many Jamaicans remain poor because they never take the time to find out the facts. The same seems true of an unfortunate assessment of the value of the shares of Access Financial Services in its current IPO carried in the Friday business section of your paper.

Share valuation is not about looking back at pass earnings but at likely future earnings. The article, deals well with many of the attributes of the company, but fails to indicate clearly, a full assessment of the true worth of the shares. In so doing, there seems to no focus on the impact of the removal of the tax on profits and the growth in earnings this year so far that will sharply boost earnings, as well as making the earnings for last year on a performa basis, better than reported.  To attempt to cast aspersions at Mayberry’s integrity in the offer price, is far too unfortunate as there is no evidence to suggest that the broker is trying to milk funds from the proceeds. In fact Mayberry is not selling any of their holdings in the offer and indicates that they have no plans to do so in the future. The gains from their initial investment, is purely on paper at this time.

Critical facts: What are some critical facts? First off the shares are not overvalued. An honest comparison with other listed companies will show that there are none that have the potential to grow as fast. The writer makes some unfortunate comparisons with JMMB and Scotia Group. The former has no chance of growing anywhere close to Access while Scotia Group’s possible growth is around 15-20% per annum. Those who fully understand share valuation know that the higher the growth rate, the higher the valuation.

The market targeted provides very high profit margin not even credit cards offer these margins. The history shows that the company has had very little bad debt even while lending to the riskier clientele. The market here is huge.

Big profit jump: Most importantly, Access earnings for last year, which came in at $69 million, was earned after writing off amounts incurred as loss of funds due to theft of $17m. When the earnings are adjusted for such losses and the tax free profits are factored in, then the earnings last year is around $3 per share. At $18 per share, the PE is 6, a little higher than the market average. But look what is happening in 2009. For the 6 month period from January to June 2009 the Company recorded total revenue of $151 million, an increase of 47% over 2008. Pre-tax net income for the period was $37 million, a 205% increase over the previous year. These 2009 figures clearly indicate that earnings for the full year should jump sharply, all things being equal. By my recognizing earnings for the full year could exceed $100 million or $4 to $5 per share. At just over $18 per share that a PE of 3 or 4, the shares are far from overvalued.

Stock to perform: Investors need also to be aware of the small number of shares that will be in the public’s hands that will exert upward pressure on the price once the company delivers. If management continues to keep bad loans at bay the way they have done so far, the sky is the limit. Investors in the stock will be extremely happy as the return on their investment will far exceed any other stock on the market. Investors who refrain from buying the stock are making a grave error if they really think it is vastly overvalued as the article suggests.

  || End  ||

READER RESPONSES to above:

warren
10/18/2009 8:47 AM

I profoundly disagree with John’s assessment of Access.
John has sought to suggest that the stock is fairly valued, but his assessment is based on future value of existing stock.
I cannot see how one could be willing to be $18.43 per share today, which is what the stock should probably be valued 4-5 years from now.
One never knows what the future hold especially in the financial market hence should never pay so much upfront especially for an IPO.
John has failed to look at the fact the growth rate of this company is most likely to fall once it has gone public, due to a different type of corporate structure and reporting requirement required for a public vs a private company.
The “new” company is likely to be more conservative in risk taking position thus likely to slow down its growth rate.
Based on the above I see the growth rate slowing down, making those who purchased this stock at this inflated rate, likely to lose at least 60% of its valuation weeks are listing.
If Access intends to sustain a pretty good growth rate, it means plowing back the profits into the company, which virtually assures that the investor has no dividend to receive at least in the first 2-3 yrs depending on management plans.
If access intends to pay dividends, this alone means less retained profits to be used in the expansionary mode, this slowing its growth.
Regardless of what John thinks, asking investors to pay so much upfront for a future value which may be justified in the next 4yrs, means investors are in for a raw deal.
I will look to buy when the stock reaches a value lower than its net current assets, which lowers my downside losses.
Persons who bought this stock at 4.35 its net current assets, have zero protection on the downside losses, and are likely to suffer very serious losses once trading begins.

