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Shoprite CEO takes leveraged bet

Questions raised over Pieter Engelbrecht’s purchase of R20m of eCFDs.

Last week, Shoprite Holdings announced to the market that CEO Pieter Engelbrecht had taken a leveraged bet on the company’s share price. Engelbrecht purchased R20 million of exchange-traded contracts for difference (eCFDs) using his own money (via an entity he controls, Transfund Investments).

The CFDs were purchased on April 18 (R1.956 million) and April 24 (R18.291 million), at average prices of R177.83 and R175.88 respectively. eCFDs are traded and listed on the JSE and enable investors to effectively trade on the price movement of the underlying share. Given this leverage, CFDs involve significant risk. They can be very profitable, but you could also lose more money than you started with. Engelbrecht’s initial margin requirement (excluding commission) would’ve been approximately R3 million.

The positions have barely been above water since they were opened.

His is a long position, meaning that he is betting the company’s share price will rise over time.

Share price drop, and a R1m hit in a single day?

An investment bank downgrade to ‘Reduce’ from ‘Hold’ is said to have caused a 6% drop in the share price of the retailer last week. Shoprite closed at R168.35 on Wednesday. With a decline of this magnitude, Engelbrecht would’ve had to meet margin calls on the day. Business Insider South Africa says Engelbrecht “probably had to pay almost R1 million in a single day as a margin call”, citing trading platform Sharenet’s CEO JC Louw. It is not certain when these CFDs expire, although Business Insider says Louw believes it is March 2020.

Engelbrecht is able to sell the eCFDs at any time.

But why did Shoprite’s CEO take such a leveraged bet on the company’s share price?

He surely considered the signal that this sends to the market (or else why make it in the first place)?

Motivation and influence

He may think this move is one of confidence. But that confidence is, itself, misplaced.

An alternate interpretation is that a move like this smacks of short-termism and excessive profiting. (If his bet pays off, of course.)

Some have suggested influence – even if indirectly – from Shoprite founder Christo Wiese, given his links to the company. Wiese famously bought single stock futures contracts in 2015, eventually closing his position in December of that year. At that point, the 3.5 million shares were worth R479 million.

Read: Wiese to lose control of Shoprite

Generally, though, the leveraged schemes at Wiese-linked companies are far more complex (and more opaque) than a vanilla CFD product traded on the exchange.

Read: Shoprite cuts chairman Wiese’s voting influence

This isn’t the first time an executive has taken a leveraged position on their company’s share price.

In the late 2000s, then Invicta CEO Arnold Goldstone made a huge bet on the company, buying R30.5 million in single-stock futures (SSFs). A few years later, Wiese bought some shares from Goldstone, and also bought SSFs in Invicta.

Bets that didn’t pay off

In 2008, Vox Telecom directors Doug Reed and Jacques du Toit saw their holdings in the company wiped out in the well-documented collapse of derivatives broker Dealstream. The two, and other executives, held their stakes via leveraged single-stock futures and contracts for difference positions. These evaporated when RMB placed Dealstream in default.

Engelbrecht’s bet is obviously not comparable, but the question needs to be asked, and asked again: Why do it in the first place?

He received remuneration totalling R20.364 million last year (and R25.835 million the year prior). And he has unvested share incentives from 2017 valued at R7.964 million. Hitting stretch targets would already have seen him earn as much as R33 million last year.

Does he need more incentivising? If so, that’s something for the board and the remuneration committee to consider.

Why not just buy shares?

Why didn’t Engelbrecht just buy R20 million of Shoprite stock? Or even R3 million, if that’s all the spare cash he has lying around. A move like that would send a far better signal to the market, especially for the long-term.

The best executives are those who aren’t worried about their company’s share price. Taking a leveraged position means Engelbrecht is betting on just that and will be watching it unnecessarily.

Engelbrecht ought to be entirely focused on operations, especially after the group endured the toughest financial year that he could recall in 2017/2018, only to shock the market six months later (in January) with its “worst” interim results by a long shot.

If he takes care of the business, his incentives will take care of themselves – as will the share price.

Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za.

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Time to sell Shoprite shares. Don’t back a gambler.

Wiese was an even bigger gambler – and still is.

Only difference is that Wiese gets shareholders to bail him out – not sure what the deal is for Engelbrecht

I’m disappointed that the author did not attempt to obtain a comment from Engelbrecht. That would have provided a far more balanced article in my view. If a comment was sought and none provided this should be stated.

“Engelbrecht ought to be entirely focused on operations, especially after the group endured the toughest financial year that he could recall in 2017/2018, only to shock the market six months later (in January) with its “worst” interim results by a long shot.”

Are you serious Hilton. I can think of no better incentive than a CEO leveraging to buy his own companies shares and if he spends 5 minutes a day looking at the price I think that is great. I hate it when CEOs get free( no risk-upside only) options. this guy has skin in the game and takes personal financial risk! Good luck to him. He is backing himself. Most corporate beasts simply want a free lunch!

Sorry to be blunt Hilton, but this is one of your( few) bad articles!

Hmmm, I wish I had that sort of loot lying around but maybe something else; “only to shock the market six months later (in January) with its “worst” interim results by a long shot”. Now my internal experience of such shocks is that just about every possible hiccup is written in, obviously sinking the share price. But because the losses are already accounted for, the following year is invariably quite good. Just thinking aloud..

Good well balanced article asking all the questions we ask ourselves as investors. In my opinion, his commitment has been paid for by the Marketing Department!
Weise still-up to his old tricks!!!
Nothing changes.

I hold Shoprite and even though I got caught with my pants down in the collapse of their price, I bought because they are essentially the South African and the African default indicator of the economy.

So I too took a long term view and will hold. I’ve sold Aspen though … bleh!

They pay day will come when a global player decides to snap up “the biggest retailer in Africa”.

But I bet the numbers in USD are horrible for all our retailers. Particularly looking at Walmart/Makro and how that’s panned out for them over the last few years.

They are completely within their rights to invest and trade as they please as long as its not illegal.

Yes its not illegal. But in the event that the share price doesn’t go up, he could lose his shares. The next step will then be him and the board saying to shareholders the CEO doesn’t have shares and needs to be incentivised – so guess who will end up paying for this gambling?

When Christo Wiese, Markus Jooste, etc (people from interelated companies), were trading CFDs a few years ago, some of us raised questions about the motive.
The fans of these individuals screamed expletives saying that we did not understand and that Christo and his crew showed confidence in the various companies they were buying these CFDs.

Of course we now know that, Christo in particular, had bought a company that had a huge carried loss. In effect he wanted to offset the profits from the CFDs against the carried loss of this shell company. In short, Christo and his gang were gambling; sorry to his fans and friends but the truth is the truth.

As for this new CEO, I do not know his motives for using CFDs. But sure as the sun will rise we will soon or later know

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