Jeema Mineral Water (PSC) of Dubai, listed on DFM, published its Interim condensed financial statements for the half year ending June 30, 2007; and the same reveals its capital deployment model, which excites my column this week.
The shareholders equity was at Dh88.2 million, and Dh55 million (62.5 per cent) of this equity, was deployed in investments probably available for sale apparently outside its principal business activity. The principal activity disclosed in the 2006 audited financial statement, was "bottling and selling mineral water as well as manufacturing plastic packs and bottles". Such investments available for sale was at Dh48 million in 2006 and Dh90 million in 2005.
Jeema's income statement had accounted Dh30,519 as operating loss from its principal activity, while accounting for an Other Income of Dh246,051, resulting in a net profit of Dh215,532 for the half year ended 2007. In 2006, Other Income was Dh10 million and in 2005 this was Dh6.5 million, while the principal business activity of Jeema earned an operating loss of Dh5 million in 2006 and Dh3 million in 2005. Only then Jeema yielded a net profit in 2006 of Dh4.8 million and in 2005 of Dh3.1 million. The consistency of Jeema's capital deployment structure and income structure that depends on its non-principal activity investments for its returns to shareholders needs to attract the attention of investors, analysts and corporate strategists.
The Notes on Accounts disclose, (e) Investments available-for-sale as: "Available-for-sale investments are initially recognised at cost, being the fair value of the consideration given including all acquisition costs associated with the investments. After initial recognition, investments are re-measured at fair value. Unrealised gains and losses are reported as a separate component of equity (investment revaluation reserve). On de-recognition or impairment the cumulative gain or loss previously reported in equity is included in the statement of income for the year. Fair value cannot reliably be measured for unquoted securities. Such investments are measured at cost less provision for impairment, if any. At the time of de-recognition, the provision, if any, relating to the securities is recognised as income."
The Notes on Accounts further disclose in (n) Basis of revenue recognition: "Sales are stated net of discounts and represent the invoice value of goods delivered. Investment income is recognised when the right to receive is established. Profit on sale of investments is recognised when they are sold and its value is realised or realisable."
Their auditors Grant Thornton, Dubai, may consider to press for disclosure on the portfolio of instruments or enterprises invested, so that marginal investors and minority shareholders will know the determinants of Jeema's material source of profits.
The 2007, half-year interim results disclose the movement in the Equity Account for 2006 first half also. Disclosing a balance of Dh76 million on December 31, 2005 as Investment Revaluation Reserve, of which Dh34 million was accounted out as directors' remuneration, while the dividend was restricted to Dh3 million in the first half interim results comparable for June 30, 2006. I wish the auditors could press for more disclosure on this material payment disclosed as directors' remuneration, which was not visible in the income statement as an expense, but was dealt by a by-pass accounting entry, through the shareholders' account. A suitable note should have been added, to be more fair to marginal shareholders who did not benefit from the directors' remuneration disbursement to know the circumstances of the same.
As a corporate strategy note, Jeema, should consider the option of acquisition of one of the suitable water industry players in the regional market, which will strengthen the operating efficiency of its principal activity, if its shareholders prefer to consider its corporate objective as, to remain focused as a water company.
The shareholders of Jeema, also have other options, including selling of the water business assets and operations to a corporate buyer, who can consolidate the water business operating capacity and draw more economies of scale and pour the performance to consolidate the water distribution industry in the region. The economy and society may benefit more, provided the monopolistic tendencies of the local market are checked by market regulators.
As a marginal investor, I tried to look at other water and 'also' water companies, including the two listed on DFM. There is a copious supply of water and related industry value chain companies. Our corporate brokers, investment bankers, mergers & acquisitions specialists should have already found the suitable pair, if not, they are not adequately proactive in making the market more healthy, in making the market more stronger. Early bird will continue to get the prey, if the strategy is right. The fundamentals exist, the technicals and politics of corporate consolidation need to be played right. Over to the chief strategist-mergers & acquisitions.
One clue is Jeema had Dh55 million in Investments - (probably) Available for Sale at the start of this game.
E Michael Johnson is a member of the Dubai Chapter of ICWAI, the views expressed here are as a marginal investor in the financial markets.
By E. Michael Johnson
© The Business Weekly 2007