Overvalued IPO
10/18/2009 9:10 AM

This stock is priced at 4.35 its book value per share, meaning it is 4.35 times its net current assets or put another way 4.35 its valuation.
Scotia Group on the other hand @ $17.96 is valued at 1.21 price to book. Scotia group earns close to a billion dollars in profit each month and pays close to a $1.00 per share in dividend each year.
Now access is being offered at a price of $18 per share, a price which is not only greater than a well run and profitable company as Scotia current price of $17.96, but at a value is almost 4 times higher than Scotia, amazing.
Price is what you pay, value is what you get and I fail to see one getting value out of paying $18.43 per share for such a small company as Access.
Personally I would not buy this stock for more than a price to book of 0.75 , which works out to just about $4.60 per share.

Orane
10/18/2009 9:12 AM

I looked over their prospectus the very day it was released and came to the very same conclusion that this price is pie in the sky!! I have a degree in Finance and I invest in companies on the JSE including Mayberry and I think this is a sad day in IPO valuation. They had the opportunity to set the standard for the Jr. JSE and they are muggin it up.
The conclusion I draw from their pricing is that they take the Jamaican investor for idiots, like so many companies in Jamaica. And they are playing on peoples greed. I would love to invest in this company and if it hits the market I will wait for the price to realign to it’s proper valuation before buying.
Mayberry’s behaviour is nothing new as mentioned in the article beyond CCFG look what they did to Salada over the from 2007-08 even though they had no hope whatsover of taking over the company because the majority share holder refused to sell they kept on putting news out into the market about them taking it over. This drove up the price on Salada shares to on speakable heights for a company barely eeking out a profit and not paying any dividend. Salada had to enact a split to create liquidity and something of a normal valuation. Mayberry is a hype machine and this is coming from an investor.

Mark
10/18/2009 12:01 PM

John, I hope you are not doing a favor to yout friends at Access and Mayberry. What you have written about Access share price is pure nonsense. The price is grossly overpriced.
IF THERE WAS AN AWARD FOR FINANCIAL NONSENSE, BASED ON WHAT YOU WROTE, I WOULD NOMINATE JOHN JACKSON!!!

.Mitchell
10/18/2009 5:46 PM

John shame on you, this is the worse crap I have heard since CASH MINUS and OFLINT. How can you look at yourself in the mirror? Bro you and your organization are worst than the THREE CARD man.
Now where the hell is the FSC dont they see the fraud that is been perpetuated on the nation. This is corporate malpractice. SHAME ON YOU ALL

nigel
10/18/2009 7:26 PM

Access financial may have great growth potential, but not great valuation just yet. This is a IPO for the balance sheet valuation somewhere else as an Associated Company. The Lead Broker could have done a better job with this IPO in more ways than one. There is no long term benefit from this IPO and all the initial investors in this IPO will lose money. The stocks will be bought back from the market when the price of the shares hit rock bottom. That is a strategy.

spectator
10/18/2009 7:49 PM

No value. I will repeat, NO VALUE

warren
10/18/2009 9:17 PM

Mayberry is reporting that this IPO has been oversubscribed!!

denise
10/18/2009 10:50 PM

Mr. Jackson everyone has a right to his or her opinion, you Sir should have done your homework. I am not a stock broker, but I was interested in the offer and did my research, after reading the Prospectus I decided not to take up the offer.
Look at likely future earnings, the future of Access Financial looks BAD. WHAT IS THEIR BUSINESS?????? SUB-PRIME LOANS. In the USA a company such as this would be called a predatory Lender.
The business model looked okay 3 to 4 years ago, but now it just looks dismal. Most of the clients the foward looking statement alludes to are people who live paycheck to paycheck. With all the talk of layoffs and cutback in the Jamaican economy, how does the principal of Access expect their business to grow?
One point made in the prospectus is that Government does not regulate this particular company, and therefore they can keep their interest rate on their products higher. Look at the percentage of bad loans recorded for 2008, and then compare that to the 9.09% projected non-performing loans in the prospectus. Come now Mr Jackson, does this sound right to you?
How is the market huge when this company’s business model caters to small and micro business sector? Take an informal survey on how many micro business have pulled down their shutter since the year started.
If i did not have access to information I might have called you for guidance as a stockbroker.,what a disappointment that would have been.

