Tongaat Hulett’s share price tanking by almost two thirds to a record low of R4.80 on Monday has not surprised equity analysts, who say the selloff was to be expected considering that the group’s shares have been suspended from trading on the JSE for almost seven months.
The embattled 127-year-old sugar and property group asked the JSE to suspend trading in its shares in June last year after revelations of an accounting scandal saw the stock slide some 75%.
Tongaat Hulett’s shares recommenced trading at an opening price of R13.21, but it turned out to be a blue Monday back on the bourse for the group, with the stock continuing to nosedive in the first few hours of trade. At the close of trade, it was down 63.66%.
“The further slide of Tongaat Hulett’s share price on its first day back on the bourse really comes as no surprise to me,” said Wayne McCurrie, portfolio manager at FNB Wealth and Investment.
“With trading having been suspended for almost seven months, shareholders and the market have not had the chance to really absorb the full extent of the group’s massive overstatement of asset values and profits under its previous executives. It was a given that the share price would fall further,” he explained.
“Tongaat Hulett’s restatement of its results in December and its latest results for the six months to September 2019, published last Friday, clearly show the impact the accounting scandal has had on the group,” added McCurrie. “With its liabilities exceeding its assets, the group effectively is in a negative equity position.”
Chris Logan of Opportune Investments and Keith McLachlan, a fund manager at AlphaWealth, also said they were not surprised by the further slide in Tongaat Hulett’s share price. Logan is a one-time Tongaat Hulett shareholder and vocal critic of the group’s previous executives.
Much as ‘come to light’
He told Moneyweb that following the company suspending trading of its shares on the JSE, a lot more information on its accounting irregularities and financial position had come to light.
“With so much having emerged since then, we are getting a clearer financial picture of Tongaat Hulett … However, with its debt standing at almost R13 billion and a negative equity of around R4 billion, the market is playing catch up to the news and the sharp slide in the share price was inevitable,” said Logan.
“In fact, we could see a further fall in Tongaat Hulett’s share price if the market is not too keen on the equity raise that the group is planning as part of its turnaround strategy,” he added.
“It’s going to be a tough ask to get existing shareholders to buy in to the equity raise, but if they don’t take part, they could see a dilution in their shareholdings.”
Logan noted, however, that Tongaat Hulett could get support from its lenders for the equity raise.
“The banks, which are already supporting the group, may exchange debt for equity in the group,” he said. “Tongaat Hulett’s new executive team and board need to do all they can to ensure that the group remains solvent to deliver on their aim of reducing its debt by R8.1 billion next year.”
Before publishing its restated results for 2018 and its delayed full-year results to March 2019 in December last year, Tongaat Hulett released the key findings of a damning forensic investigation by PwC into the group’s operations. This pointed to serious accounting irregularities and corporate governance failures under the group’s former CEO Peter Staude and other senior executives.
Those implicated face legal action
The group, under the leadership of new CEO Gavin Hudson and an overhauled board led by new chair Louis von Zeuner, said at the time that it planned to pursue claims against certain implicated individuals and was looking to recoup some of their bonuses. It is also cooperating with the National Prosecuting Authority, the Financial Sector Conduct Authority and auditing bodies on the matter.
During the December results presentation, the group revealed that its equity had to be reduced by around R11.9 billion, due largely to impairments, land expropriation and tax-related issues in Zimbabwe totalling some R7 billion.
The balance of the reduction in equity was related to the accounting-related wrongdoings by some of Tongaat Hulett’s former executives.
Releasing its latest results last Friday, the group posted a headline loss of R314 million for the half-year period (to September 2019), which it said was an “improvement” compared to the R354 million restated loss for the comparable six months of 2018. However, the group’s equity came in at “negative R3.9 billion” and its debt ballooned to almost R13 billion.
WATCH: Tongaat Hulett CEO Gavin Hudson discusses the group’s interim results and interventions following revelations of accounting irregularities
Speaking at the interim results presentation, Hudson said despite it being a “turbulent year” and “brutal on many fronts”, the group had made progress in its ‘Project Crystal’ turnaround initiative, with the latest results starting to reflect the significant interventions that have been made.
Listen to Nompu Siziba’s interview with Jean Pierre Verster of Protea Capital Management: