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SA’s corporate meltdown

Why these 20 high-profile companies’ share prices have tanked, with billions of rands vaporised.

SA’s listed corporate space has seen an unprecedented number of big market cap meltdowns over the past two years. In this article, we identify 20 high-profile listed companies whose share prices have plummeted and explain why.

The temptation is to jump to the conclusion that SA business is fraught with malfeasance, but this analysis seeks to illustrate that, while there has no doubt been unethical behaviour, the majority of failures have been through a combination of bad luck, tough market conditions, one-off unanticipated events and poor judgement.

Many SA corporates’ share prices have been toppling at a time when the public sector has been exposed as having dodgy business practices. This gives one the sense that everybody is dishonest and most people are for sale at the right price. We have more faith in humanity than that. SA has a long-standing good name globally for the quality of management in the listed company space. This has no doubt been dented, but investors can rest assured that, in general, SA corporate’s ethics are sound.

Let’s first deal with the failures that might imply some level of impropriety: Steinhoff, Tongaat and EOH.

Many SA corporate share prices have been toppling at a time when the public sector has been exposed as having dodgy business practices.

Steinhoff, with its share price 99% off its highs, is an anomaly. Once in an investment career, fund managers might come across a high-profile, high-value fraud. For me, and most of my industry peers, that was Steinhoff. I clearly remember telling our investment team the night before Marcus Jooste’s resignation that it was inconceivable that such a big company could be a giant fraud, especially considering the high profile nature of the directors, auditors and everybody else associated with the company.

To put it in context, this is the second-biggest listed company fraud in global history. Yes, read that again. The Enron fraud of 2000 brought down Arthur Anderson and changed global risk assessment forever. The Enron fraud involved $60 billion of assets and by comparison Steinhoff’s was $30 billion. And now it’s all gone – zero value remains and the share price of around R1.50 (from a high of R95), represents a faint glimmer of hope that there might just be something left. We posit there is no value left. Zero. A combination of false profits, related party transactions and dubious property valuations deceived the smartest minds in the country.

Then comes Tongaat. From a high of R140/share, it was recently suspended from the JSE at a price of R13.21/share. The problem is that the company built up a high level of debt and a decrease in asset value has a negative multiplier effect. The beans have not been spilt yet, but it appears that sugar cane valuations were overstated, and property deals brought to account were nowhere near done and many had to be reversed after new management faced this reality. The company is in the process of a forensic investigation. The accounting fraternity is alarmed and the previous management will be under pressure. The question being asked is if they inflated profits to secure generous incentives.

Then comes the previously high-flying EOH, with the share price down from R168 to R15. The highly regarded new CEO, Stephen van Coller, who was brought in to regain credibility, found worms when he peeled back the can. In the part of the business that deals with the public sector, certain individuals are being investigated for their part in transactions which “may relate to legitimate transactions, theft or bribery and corruption payments” (this might be the best way for the stretched National Prosecution Authority [NPA] to get irrefutable evidence of corruption). Microsoft has cancelled its licence for the group and there is a risk that other global vendors will follow suit. There appears to be some value left, but it’s a long road ahead and will involve selling off some of the family jewels.

Those three are the companies where bad behaviour has been implied. For the rest it’s bad luck, poor judgement and the toughest local operating conditions in decades:

Aspen (share price down from a high of R385 to R95 currently): The low cost of money globally lured Aspen into numerous deals which have not turned out as expected. The heroes of SA pharmaceuticals have not cracked it internationally and debt increased as profits went sideways or down. We back the management team to recover value and get the company back on the growth path but, in a common theme, some of the crown jewels are being sold off to right-size the balance sheet.

Mediclinic (R215 to R58): One of the best businesses in SA ventured offshore and got body blows in Dubai and Switzerland as regulators changed the rules of engagement. This saw a 75% drop in the share price off a highly geared balance sheet. It will be a long, slow recovery, but the underlying assets are of a high quality.

Tiger Brands (R467 to R230): This decline was caused by a combination of bad luck (Listeriosis), poor judgement (Nigerian investments), dismal market conditions and a global trend away from premium-priced food brands. There is a question mark over whether things have changed structurally – will consumers switch back from the Pick n Pay house brand to the much more expensive All Gold tomato sauce?

Netcare (R36 to R17): A company-changing UK acquisition was eventually written off. Massive value was destroyed. Netcare is now trading at less than a 10x PE and a recent midnight appendix operation for my daughter reminded me that it provides an essential service. It’s cheap, but Discovery Health is pressuring the top line and it might not grow meaningfully for some time.

British American Tobacco (R942 to R590): The management team is doing just fine, but the market has marked down the share on concerns of reduced tobacco demand and regulatory moves.

MTN (R250 to R95): This share was smacked by Nigerian regulators who irrationally demanded $8bn back from the company (almost the entire current market capitalisation). This was subsequently retracted, but left investors in a quandary as to how to value emerging market businesses. Having 10% exposure to Iran has not helped in a Trump world.

Ascendis (R28 to R4): Buy lots of small businesses. Gear up, buy more, repeat. It’s all ended in tears and again it’s the theme of selling off the family jewels to repay debt.

Brait (R170 to R15): The value and prospects were destroyed by the acquisition of UK-retailer New Look. It (New Look) is effectively valued at zero in the Brait share price and has dragged the company into the doldrums.

Blue Label Telecoms (R21 to R3.60): The acquisition of a controlling stake in Cell C was a negative turning point. It is not working as planned and it’s a case of too much ambition and too much debt.

Intu Properties (R74 to R8): This is the Liberty offshoot into UK property where the retail sector has been a bloodbath. The company had to do the unspeakable and not pay a dividend to reduce debt.

Consolidated Infrastructure Group (R35 to R1.30): Government delays on power infrastructure projects, together with cash locked up in the Angolan subsidiary saw this company fall from grace. High debt levels and poor cash generation exacerbated the situation.

Woolworths (R97 to R54): A great SA business has been brought down by a disastrous Australian acquisition spree – the implied market value of the Aussie business is zero. The current valuation gives investors some optionality on at least the partial recovery of the Aussie business.

Truworths (R110 to R65): Ventures into the UK have seen value destroyed and the company is busy with massive store closures in the UK.

Resilient Reit and family (R152 to R63): The sharp decline in the “Resilient family” shares were driven by accusations surrounding share dealing and related activities. The shares were trading at massive premiums to net asset value. While they have not been found guilty of anything, the shares have not recovered what they lost.

Rebosis Property Fund (R13.25 to 40c): Another example of a SA corporate borrowing money to buy a UK business. With the UK retail bloodbath, this R3 billion acquisition has been written off. This leaves the company with unsustainable debt levels and, once again, it has to sell off the family jewels.

Almost the entire listed construction sector has been a disaster, with the big two exceptions being WBHO and Raubex. Poor local conditions, which were often exacerbated by offshore losses have seen Group Five and Aveng virtually vaporise. Another one is Omnia, which is another story of too much debt and not enough profit.

So what have we learnt? Some of the people we have trusted the most are not trustworthy. Analysts will be more sceptical for years to come and numbers do not lie (unless the numbers themselves are lies, as suggested by Steinhoff and Tongaat). But, for the most part, it was bad judgement. Be wary of companies with high gearing, be sceptical of big offshore investments and be aware of the risk posed by regulators who can change the rules of the game overnight.

Be wary of companies with high gearing, be sceptical of big offshore investments and be aware of the risk posed by regulators who can change the rules of the game overnight.

Are there more to come? The unexpected can always happen, but our view at present is that most of the pain has been felt and companies like Anheuser-Busch InBev are actively de-gearing in order not to be exposed if the global economy turns south.

Peter Armitage is the CEO of Anchor Capital.

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So Peter, tell us how Astoria Investments Ltd is doing these days.

I can recall this gentleman telling the world that he is investing his children’s future money into this “excellent” company – LOL

A very interesting article indeed! It is also true that there were some success stories during the same period of SA companies which made it big offshore e.g. Naspers and Richmont.

And, no doubt, all these Exec’s (brilliant folk that they are) paid themselves massive bonuses. There is an appalling litany of poor judgement and downright shady practices across so many of these businesses. I wonder what the grand total of all the Exec bonuses for these companies amounts to?
Oh! And lest we forget, the very vociferous defence for extremely high salaries and bonuses is always about the high level of skills and experience that the Execs bring – just goes to show what BS that is.

My theory is that corporate boards matter. Might be informative to investigate which role players were common to Steinhoff and EOH when the scandals broke.

All of this can be traced back to two reasons. One; the challenge of working in an unethical, morally corrupt, ruinous environment (as delivered by your friendly politician) will eventually taint everything and everybody it touches. Companies will either join in the fun, or desperately seek opportunities outside the country (mostly with disastrous consequences). Two; pure greed.

Wow! So it’s the fault of the politicians??? Come on – there are more crooks in the private sector. It’s where the politicians go for lessons.

SPAP you are absolutely right…..the discrepancy between share-price difference is very high!

Shame, poor private sector has no morals and agency of its own. It is the victim of the state.

Try again.

“It is when the tide goes out, that we see who is swimming naked” – Warren Buffet.

Would you say that this is the Dunning-Kruger effect (look it up guyz!)in action? Of course you would.

The structure of their salary packages, and the percieved talked it up notion of how good they are, are the problem!!! If and when I apply “poor judgement” to my own business, my personal income is the first thing that takes a smack, not so with these fat cats, and simply, therein lies the problem!! With the brains trust of actuarist’s and accountant’s available to corporate SA, surely better formulated salary structures should be in place to protect shareholders!? Oh, but wait, the fat cat’s are also on the remuneration committee , or appoint those that are, backscratching of note!!!

Funny thing is that just as well they don’t put out a SENS announcement every time one of these exec’s has a weeks Flu bout, as that can be a value destruct of up to R600 000-00 in some cases!! Now that would burn my lily white properly!!

An interesting study would be to compare the success of companies that are founder-managed and the founders are still significant shareholders, to typical company that is run by hired help and the shares are controlled by the ‘professional’ investment industry.

I think many good companies delist or don’t list in the first place, because (1) they are too small for the professionals to spend time on understanding (2) the pain in the but from being public and all that entails in terms of regulations and governance etc is not worth it for the capital access. There are some ENORMOUS private companies in SA. They do well enough that they do not need the one-off access to capital from a share issuance.

The next one to fold will be Impala Platinum with its proposed massive investment in a Canadian Palladium venture. It’s obvious that the directors have never considered what happened in the past when the Palladium price outperformed Platinum by more the 50%. But then that’s Impala always late with their planning.

Yes, it would be terrible if they diversified into another metal from Pt. It would be a disaster if that metal did better than Pt. In this case they would be better off without it.

Is it a “meltdown” OR a “Transformation” of the SA corporate landscape?

Reads like a horror story. Too many SA companies rush to look for growth offshore where it too is risky.

Or is it? Conspiracy theorists believe that most of these crushes are just decoys for companies to abandon the sinking SA Inc. sheep. In 2 years or so, articles like this will include the likes of Multichoice and Naspers will ask the money moving to Prospus. Then the mining guys followed by finance institutions. How much do you reckon Barclays left with?

For me, a common theme is very clear. We do not seem to have figured out how to successfully expand a business internationally from South Africa. For many its a logical next step of expansion yet very few have managed to do this successfully. Sasol would probably be another example.

Even though the traction has gone from these comments I can’t help myself – if you include regulatory actions and allegations of dishonesty that caused major losses your ‘3 isolated cases’ become NINE!

Aspen has been accused multiple times of wrong doing;
Resilient stable has 4 companies that all lost over 50% on allegations meaning the market believes there is something dodgy going on; and
MTN was whacked for NOT COMPLYING with laws and regulations multiples times on top of allegations of bribery in Iran.

#JustSaying #GlencoreToo

Where’s all the Steinhof money that disappeared?

What Steinhoff money ? It was a house of cards financed by debt. I’m not sure that the class actions will achieve anything for shareholders.

Jooste’s personal profit will have been (relatively !) small, and the assets probably aren’t in his own name. Maybe he will get his comeuppance eventually but it will take a decade in court.

Of higher-profile companies you could add Sun International, as a result of a huge share buyback at the top of the market ; it has yet to recover from the consequent ballooning debt.

“We posit there is no value left. Zero. A combination of false profits, related party transactions and dubious property valuations deceived the smartest minds in the country.”

They are not smart, they are all a bunch of pretenders, old boys club. They know a lot but do very little independent thinking and even less questioning. They worship the CEOs instead of viewing them with skeptism. I cringe whenever I hear one of these cowns go, “with so and so at the helm of this company…” like Are these analysts or cheer leaders!

and you forgot OMNIA

SEE BELOW.Cut and pasted from above.

Another one is Omnia, which is another story of too much debt and not enough profit.

Remember this next time you claim that the State would be better run by the private sector. Seems like you are all clowns down there.

So Listeriosis was “bad luck”? This just says everything about SA and its standards.

Thank you Peter, for this useful summary. Personally, I think you are far too forgiving. It seems to me that the cases of, for example, MTN, Tiger, Resilient, CIG, Ascendis are not merely bad-luck. It was more insidious… and self-destructive. The root is a lack of oversight by shareholders, lenders, regulators, journalists, and their boards.

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