At Remgro’s AGM last November, All Weather Capital chief investment officer Shane Watkins urged chair Johann Rupert to take the necessary steps to address the performance of Remgro operating subsidiary RCL Foods’ performance, which he described as a “catastrophic disappointment”.
Watkins told the meeting that over the past 10 years the RCL Foods share price had dropped from R17 to R10; over the same period Astral’s share price had surged from R20 to R200. While the two companies’ operations are not entirely similar (in addition to chicken, RCL has sugar and groceries) the comparison is valid enough to be used regularly by analysts.
The slump in the RCL share price reflects the group’s sustained underperformance. By almost any measure – operating profit, operating margin, headline earnings, return on equity, return on invested capital (ROIC) – RCL has performed dismally over the past 10 years.
In its 2019 financial year, earnings plummeted 61% and ROIC slumped to a negative 0.8% from a positive 8.1% in 2018.
As it happened, 2018 had been a comparatively good year for RCL, but even at 8.1% it was not generating sufficient returns to meet its cost of capital.
Watkins, who reminded the AGM that Remgro had outperformed the JSE over the same 10 years thanks to some excellent businesses, said action was needed to address the “catastrophic disappointment” that was RCL. “I think bold steps are needed here and I want to encourage you to empower your management team to take the necessary steps.”
After a few seconds’ pause, Rupert replied: “I thank you … we’ve got the message.”
Judging by the just-announced plans to pay CEO Miles Dally R37.2 million for the 3.6 million shares (R10.29 a share) he was awarded in terms of a long-term executive incentive scheme, it seems Rupert got the wrong message. The shares were awarded to Dally in 2017 at zero cost subject to performance conditions. The conditions were not specified but were apparently attained as the shares were transferred to him on April 1.
And now, in a move described by Watkins as “outrageous”, RCL has announced plans to repurchase the shares from Dally as well as other executives – 14.5 million in total – who were awarded shares, also at zero costs in terms of the scheme.
The company’s extremely limited free float, low trading volumes and lack of tradeability severely restrict the ability of the participants to trade in these shares, Remgro CEO Jannie Durand told Moneyweb.
“By way of example, the first three months of this year saw less than four million shares traded on the JSE and as you know this repurchase is for 14.5 million shares.”
The transfers of the shares to Dally and his executives have triggered tax obligations. “Given the lack of liquidity in the market there’s limited opportunity for individuals to sell these shares to meet tax and other obligations,” said Durand.
He added: “In hindsight, we should have made provision in the scheme for an option to cash-settle, which would have prevented this problem.”
It might also have avoided incurring the wrath of shareholders who are unhappy that executives are being treated so favourably.
“I can’t exit my shares in this manner, I would have to accept a discount … ” activist Albie Cilliers told Financial Mail.
Watkins suggests that as a matter of fairness: “The company should extend the offer to all shareholders.”
But an option to cash-settle would not have avoided the wrath of shareholders who believe there is absolutely no justification for the RCL executives to receive performance bonuses.
“They have destroyed value in a sustained manner. How is it possible they are being given bonuses?” questioned one analyst. He added that with or without a tax obligation the executives would be keen sellers of the shares.
“They’re not stupid, they know which way the share is going.”
Corporate governance activist Theo Botha said South African companies have to stop bailing out their executives, adding: “It sends out the wrong message, especially in these times.”
In terms of JSE regulations, because it is a specific repurchase, shareholders will be given an opportunity to vote on the 14.5-million buyback. A shareholders’ meeting is scheduled for May 26, but with Remgro holding over 75% of the shares it looks to be a done deal.
Asked if Remgro would abstain from voting on the contentious issue Durand said: “Remgro will vote at the shareholder meeting in the best interest of the company, the shareholders and management.”
Durand added that the remuneration committee and the RCL board have recognised that the long-term incentive scheme in its current format is not working as well as it should and engaged PwC late last year to review the RCL Foods short-term and long-term incentive compensation schemes, which is currently work in progress. “This should prevent something similar happening in the future,” said Durand.
But the analyst who spoke to Moneyweb said that as PwC is RCL’s auditor, it is unlikely to approach the issue with the vigour needed.