NOMPU SIZIBA: Sugar producer and property owner Tongaat Hulett’s share price got a further whacking today, following Friday’s revelation that a forensic report being done on the business shows that the company’s assets were over-inflated in its 2018 financial results. On the day, Friday, the share lost value and that has continued today. It’s believed that the company may have to restate its assets by up to R4.5 billion less. New CEO Gavin Hudson came in and ordered that PwC do a comprehensive review of the company’s assets, and now irregularities have been uncovered. What does this all mean?
Well, to break it down for us I’m joined on the line by Greg Davies from Cratos Capital. Thanks very much for joining us, Greg. There’s been some jiggery-pokery going on with the financial statements. In layman’s terms, just explain to us what exactly appears to have been overstated in value.
GREG DAVIES: I think the key thing there is probably the value of the property. Some time back, when the business model for Tongaat was obviously sugar farming effectively, and the by-products that go with that, they kind of said look, we’re actually a property company, and that will get us through. Like all things with property, it’s difficult to work out what property is actually worth until somebody writes you a cheque for the property. So I suspect a proper land audit wasn’t done correctly – where are these properties, are they usable, and can they be developed for housing, for factories, and so on? Some of these things might be right against the highway or in difficult parts. So I think that is slowly coming to light.
Then, looking at the history of the company, keep in mind [it’s been there] since 1952 – so a stalwart of the JSE for all of these years – with 38 000 employees. It has a small market cap nowadays, but what a disaster for one of the doyens of the JSE!
NOMPU SIZIBA: Thanks for that perspective. It’s very sad indeed. Now, with Steinhoff, some suggest that it was difficult to discern that there were misrepresentations being made around the company’s assets, because it’s a convoluted, complicated structure, with it having operations overseas as well.
Why do you think that people in the financial fraternity, especially those whose job it is to interrogate company numbers, inside and out – why do you think there haven’t been any questions about Tongaat in the past?
GREG DAVIES: Colleagues in the audit industry are probably seeking a pay increase. [Laughing]. … No one is really checking. In the case of Steinhoff, Mr Jooste was a powerful CEO, well known for shouting down young auditors for asking questions. In a similar situation, in the same auditing they’ve had for 20 years, the correct, angry questions weren’t asked. It’s a strange relationship between the company and the auditors if the company is paying the auditors and sometime both lines become blurred when the auditors should be demanding answers.
NOMPU SIZIBA: Let’s go to motive. We know that – at least of late – a global oversupply in sugar and sugar taxes around the world have put a spanner in the works for sugar manufacturers generally. And we know that with Tongaat, which has a large property portfolio, as you’ve just told us, valuations have come down. What do you think will have been the motive for the cookers of the numbers to do this?
GREG DAVIES: I suppose the motive is, in simplistic terms, always money. But also in the back of their minds you’ve got those 38 000 people working there. You may perhaps say to yourself, and probably Mr Jooste at Steinhoff said something similar, look, we are going through a difficult patch, let’s just blur some lines, let’s push though, let’s just maybe fudge the numbers a little bit until things, perhaps in the sugar market, start to turn around. We can kick the can the road, as the American expression goes, and hopefully things can pick up and we can turn around. But as you say, the share price is down another 1.2% today, back at R16.50.
I was looking at some of the charts here. In 2017 the share was over R120/share. In most of 2018 between R75 and R80/share. So it has fallen a long way. If you just look at some of the biggest shareholders – the Public Investment Corporation, and Allan Gray has also got a lot shares here. So a lot of people are being hurt by the short-term greed.
NOMPU SIZIBA: Yes, indeed. So there’s been short-term greed, but also the market has been selling off this particular stock. Does this speak to the market now, believing that this company needs to rethink its model, given all the problems that it has, property valuations being down, and so on?
GREG DAVIES: Yes, it’s again almost a ghost of Steinhoff, really. Before, we would have believed management, we would have believed auditors and said, look, obviously a forensic audit is going to happen. Let’s wait and see and see what light is cast on this story, with the truth coming out. Then we can assess. But nowadays the market is selling first and asking questions later, unfortunately. That makes it even more difficult for management to have something like a rights issue, or just buy time with the market.
I was actually with some colleagues at an investment meeting this morning, as we always have here at Cratos on a Monday, saying it’s not impossible. We should wonder why the JSE hasn’t even gone through the step of suspending the share, which is quite a dramatic step. But when we’ve been told that the audited numbers that we’ve received may have to be restated, then we are trading a share where we don’t know what the audited numbers are. So that makes it really difficult.
NOMPU SIZIBA: Yes. But then you could argue the same with Steinhoff, because that question was put to the JSE about Steinhoff as well.
GREG DAVIES: Well, the answer given at the time I think was probably quite right by the JSE – Steinhoff is listed in Frankfurt in Germany, and they don’t have a rule around suspending shares. The Joburg or South African shareholders would be put at a huge disadvantage because the share would continue trading in Frankfort and, if Steinhoff was not trading in Johannesburg, we would be at a big disadvantage.
NOMPU SIZIBA: Okay, thanks for explaining that. Shareholder activist Theo Botha has come out to say that there needs to be more scrutiny on private-sector corporate governance, because we are always moaning about what happens in the public sector. But sometimes the eye seems to be taken off what’s going on in the private sector. So, what, practically, needs to be done to reassure shareholders, especially because, when investors get financial results, much of their reading of information is pretty much based on trust. And, let’s face it, the vast majority of us don’t really understand a lot of the stuff in those results.
GREG DAVIES: Yes. You make some very good points there. It’s all about trust when you are investing. Anytime you are buying shares and doing what I do, investing on behalf of investors, managing money, I have to look at the results and the company’s statement, the management – I have to believe that they have given me an honest feedback, otherwise investing just becomes impossible. It is based on trust.
The audit industry in South Africa had a very, very good name for a very, very long time. [It was] very stoic and you never managed to get anything out of them and they were often in a position where they were aware of problems and they would keep it quiet. But now it seems as if something slips in, and it’s probably slipped across from the public sector; people have seen what’s happened right at the top of the Guptas and everything. The kind of moral ground has shifted underneath us, and perhaps there is just more focus on these things. But it just seems to be one negative story out of the public sector matched by the private sector time and again.
NOMPU SIZIBA: Some people are calling for the executives who benefited from the large bonuses that they got, which were based on the presumptions made in the results that came out, and they are saying that they must pay back the money. Once everything is confirmed, what is the likelihood that the company would be able to recover funds from those executives?
GREG DAVIES: It reminds me of back in the day when the EFF first got a nice foothold in parliament and they were singing “Pay back the money!” to Mr Zuma.
NOMPU SIZIBA: [Chuckling]
GREG DAVIES: I can’t imagine something similar happening at a Tongaat shareholders’ presentation. I surely should have. You just wonder, who has the key to take all this – the FSCA [Financial Sector Conduct Authority], the JSE? We need something from the regulators, we need them to show some teeth here and make a precedent, and say, look, this money was ill-gotten, the shareholders were misled, they’ve been punished by the share price. Surely some of that money should be paid back. There obviously needs to be a forensic investigation to find out exactly who was behind all of this. But those people should in some way be punished, or at least pay back the money.
NOMPU SIZIBA: Greg, it was lovely talking to you. We are going to leave it there. Thank you.