Michael D Sims
The financial performance of Guardian Holdings (GHL) in
the last three years reads like a bad game of monopoly for
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 dont 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. Thats 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 stageaccording to
the chairman of GHL, Arthur Lok Jackthe 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:
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
With a profit attributable to shareholders of $150.7 million,
Lok Jack commented in his chairmans 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 GHLs 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 Jackand evidently the boardwere
confident too. He closed his chairmans comment on
the half-year results with a statement that the board is
still confident in the achievement of budgeted profit
The rest, as they say, is history. The year 2005 closed
significantly below the companys 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,
Fair comment, but what happened in the month of June 2005
on the stock exchange and werent the projections used
in the prospectus made up to June 30, 2005, and not the
May 31, 2005?
Still further, didnt 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