Navek
10/19/2009 8:17 AM

Does anyone still have the Mayberry IPO. Well it is the same way before they go public two years before they have a MASSIVE growth. I read the ACCESS IPO and and decided that i would wait or investigate the financial details. I am in a WAITING mood

Chris Berry
10/19/2009 9:46 AM

Orane,
Your recollection of what happened with Salada is not correct. The current owners made an offer to purchase the outstanding shares of the company, we made an offer which was substantially higher than the current owners offer. At the time many said our offer was too high yet the price passed our offer and remains substantially higher to this day. We sought to purchase an undervalued asset and we were unsuccessful in acquiring it.

Cairy
10/19/2009 11:15 AM

John – A couple of quick questions for you and possibly the Observer. Who is responsible for regulating financial analyst commentary on securities in Jamaica? Are there any rules around disclosure either for the publisher or the analyst? Don’t you think regulation in this area would be welcome? Comments from the BOJ, FSC, FDIC or the JSE would be welcome.

KLE Group — to buy or not?

Add your HTML code here...

KLE Group’s entertainment hot spots may be great places to let one’s hair down after a long day but are the shares, placed on the market late last year, good for one’s pocket and peace of mind? That was the challenge many investors faced when the company placed 27 million shares on the market, which was snapped up with great speed. But judging from the small 13 percent level of oversubscription and 198 applicants, seasoned investors had a different picture from that of the promoters and the principal owners.

In 2008, seven young Jamaican entrepreneurs are said to have had a world-class vision to create a unique blend in the local entertainment market-place, thus was born the hybrid lounge/club — Fiction — a new addition to Kingston’s night-life with its über chic design, lavish, intimate VIP booths, premium audio visual equipment and first-rate bar experience.

To rave reviews and patronage from locals and some of the world’s top celebrities, the club imprinted the Fiction Lounge brand on the entertainment industry. The early success attracted one of the world’s most marketable and fastest athlete, Usain Bolt and the Usain Bolt’s Tracks and Records restaurant with its perfect blend of what is termed a “4 dimensional experience of touch, taste, sight and sound” brought together in the same location as the Fiction Lounge.

Expansion | Having raised the desired capital, the KLE Group is to expand into other related ventures including a theme park and villa community on the north coast. The ventures include the following collaborative projects highlighted in the IPO.

“The Secret Room”, said by the promoters to be the first of its kind gaming lounge will be operated in conjunction with Supreme Ventures Ltd., and strategically positioned between Fiction Lounge and Usain Bolt’s Tracks and Records restaurant.

Night life in the second city, Portmore, will be catapulted into a new experience with a coliseum style nightclub to be named FAMOUS. KLE said that the more than 6,000 sq. ft. setting will be decked out with LED screens, projection walls and “unparalleled décor, sound and lighting” that will create an unforgettable nightclub vibe.

KLE Group plans to add BESSA, a lifestyle themed villa community to be built in Oracabessa in partnership with Sagicor Life Jamaica. The 8 acre ocean and river front property will be the site of 45 lavish living spaces with 1 bedroom swim-up suites, condos and 4 bedroom villas.

The expansion plans sound impressive but these are yet to come on stream even as the risk associated with them seems higher than for many other ventures in the country and certainly, the businesses operated by the majority of listed companies.

Priced for future | The numbers in the prospectus did not read impressively and nowhere therein could one find information to justify the $3.70 offer price with a PE ratio around 17. The best that could be gleaned was a price below $2 each which would have been more reasonable.

It was fully priced to sales, which came in at approximately one time sales. That may not have appeared bad and was around the trading point for most of the junior market stocks. However, the price to net book value was 18 times, representing a huge premium over all other junior listed stocks. Cargo Handlers was the highest priced in terms of net assets at 6 times, based on the 2011 audited results.

Pan Caribbean Financial Services (PCFS), financial adviser and broker, indicated how they arrived at the price but unfortunately, investors were not privy to that information as it was not included in the prospectus. A spokesperson for the broker provided some clarification on KLE’s valuation as follows:

  1. DCF (discounted cash flow) methodology was used in computation.
  1. A discount rate of 23% – 26% was applied with terminal multiple of 4.5 – 5.0.
  1. This methodology was chosen based on KLE’s immediate prospects as outlined by the group.
  1. KLE is a true start-up and as such forward looking.
  1. Based on conservative estimates, we see KLE having earnings of between $50 million and $60 million next year.
  1. Any potential earning was excluded from Usain Bolt’s Tracks & Records’ expansion and franchising.
  1. Given the above, post IPO P/BV of 2.9x and forward PE of 6x-7x.

The main issue with this valuation is that the stock market has not priced in 2013 earnings for the vast majority of stocks. So why should that be done for what many see as a very a risky investment in KLE? But even if the company hits the profit target, at the upper end, based on present valuation of stocks, one would be looking at a price around $5 for a gain of a third, several months down the road. Interestingly, subsequent to this issue, there were two others. One, Paramount Trading came out in December at a PE of 3 times earnings before tax, with the price of the stock moving up in value, and before that, Consolidated Bakery (Purity) came out with what then appears to be a PE of 8, more or less in line with the Junior market valuation but has hardly moved up on price, having been barely oversubscribed.

One off cost | One possible hidden factor that could help is the administrative costs for 2011, which has some one off expenses that should not recur and therefore, stands to boost the bottom line, all things being equal. In addition to income and expenses attributable to the restaurant and Fiction Lounge, there were other corporate expenses not directly related to either. These included professional fees, categorized as enterprise management expenses paid to Neustone (provider of managerial and administrative services) in exchange for business development in relation to new and existing business opportunities for the company as well as other services.

If one thinks that Usain Bolt’s name was worth a fortune then his association with the brand may have compelled one to invest. After all, he had indicated his interest in stepping up his investment in the venture. Time will tell if his athletic prowess will be reflected in his financial skill.

Another issue  in the short run is that, so far, there is no evidence that the restaurant’s success to date has been significantly impacted by the worldwide name recognition of the world class athlete. Will it positively impact the fortunes of the company in the future? Only time will tell.

2012 Results | Subsequent to the above, KLE recently released full 2012 results with and reported a loss of J$13 million versus $7.7 million in 2011. In 2012 depreciation charge swelled to $20 million compared to $4.7 million in the previous year, while a $15 million reorganization cost was picked up in 2011. The stock which was issued to the market at $3.70 each last traded at $3.50 on April 4 but the offer is down to $3.20 with no bids as of April 24.

NCB to release post-NDX results today

Update | Click here to view NCB results posted on April 29, 2013

National Commercial Bank (NCB) is expected to release results today for the six months to March this year. This will be the first results for investors to assess the impact that the NDX debt swap of government’s bonds will have on profits. The expectation is for a big hit from the write down of the carrying value of the bonds that was in excess of the face value at which they were issued. At the end of 2012 NCB’s fair value reserves amounted to $1.8 billion. While all of this is unlikely to relate to government of Jamaica bonds, it gives an indication of the likely hit that could be taken against profits. The write down of the fair value reserves will be a one off event, more importantly, is whether the group will be able to adjust rates fast enough on various instruments it offers the public, to make up for lost income from government bonds that were swapped out for lower yielding bonds.

NCB is also expected to declare a dividend when the results are released. In March this year they paid 23 cents per share as dividend. It is unclear what amount will be declared today in light of the hit they took from the debt swap.

Other companies to release results shortly are Mayberry Investments, Barita Investments, Seprod, Grace, Sagicor Life and Sagicor Investments.

Kremi Cream IPO — a strong buy

Update | The Kremi (Caribbean Cream) IPO was oversubscribed and closed earlier than expected on Wednesday May 1, 2013. Click here to read more . . .

Kremi (Caribbean Cream) racked-up 60% increased sales in the nine months to February this year, consistent with the historical growth of the company. If past history of revenue growth is anything to go by, the immediate future could be bright for the company and investors, who hold on to the stock after the company issues shares to the public officially on Thursday April 25.

The issue, in all likelihood, will be closed minutes after it opens as investors try to get hold of as many shares from a limited amount that will be available to the general public. Just about 68 million of the shares at a $1 each will be available to the general public, which includes 18.9 million reserved for Stocks and Securities Limited or their clients.

Kremi Ice-Cream is the brand; the company is Caribbean Cream Ltd, which started operations in 2008 just before the economic recession commenced.

