The more things change, the more they stay the same

Earnings differences amplified by virus and apparent indifference noted – a look at Trencor, Tongaat, Capitec and others.
Shadow presence … the thing about virtual meetings is that a shareholder’s voice can be easily, albeit temporarily, muted. Image: Waldo Swiegers, Bloomberg

Ten long weeks into lockdown and it’s evident that we’re dealing with two primary categories of workers. The first comprises corporate executives and public sector employees; the second all non-executive private sector employees, including those in the informal sector.

The first have guaranteed employment conditions, including wages and pensions; the second don’t. The Covid-19 lockdown highlights just how extreme are the differences between the two categories.

One different aspect of lockdown is that fully virtual AGMs already have an air of normality.

Trencor

Well, perhaps not all of them. Trencor’s haven’t had an air of normality for years and, given the controversially glacially slow winding down of its existence, there was little prospect that its June 2020 AGM would be any different. It was a fractious two-hour long affair during which the board failed to answer increasingly hostile questions from a number of shareholders.

The indomitable private investor Nic Krige made corporate history as the first shareholder to be muted at a fully virtual AGM. Krige has probably secured his position in the history books by being muted a full four times during the AGM.

And then – who knew? – it emerged that Zoom has a facility to send out messages to all attendees at a meeting, even by people who’ve been muted.

“Tell them to unmute me,” said the man who might best be remembered for telling African Bank’s Leon Kirkinis, during one of his glitzy roadshows and long before anyone else seemed to have noticed, that his balance sheet was in a disturbingly precarious state. Shane Watkins of Fair Weather Capital was also muted by the Trencor board, but only once.

Despite persistent questioning, the shareholders were unable to discover precisely why such apparently generous terms were provided to a trust that lies at the centre of Trencor’s complicated structure.

It means Trencor will live on well beyond its useful life and chew up shareholder value with each passing day.

Perplexing change to JSE requirement

News that the Financial Sector Conduct Authority (FSCA) had approved the JSE’s decision to exempt companies from the requirement to hold physical shareholder meetings to approve share issues for cash was perplexing. The FSCA has ruled that until December 2020 companies can use written resolutions to get the necessary shareholder approval.

First up, what has it got to do with the FSCA?

It’s a JSE listing requirement and as such entirely up to the JSE to decide whether or not it can be exempted. And then there’s the motivation for the move; to allow for a “more expeditious” cash-raising process, says the FSCA. It’s difficult to imagine how that can happen if, as the JSE has stressed, 75% of all shareholders must back the necessary resolution – not just 75% of those who respond to the written resolution. Getting 75% of shareholders of a large listed company to respond to any corporate initiative is a major, and time-consuming, challenge. So it’s difficult to see where ‘expeditious’ features. Anyway, developments on this front will no doubt be watched closely over the next six months.

Tongaat murkiness

Former Tongaat director Jenitha John’s era as CEO of the Independent Regulatory Board for Auditors got off to an inauspicious start last week with veiled threats of legal action against parties that had suggested she might not be the best choice for the job.

Legal action might be just what’s needed. It would surely provide an opportunity for the full disclosure of the contents of PwC’s forensic report into “undesirable accounting practices”, including details of the auditing firm’s remit.

Read: Treasury to look into Jenitha John’s Irba appointment

Then there were the Sens statements released last Thursday by Barloworld and Tongaat over the planned purchase by the former of a subsidiary of the latter. They indicate just how far apart the two parties are on the matter – Barloworld’s Sens talked in terms of a deal that could very well not happen; less than an hour later Tongaat released its Sens, which seemed to talk in terms of a deal that had merely hit an inconvenient bump.

On Friday almost 100% of Tongaat’s shareholders voted to approve the sale of the starch business. Now all they need is a buyer.

Capitec a little blasé …

Capitec seemed a little cavalier in its approach to signs of insider trading last week.

It does look as though the admin around valuable hedging transactions by directors Michiel le Roux and Chris Otto was a bit sloppy.

Read: JSE probes Capitec directors’ share trading

Given the price-sensitive activity that was going on – PSG’s announcement that it is unbundling a hefty chunk of its Capitec shares, and the Capitec profit warning – the company, its sponsors and the JSE should have made sure the oversight systems were more effective.

What the banks are banking on

Talking of profit warnings from banks, FirstRand’s expected 20%-plus drop in earnings per share for the year to end-June is driven less by a deterioration in its actual lending portfolio performance and more by its “forward-looking assumptions used in the modelling of expected credit losses”.

Does this mean things haven’t been too bad so far – but are expected to get much worse?

Read:

That things might not be too bad for the banks is suggested by the SA Reserve Bank’s comments on the disappointingly low take-up of the R200 billion in Covid-19 loans that banks are administering.

The low take-up prompts the question: why would the banks dispense the much-lower margin Covid-loans if they reckon they can still extract higher margins from ordinary lending facilities, even from distressed clients? The banks are, of course, best placed to know exactly how far they can push their clients.

Finally, what is Stellar Capital up to?

Since its November 2019 AGM it appears to have bought back as much as 13.5% of its shares.

This is more than double the level that triggers appraisal rights, yet there has been no sign of Stellar’s dissenting shareholders being offered these rights.

Share buybacks are essentially a swamp of conflicts of interest between company insiders and their shareholders; it’s time the JSE took that conflict more seriously.

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“It means Trencor will live on well beyond its useful life and chew up shareholder value with each passing day.”

A brilliant line Ann-so true. And how dare that dysfunctional board mute a shareholder. The arrogance of these elderly men is unreal! Mr Nureck should publicly apologise to Messrs Krige/Watkins for his disgraceful handling of a virtual AGM-scandalous conduct. Surely shareholders can get someone better ..and who can give an AGM the decorum it deserves!

JSE has been asleep at the wheel for a long time on these types of issues.

Good article. Though would disagree that share buy backs (Stellar capital) are bad for shareholders. As long as balance sheet strong enough, buybacks help current stock holders (if at a good price) as # of shares reduced and those wanting to exit (as it increases demand for stock).

The more worrying situation is when the company (or its subsidiaries) buys back shares from specific shareholders only – especially when those shareholders are execs. In those circumstances it is possible that execs are benefiting at the expense of other shareholders (if the company overpays), and raises the questions in whose interests are the buybacks occurring. This would especially be the case for thinly traded shares where the market price is less likely to be fair. This practice among JSE companies could be better regulated.

On second thoughts it might be appropriate for Stellar to grant appraisal rights given the extent of insider ownership. IN the circumstances, the company buying back shares means an effective increase in the share of insiders.

Appraisal rights are also relevant given the low liquidity of the stock. It would be unfair, for example, for the company to be later delisted at a potentially low price which in turn was justified by very low liquidity and high insider ownership resulting in part from buybacks – esp if they were below appraisal value.

End of comments.

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