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Closer look at Cave Shepherd and Company

Thursday, October 4, 2012


A Barbados icon copes with rough times while keeping its shareholders happy. Cave Shepherd and Company (CSC), based in Barbados, reflects a conservative approach to business combined with tight fiscal management of its resources. In 2009, CSC recorded a loss of 23 cents per share. This was followed by a smaller loss of 14 cents per share in 2010 and, in 2011, the company returned to profitability, when it earned 6 cents per share. In all three periods the company, using its retained earnings and strong cash flow position, paid a dividend of $0.20. It is interesting to note that in each of the last three years CSC’s working capital position improved. This measure of fiscal rectitude moved from less than B$50 million at the end of 2008 to B$52 million in 2009, B$56.5 million in 2010 and B$60.20 million as at December 2011.
As at December 2011, the company reported having net assets of B$144 million. This was financed by B$113.5 million in equity and B$30.5 million in long-term borrowings. Due to the high cash component of its assets, the company is essentially debt free. For 2011, its current ratio was 4.40. For each of the prior four years, its current ratio was consistently above 6.00.
In 2011, total operational revenue and other gains fell to B$16.15 million; this reflected a 15.4 per cent decline from the B$19.1 million recorded in 2010. However, the contraction in expenses was much more favourable as these declined by B$7.8 million to B$13.1 million; this reflects a reduction of 40.8 per cent below the B$19.1 million recorded for 2010. The most significant revenue line item was management fees, which increased to B$7.12 million from B$6.63 million in 2010. Sales from retail operations came in at B$4.6 million, down from B$4.9 million a year earlier. Finance income improved from B$3.47 million in 2010 to B$3.56 million last year. 
Also forming part of revenue was B$0.84 million reflecting a gain on the sale of financial assets; in 2010, this line item reflected a loss of B$1.03 million. For 2011, there was an unrealised loss of B$2.54 million on financial assets; in 2010, this line item reflected a profit of B$2.05 million. Most of the various expense line items showed stable or slight changes from the previous year. The two main reductions in expenses related to non-cash items. In 2010, there was an impairment of goodwill charge amounting to B$5.4 million; of this total, B$4.2 related to Columbian Emeralds International Ltd in Tortola while B$1.20 million was for Franchise Services Corporation, which is no longer in operation. In 2011, there was no goodwill impairment.
Also contributing to the huge reduction in expenses was a writeback of B$1.12 million; in 2010, there was a receivable of this size due by an associate company (GCS Ltd t/a Ganzee) that became impaired; in 2011, the circumstances that give rise to this situation were reversed allowing the charge to be cancelled in 2011. The net effect of these changes allowed the company to report an after-tax profit of B$1.9 million. Of this total, B$1.1 million related to equity-holders with the remaining B$0.8 million being attributable to non-controlling interests. This translated into earnings per share of B$0.06. Although the company structures its reporting along two major lines, retail and services, finance income and investment income also make significant contributions. In addition, associated companies provide a large portion to its earnings.
Significant reduction in losses
The major subsidiary companies forming the retail group are Cave Shepherd USA, Barbados and Grand Cayman and Columbian Emeralds International outlet in Tortola. Sales were down slightly from 2010 while 2011 saw a significant reduction in the loss from the previous year. Most of the major retail brands operate under the umbrella of its associated company, Duty Free Caribbean (Holdings) Group. Other major brands under this grouping include Harrisons and Pages Bookstore. The services division mainly comprise Fortress Fund Managers Ltd. Revenues advanced by almost 11 per cent to B$9.2 million from 2010’s B$8.3 million. More significantly, profit for 2011 came in at B$2.18 million after recording a loss of B$0.8 million in 2010. A major associate, The Signia Financial Group, provides loans and operates a stock brokerage business. A Canadian registered associate, DGM Bank and Trust, through various Barbados subsidiaries, operate a local bank and trust company, insurance and brokerage services provider.
The company reports major financial data reflecting assets, liabilities, revenue and after-tax profit (loss) figures for its nine major associated companies based on its percentage of ownership, which ranges from 16 per cent to 40 per cent. In 2010, the company’s share of associates profit came in at B$2.17 million; however, in 2011, this declined to B$1.05 million.
In 2010, the two star performers were Franchise Service Corp/The Perfect Time Ltd, which contributed B$1.53 million in after-tax profits, while CSGK Finance Holdings Ltd (a joint venture with GraceKennedy of Jamaica) added another B$1.3 million to the associated results. In 2011, the two major contributors were CS&C Joint Venture with B$0.79 million and CSGK Finance Holdings with a contribution of B$0.67 million. In both periods, its flagship operation, Duty Free Caribbean Holdings Ltd, in which its holds a 40 per cent interest, reported losses; for 2010, this figure was B$1.98 million. Fortunately, there was a strong improvement in 2011, when the loss contracted to B$0.58 million.
Almond Resorts Inc
In both periods, its 20 per cent associate, Bridgetown Cruise Terminals Inc, was profitable; it earned B$0.24 million in 2010 and improved on this performance in 2011, when it recorded a profit of B$ 0.33 million. In contrast, DGM Holdings (Canada) Inc, which is a 40 per cent associate, saw its profits halved from B$0.61 million in 2010 to B$0.30 million in 2011. For the six months to June 2012, CSC recorded reduced revenue, which, when combined with increased expenses and higher taxes ultimately translated into a loss per share of 4 cents. Despite this result, the company, based on its good liquidity and healthy reserves, maintained its interim dividend at B$0.10 per share. A major contributor to this result was the increase in the unrealised loss on investments held for trading, which rose from B$0.3 million to B$0.9 million. Included in this figure is the writedown of the company’s investment in Almond Resorts Inc. In addition, the closure of its retail operations in Tortola resulted in a loss of B$0.6 million. 
Overall income for the period declined from B$8.2 million last year to B$7.6 million in the current period. Also contributing to the lower result was the group’s share of profit from its associates; this item fell to B$0.87 million from B$1.1 million in the June 2011 reporting period. A significant contributor to this was the reduced income from its flagship retailer, Duty Free Caribbean Holdings. Reduced visitor arrivals both in Barbados and at other Caribbean destinations saw revenues fall. As part of its restructuring exercise, DFCH initiated a voluntary redundancy programme; most of this cost was expensed in the reporting period. The financial services companies reported acceptable results for the first half of the current year. In summary, the company reported an after-tax loss of B$0.52 million. Of this total, non-controlling interests earned a profit of B$0.25 million leaving the parent company’s shareholders with a loss of B$0.77 million.
In both 2010 and 2011, the company repurchased a total of 424,630 of its shares; thus, as at the end of 2011, the number of shares outstanding stood at 18,358,398. Each of its eight directors, in their personal capacity, owns at least 50,000 shares each. Three other shareholders own a total of 10,180,700 shares, corresponding to 55.5 per cent of the total; these shareholders are its chairman, R Geoffrey Cave with 5,838,534 shares (31.8 per cent), Landview Ltd with 2,193,517 and Aerie Ltd with 2,148,649. As at June 30, 2012, each of the company’s shares had a book value of B$5.96. On the Barbados Stock Exchange, the share recently closed at B$4.68. With an annual dividend payout of B$0.20, the yield is 4.27 per cent. In addition, the discount to its book value is a comfortable 21.5 per cent.