While net asset value is a mere 15 cents per share — which is very high — the earnings per share work out at 15 cents for the year, it was 10 cents ending May last fiscal year. Investors Choice, a sister publication to ICInsiders.com, projects earnings of 39 cents for the 2013/14 year on the basis that revenues will continue to climb aggressively but at a slightly slower pace. Based on this year’s numbers, the PE is around 6, about the average of the majority of junior market companies. Revenues are growing very strongly and could accelerate if all the expansion plans and new machinery materialize. This suggests that there is considerable ‘upside’ for earnings and the stock value going forward.

Sales for the 2013 fiscal year to November were $462 million compared to $431 million for the full 2012 fiscal year and $289 million for the nine months to November 2011. That’s impressive, and if it continues for some time into the future, profits will increase appreciably. Listing will add some cost to overheads as listing fees and other associated costs increase with more shareholders.    

Earnings Growth | Caribbean Cream’s performance in fiscal year 2012 was impressive as turnover increased 47.44 percent to $431 million while pre tax profits more than tripled to $31 million. This year seems set to surpass 2012 as nine month numbers are already ahead of those for the prior year for the same period.

Pre tax profits for fiscal year 2010 slipped 19.7 percent to $5.3 million, mainly due to increased administrative expenses, which climbed 25.5 percent to $37.6 million; selling and distribution costs were up 47.1 percent to $7.5 million and finance costs rose 36.8 percent to $3.9 million—all costs associated with a planned expansion.

After fiscal year 2010, management invested in production, which helped to grow turnover by 38.2 percent to $292.3 million, and pre tax profits 36.2 percent to $7.2 million in fiscal year 2011, as net profit margin remained low. Gross profit margins have remained consistently above 25 percent for the last four fiscal periods.

The company is sensitive to changes in foreign exchange rates as they import most of their major ingredients. These fluctuations will impact its margins from time to time as input costs adjust accordingly.

Borrowings climbed in the November quarter on that of the prior year as well as inventory, which exploded no doubt to meet high Christmas demand and also to possibly counter the foreign exchange risk from devaluation. At the 2012 year end, debt to equity was almost 1:1 compared to 2.4:1 in the prior year.  As of November 2012, the ratio was slightly less than 1:1 even as borrowed funds climbed to $94 million.

The current asset ratio is low, well below norm, but the company over its recent history carries low levels of receivables and inventory except for except for an substantial increase in the amount tied up at November 2012.

Concerns | There were errors in the report of the auditors that were included in the prospectus. Clearly, the auditors, the executives, the board, brokers, the stock exchange nor the Financial Services Commission (FSC) picked up the errors. Some investors may well ask- if there are errors, could there not be more lurking in the dark?

I am recommending it as a BUY for this stock as the performance to date, suggests strong sales and profit going forward into 2014 fiscal year.

Kremi_Analysis

Carreras’ charge – artificial transactions

CarrerasTobaccoFree280x150After more than a year of being slapped with a huge and what many say is an unjust tax bill last year, Cigarette Company of Jamaica (CCJ) a subsidiary of Carreras Group Ltd only recently learnt what was the basis of the charge. This they discovered only towards the end of the tax appeal hearing held in August. The charge is based on some $8.5 billion paid to the parent company by Cigarette Company of Jamaica, which the tax Authorities claim is subject to tax as a distribution. But the tax body is not relying on the section dealing with distribution to tag the company and instead leaned on section 16 subsection 1 that deals with artificial transactions as the foundation of their claim.
The information on the tax assessment was disclosed by the company last year and is reflected in a note to the audited financial statements but the Investor’s choice is informed that Carreras was sent the shocker in April last year. The note in the financial statements reported that “Cigarette Company of Jamaica Limited, has received income tax assessments in respect of the years 1997 to 2002 from the Commissioner, Taxpayer Audit & Assessment totalling $5,716 million, being income tax of $2,172 million and penalties of $3,544 million.

