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Corporate ‘kitchen-sinking’ in dystopia

Sasol, PPC and Truworths cram in the bad news. Also a look at Sibanye-Stillwater backing Bapo-Ba-Mogale and the question of SOE authority.
‘Kitchen-sinking’ is about including all possible bad news in a single press release, usually for strategic purposes. Image: Shutterstock

Right now it seems that the critical faculties of most investors have been numbed by the most dystopian period of the past 70 years. The first pandemic to ever occur in a social media-dominated world, where second-guessing governments has become the sport of the day, has been a truly grim affair – made worse by the suspicion that natural science is not much more robust than social science.

And so it was probably inevitable that across the globe the Covid-19 lockdown would have prompted huge volumes of kitchen-sinking. Indeed any company that has not reported hefty write-offs, adjustments, impairments, restatements and so on in the past five months is probably being looked at quite closely for signs of inept management skills.

‘Kitchen-sinking’ is, according to Collins dictionary, the practice of including all possible bad news in a single press release, usually for strategic purposes. It’s based on that very old saying about ‘throwing everything in but the kitchen sink’ and is related to a more recent saying about never letting ‘a good crisis go to waste’.

Sasol’s write-downs

Sasol might just have pulled off a world record in kitchen-sinking.

It has written off R112 billion of assets, it has reported a full year loss of R91.3 billion, and it is loaded down with debt of R190 billion. So it’s not just the kitchen sink – it’s the entire house and the garden, leaving behind the slightly run-down garden shed.

Read: Sasol promises a better future
Listen: Sasol reports major loss due to lower demand; prices

Remarkably, despite the jaw-dropping nature of these write-downs, there is no mention of pursuing former executives for repayment of their extremely generous bonuses. Surely somebody must be knocking on former CEO David Constable’s door, among others.

Or is the prolonged destruction of value only problematic when it’s blatantly fraudulent?

PPC’s poor accounting

PPC has expanded rather imaginatively on the kitchen-sink strategy: the troubled cement producer is using the grim Covid-19 era to write off prior year earnings. A whole slew of investments has been impaired, but not for the Covid era – for the previous financial year. Presumably this was to ensure shareholders believed the fault lay with the previous financial management.

But where does Deloitte fit into the embarrassing situation? It has been PPC’s auditors for many years. Perhaps shareholders will take this into account at the next AGM when voting on the appointment of auditors.

The situation, of course, became considerably more embarrassing a day after the release of a lengthy Sens statement, outlining the prior-year adjustments, when PPC was forced to issue another Sens statement. This one pointed out that it had been the JSE’s proactive monitoring process that had forced disclosure of some of the restatements. So, it came down to not only poor accounting but pretty shoddy governance. Well done to the JSE.

Truworths

Truworths has also embraced the kitchen-sinking opportunity provided by the Covid era; last week it announced it had impaired an additional R2.8 billion of its investment in UK-based footwear retailer Office. In total it has impaired R4.7 billion on the asset; this compares with the R5.5 billion it paid for Office in 2015.

Office was yet another one of those desperate purchases by a traumatised corporate leadership team in the Zuma years. Brexit knocked it sideways and it seems Covid-19 dealt it an enormous body blow. Like so many others, Truworths’ shareholders have suffered a triple whammy – Zuma, Brexit and Covid-19.

Read: SA corporates’ offshore forays have destroyed over R300bn in value

Sun International gives in

Sun International appears to have withdrawn from a full-on battle with its seemingly truculent Latin American partner. Given all that’s been happening and the likelihood that trading conditions for the foreseeable future will continue to be extremely tough for the hospitality industry, the decision to exit its Latin American operation Sun Dreams seems like the best one.

However Sun International shareholders might consider the exit price – an historical multiple of 5.5 times Ebitdar (earnings before interest, tax, depreciation, amortisation, and restructuring or rent costs) – as inevitable rather than attractive.

Read the full Sens statement here.

Sibanye-Stillwater backs Bapo-Ba-Mogale

Full marks to Sibanye-Stillwater for backing the Bapo-Ba-Mogale community’s legal bid to recover hundreds of millions of missing royalty funds. The group’s CEO Neal Froneman has asked former Public Protector Thuli Madonsela to help in seeking justice for the community, which is struggling to get its hands on the R617 million it earned – over 20 years – in royalty deposits from Lonmin plus interest.

According to Business Day, officials in the North West provincial government had authority over the bank account, which currently contains just R500 000. Madonsela has probed the disappearance of the funds but said no action has been taken on her report detailing the mishandling. She now wants the minister of justice and the National Prosecuting Authority to get involved. And so they should.

The payment of royalties to mining-affected communities is one way of trying to compensate for the utter disruption caused by mining activity.

It is heartless in the extreme that this money should have been funnelled off to some well-placed provincial government employees.

Also well-done to Sibanye for making some, albeit small, progress on the extremely complicated issue of housing in the Marikana region. For decades Lonmin seemed utterly incapable of effectively addressing this issue. Of course given the bargain-basement price at which Sibanye got the troubled platinum miner (in June 2019) it could afford to splash out.

But all in all, Marikana looks to be much better off now that Sibanye has moved in.

Who’s in charge?

It’s difficult to know what the Department of Public Enterprises (DPE) is attempting to do with its state-owned entities (SOEs).

Last week the department’s chief director of the governance unit said it was redrafting the memoranda of incorporation (MoI) for state-owned companies (a subset of SOEs) to provide the minister – as representative of the sole shareholder – with greater authority to step in when things go wrong. However, the Companies Act, which trumps any company’s MoI, is the major source of restraint on what shareholders can and cannot do to rein in boards when “things go wrong”.

As things stand, an inept board – in the private sector as well as the public sector – is well protected by provisions of the Companies Act. If the DPE wants to see change, it is the Companies Act and not MoIs that will have to be changed.

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Dystopia was SA,a new name long before Covid-19.

Great article – thank you!
Hopefully the bad news written up in these companies results is where it ends and the next results will show us some hope! It’s rather like going in for routine surgery and having a facelift at the same time! One can only hope the opportunity pays off.

We are heavily involved in the forensic work on behalf of one of the other tribes. It’s a nightmare to discover documentation and transactions. There is also no real will from the provincial government in particular to resolve matters. The royal families and tribal authorities are the biggest culprits. The Hawks, although committed to their work are too thinly spread and are in great need of resources.

End of comments.

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