Oh no! you sigh, it’s that group again!
Yes, unfortunately it is. But consider this: you might never hear about it again. The point about talking about what we consider to be wrong in the field of governance is to avoid repeats and to rectify.
So here is the story of a very deep dark hole and another Two Billion Rands that went down it…
In a story long, long ago (Keeping secrets from Shareholders, in June 2014) we discussed how the JD Group directors had scoffed at my suggestion in 2013 that their provisions for irrecoverable debt might be on the low side. Essentially the reaction was still well-mannered (on this point at least) but extremely firm: THE PROVISIONS ARE ADEQUATE, MR BOTHA.
When I requested that the company secretary at the time provide me with his notes of the 2013 AGM because I did not agree with the level of detail that he had minuted in respect of our discussions on the debtors, I was rebuffed and I have often wondered why such an issue was made of this request. I still don’t know but the plot has thickened.
Let’s take a step back in history. Bear in mind that the traditional appeal of furniture company investments was that fairly big-ticket items were sold to a large portion of the economically active population, normally on credit that produced additional profits, including highly profitable credit life insurance. Astute operators did extremely well.
There was admirable disclosure in the JD Group Integrated Report of 2013 about the components of the debtors book. Note 9.4 of that document that can be found here provides a substantial set of information in the accompanying tables, useful in order to consider whether the provisions are adequate. The 2014 version is a completely different story: find the financial statements at this address and consider the paltry information in note 20.4 on page 45 – of little use in considering the adequacy of the provisions. So it was difficult to make as strong a case for further provisions at the 2014 AGM held on November 19 2014. The directors and management assured me that everything was fine, however (haven’t we heard that before?).
Now hindsight comes into play. We have a circular that supports the proposal to sell off the problematic debtors’ book to RCS, the old Foschini consumer finance structure now owned by BNP Paribas. And lo and behold, a bit of digging comes up with the information that “in October 2014” there was an impairment of some R2 billion that became necessary because RCS was not happy to pay more than R4.6 billion! The same paragraph, 126.96.36.199 on page 8 of the circular that can be accessed here, makes it clear that there was no material change in the net asset value of Consumer Finance between October 2014 and now. Well, that’s interesting, because no-one made any mention of this little R2 billion snippet at the November AGM, nor in any market update in October, November, December or January: so what’s up?
Well, at the general meeting on February 25 2015 that was set up to discuss the circular, I asked for a reconciliation between the R6.4 billion valuation as at June 2014 and the R4.4 billion at the end of October (as the circular states). Response? Blanket refusal by the CEO. Stonewalling. Zero information. I suppose we as shareholders are only bankrolling this little show in value destruction, not really entitled to know what really happened! And abject apologies? No. Management and directors on their knees, waiting for the sword of retribution? No, dear Reader. Maybe ‘the devil made them do it’. With our money. It hurts.
And the JSE? Surely it understands that shareholders would have preferred to know in November or December that the half-year results were going to be even worse than expected? No sirree, says the JSE: JD Group didn’t know about this little write-off then, and only just before their interim results in February did they quickly release a trading statement: their half-year results (until December) were only finalised in February, when a ‘reasonable degree of certainly existed’. Interesting, that. Because the announcement of the deal was done on December 18 2014, apparently when the parties signed. So poor JD Group had no idea that a R2 billion write-off could influence its results rather dramatically? The JSE, Ladies and Gentlemen, is of the opinion that JD Group released the trading statement ‘timeously’ on February 24 2015.
(A worrying thought: the JSE response to our questions is couched as if it has actual knowledge of events, not as if it was informed about them by JD Group.)
Ahem. We are not of the same opinion. And we have been pushing and shoving to get decent information, because based on what happened in 2013, we seem to have a better outside perspective on the risks in the debtors’ book than management itself? In that case, JD Group also ‘didn’t know back then’. A rare one, that. Now, clearly not so rare anymore.
I repeat myself when I say that the little foxes spoil the vineyards. Admittedly this fox isn’t so little. What a shame when our well-conceived regulation and rules don’t bring large corporations to heel, in the interests of the shareholders. This Uncle is hurting its stakeholders.
(Theo Botha and Charl Kocks are partners at CorporateGovernance.Pro, part of the team that produces Proxy View, a service for individual shareholders of listed companies to help them decide how to vote. Follow Theo on Twitter: @tjbbotha)