Image courtesy of cooldesign/FreeDigitalPhotos.net

Image courtesy of cooldesign/FreeDigitalPhotos.net

An objection to the assessments has been filed and the decision of the Commissioner, Taxpayer Audit and Assessment, has been appealed to the Commissioner, Taxpayer Appeals. Counsel for the company has advised that, although the results of litigation are not predictable, it is his opinion that there is no proper basis in law or fact for the
assessments, which should therefore be discharged. The Directors are unanimously of the same view. No provision for this amount has been made in the financial statements.
Initial reaction|The initial reaction of the public to the assessment is that the amount on which the tax is based was being treated as a distribution under section 35 of the income tax act. A check on that section suggests that it is unlikely for the company to be caught under this section. In fact a reliable source told the Investor’s Choice that this is not the section that the tax authorities are relying on for the case and in fact they never contemplated using this section. This was further confirmed by another source as well, who indicated that section 16(1) is the applicable section used. Under section 35 see an extract of the section the loan is repaid within five years of the date of advance will not have to pay any taxes under the section if in fact they were taxable. Cigarette Company of Jamaica could only be taxable under the section if Carreras Group the recipient of the funds were a foreign based company and did not get any permission from the Minister of Finance to made the advances. This is a view agreed to by a noted tax practitioner. But this is clearly not the case.
Earlier this year the group put into liquidation all none operating subsidiaries including Cigarette Company which ceased to operate in December last year. This publication understands that the scheme to reorganise the group was determined by the overseas parent from very early in 2003 and the tax authorities were advised that the loans would be repaid, as they would be liquidating the company. Communication between the company and the tax authorities we understand confirms this and the authorities indicated thereafter the amount of transfer tax to be applied in the liquidation at the same time they advised them of the additional income tax assessment.
Inter-group advances cleared|All amounts advanced to the Group Company was cleared by the end of March by a combination of cash payment and a capital distribution of $4.67 billion that was made to the parent company net of transfer tax. The move helped to wipe out $9.7 billion shown as due to subsidiary, at the end of the previous year. At the end of the 2002 fiscal year, the amount owing to subsidiaries amounted to $8.5 billion and climbed further in 2003. The effect is that there is every reason to feel that an additional amount will be taxed based on the additional $1.2 billion advanced up 2003. Under section 35 the worse case scenario if that were the section under which the assessment is applied would remove $4.7 billion from being subject to taxation, the amount advanced to Carreras between 1998 and 2002. It is not clear how the capital distribution on which transfer tax was paid will be treated by the tax body if their claim succeeds.
Section 16 indicates that where the Tax Commissioner is of the opinion that any transaction which reduces or would reduce the amount of tax payable by any person is artificial or fictitious, or that full effect has not in fact been given to any disposition, the commissioner may disregard any such transaction or disposition, and the persons concerned shall be assessable accordingly.
The problem for the tax authorities if they were to succeed at the tax appeal stage is for them to prove a loss of tax revenues, further they are likely need to prove why it is that they allowed the company which is said to have advised the government from 1977 of the arrangement between the group companies to ensure compliance with foreign exchange controls that they never considered the advances then distributions.
Tax neutral|The funds transferred to the parent company does not affect the net tax position of the group as income earned on the funds by Carreras Group Ltd is taxed at standard tax rate putting the government in no worse a position than if the funds were in the hands of the subsidiaries. It is difficult to see the Government getting away with the taxing of CCJ for the funds advanced and not allowing Carreras Group Ltd to benefit from the an imputed expense. The other factor is that our understanding is that the Carreras Group never charged royalties and only recently, management fees which it could have charged to CCJ well within the norms of business practise.
The problem seems more complicated thought. If the Commissioner is claiming that Carreras transfer the funds to allow the parent company to earn income in its own right without adequately compensating CCJ thus allowing them to pay dividends to shareholders without further tax deductions, the group will need to prove that the government is not short changed with what was done, otherwise it appears difficult that the commissioner will be convinced that the move was not one of tax avoidance. The courts may well take another view entirely. But Carreras during the period of assessment made payment of dividends that were taxed in the main at the official tax rate hence the amount of taxes lost by the government from the group is at worse be minimized and at best left the government in no worse position than they currently are in. In fact this publication understands that the tax position for the group was essentially tax neutral.
Carreras Group’s executives indicated that they were unsure what exactly it is that they are being taxed for? Both the company and the tax authorities agreed that this was the case but that it now clear with the Tax Appeal hearing now completed. Reports are that the tax collection agency is very confident that they have an excellent case against the group, but it is also the view of the body that they see the reorganisation of the group this year as an attempt to avoid the liability. If so this appears less than fair not only from the stand point that group apparently took the decision before the assessment, but importantly that the Group has very good reasons to proceed to flatten the organisation. For one, the group now only operates a hotel and the cigarette production unlike previous years when they also owned and operated the Biscuit Company of Jamaica, Graphic Arts, Agricultural Products of Jamaica. The group faced a major problem with the inability to get to the profits of CCJ without paying additional taxes on any distribution that the company may have paid. With a bulging pocket filled with cash and needing no more as the operations continually threw off annual surplus cash, the Group company was constrained in how much it could pay to shareholders. In such a scenario, CCJ was a costly appendage to keep and worse a big irritant. The company took the logical approach to liquidate the unneeded subsidiaries cutting cost in the process and simply the operations as the group now operates out of one office at the factory site in Spanish Town except for San Souci which is located in Ocho Rios. The situation has only become relevant since government started to reduce the tax on dividends paid by listed companies. Before that dividends paid would be subject to tax but recoverable by the recipient or treated as prepaid taxes.
What now seems clear is that the tax is based on the distribution and not the interest that the funds could have earned. The problem for the tax authorities is that section 35 covers distributions relating to loans made to a corporation and not section 16. But one pleading is that Carreras low dividend payment amounted to a scheme to avoid tax. But that seems to hold no water, as the group is one of the highest dividend payers of all the stock exchange listed companies with only BNS and Cable & Wireless consistently paying out more profits than they.
The tax staffers have virtually been gagged and making little or no comments on the matter. The Investor’s Choice gleaned that if they succeed in winning the matter then Carreras Group would face an additional charge for 2003. Quite likely 2004 could well suffer the same fate. By liquidating CCJ the group has limited the liability as the subsidiary now has just about $5 billion in assets to play with and any interest that may be accrued thereon.
Wide Implications| Corporate Jamaica needs to take a very close look at this one as it has wide ranging implications for a wide cross section of companies operating in the country. It has always been accepted that companies within a group can lend to each other without interest being charged. More importantly, it is the accepted practise worldwide that the parent of Group is the one with the responsibility for treasury functions without worrying about taxes being applied to the amounts advanced. But this case is turning all of this on its head. But it appears that it is not just the matter of a loan to the parent that was at stake at Carreras but the amount of funds involved that attracted the authorities. The issue places the country in a bad light as it sends a message to the world that the country is not principled. And yet it goes well beyond this. If carried to its fullest, a lot of companies could find that they are slapped with taxes and may well face bankruptcy. Far worse than all of this, is that investors could take their assets over seas where it is not only welcomed but the rules are clear and applied consistently.

