Thursday 6th March, 2008


Bad game of monopoly

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By Michael D Sims

The financial performance of Guardian Holdings (GHL) in the last three years reads like a bad game of monopoly for shareholders.

Stuck in jail with no cash (in the form of missed dividends) and facing a line of hotels if they choose to come out, some shareholders probably don’t know what to do or even what questions to ask.

But why is it monopoly we are playing here?

1. In line with all companies quoted on the T&T Stock Exchange, GHL shareholders have had to suffer a significant fall in the value of their shares. Consider that at June 30, 2005, the share price was above the $40 requested by GHL from its existing shareholders in its rights offering. At the time of writing the group Web site states that the current share price is close to half of the rights price and stands at $24.99. That’s almost half the value of the share gone in a matter of just over two years.

2. The returns forecast and promised at the time of the rights issue have not materialised. The results for 2005 were way below expectations and the group recorded its first loss in history in 2006. And, as at the third quarter of 2007, the group has recorded a loss of $69 million.

3. The positive operating returns generated by the group have been eroded by the application of International Accounting Standard 39 (IAS 39). This standard has required the group to mark to market most of the equity investments including its shareholding in RBTT. The application of IAS 39 has hit GHL harder than any other insurance company in the region and shareholders are entitled to ask and expect answers to the question: why is this the case?

But how did shareholders reach this stage?

Well, the writing was on the wall for shareholders as far back as the Q1 2005. For the three months to March 31, 2005, profit attributable to shareholders amounted to $141.5 million significantly lower than the corresponding results for the Q1 2004 ($532.8 million). At this stage—according to the chairman of GHL, Arthur Lok Jack—the results of 2004 were artificially high because many of the investments held by GHL had been marked to market and this process had given rise to large unrealised gains that had to flow through the profit and loss account in accordance with IAS 39.

Quoting Lok Jack: “In fact the solid performance achieved in the current quarter was delivered despite the depreciation of the same investments since December 2004.”

Despite the writing on the wall at June 30, 2005, before the publication of its results for the half year the company on June 30, 2005, issued an Information Memorandum offering existing shareholders a one for 19 rights issue at a price of $40 a share.

The purpose of the rights issue was to retire short-term debt used to assist in the purchase of the Zenith Group and to fund its private equity initiatives (a concept that was not defined in the information memorandum). Despite misgivings earlier in 2005, shareholders may have taken some comfort from the following statement that appeared in the memorandum:

“Our projections are made on the basis of the best information available to the group and its subsidiaries at this time in respect of the markets in which we operate, and what we consider to be reasonable assumptions concerning the macroeconomic environment in the region. For the life insurance companies, our actuaries have projected the growth of the business based on conservative assumptions and experience. The future may not materialise as projected.”

Given the results for the first quarter to March 31, 2005, and speaking with the obvious benefit of hindsight, it would seem that these projections were hopelessly unrealistic for may reasons.

If, for the first three months to March 31, 2005, GHL delivered a profit of $141.5 million, you would have required that the balance of 2005 would yield you an additional $613 million to get GHL on par with its projections.

Compounding this within a few weeks of the closure of the rights issue at the end of July GHL released its results for the half year to June 30, 2005. These results were hardly encouraging.

With a profit attributable to shareholders of $150.7 million, Lok Jack commented in his chairman’s report that “the reversal was caused entirely by the net adverse valuation adjustment of our investment portfolios during the second quarter of the year. International Financial Reporting Standards require that investments are stated at fair market value at each reporting date.”

This raises a very serious question.

When did GHL become aware of the reversal?

Clearly, it had its roots before June 30, 2005, and to what extent, if any, did it impact on the projections used in the information memorandum for the rights issue?

Perhaps only GHL has the answer but what we do know is that Lok Jack still remained comfortable with GHL’s position as at June 30, 2005.

In respect of the equity portfolio Lok Jack stated, “we are very confident that the performance of our investment portfolio over the medium and long term will be consistent with budget expectations.”

Does this mean he still meant to hit the targets in the information memorandum or was there a separate budget?

In the short term, Lok Jack—and evidently the board—were confident too. He closed his chairman’s comment on the half-year results with a statement that the board is still confident “in the achievement of budgeted profit for 2005.”

The rest, as they say, is history. The year 2005 closed significantly below the company’s own expectations. In the audited accounts for 2005 the chairman referred to the results as a “stumble along the way.”

He also used the annual report as an opportunity to comment on the assumptions used in the information memorandum. He stated “in our assumptions for the rights issue in July last year, we had projected that the T&T Stock Exchange composite index would rise by 15 per cent in 2005.”

He goes on to say that this assumption “appeared well on track since the index grew by 13 per cent to May 31, 2005.”

Fair comment, but what happened in the month of June 2005 on the stock exchange and weren’t the projections used in the prospectus made up to June 30, 2005, and not the May 31, 2005?

Still further, didn’t the rights issue remain open to the end of July 2005 and what happened to the stock exchange in July 2005?

There are clearly some lessons and unanswered questions.

n Continued next week


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