The Tax Appeal commissioner heard the presentation of both parties and is expected to hands down his decision by October or early November. The position as we understand it is that CCJ can appeal the decision but this is apparently not the case of the tax commissioner.
The entire matter has made a number of persons uneasy, including the auditors. Efforts are being made to get the Minister of Finance to actively intervene in the matter. The minister can intervene under the Income Tax Act the Investor’s Choice was reliably informed. Not all in the tax practise field thrilled with the move to get the Minister involved but it is unclear that he will. In fact the Minister was informally told that the tax assessment was a bad move shortly after the assessment was raised but it appears that nothing have happened. It is unclear if the Minister could possibly intervene at this late stage with the appeal process in place as it would set a bad precedent.
The group’s reorganisation and the capital distribution made to the local parent, places the group in a position to make a major dividend payment, however, the tax assessment is likely to delay any major move in this direction until after the matter is cleared up.
Investors hit with the news seems to have factored in the worse outcome for the company and marked the stock down with a spate of sell off. While the stock made headway earlier this year in the big market move up to April the stock has since fallen sharply on the back of lower than expected profits caused in some part by increased cost and additional tax flowing from the proposed distribution of revenue reserves of Cigarette Company. At the present price the stock offers double-digit dividend returns.
Note. The above article was published by the Investors’ Choice in 2004