Until the accounting issues at Steinhoff were uncovered, nobody in South Africa had heard of Viceroy Research. However, the report it released shortly after Markus Jooste’s resignation thrust it into the public spotlight.
The company appeared to have identified off-balance sheet transactions that Steinhoff had used to artificially inflate earnings. Its findings were widely reported and brought the firm a substantial amount of notoriety.
However, on Thursday morning research house Intellidex released an analysis of Viceroy Research’s work, and argued that this reputation was built on research that the company had not done itself. According to Intellidex:
“The Viceroy report has striking similarities to a report produced by Portsea Asset Management, a London-based hedge fund registered with the Financial Conduct Authority, published on June 12, 2017, some six months before Viceroy’s publication,” Intellidex notes. “There are several tracts of text and several financial estimates that are verbatim, cut and paste from the Portsea report, and the general thesis and argument of the report are largely the same as Portsea’s.”
Intellidex backs this up by providing a number of examples of where the reports use very similar, and in some instances, exactly the same wording. Viceroy was given the opportunity to respond to the claim that its findings on Steinhoff were plagiarised, and the response from Viceoroy’s Fraser Perring was that:
“Viceroy is sent significant amounts of data anonymously, which of course may come from funds. In the case of Steinhoff, we received an e-mail with data pertaining to further information on an off-balance sheet entity, which we incorporated into our report, and transcripts of a call to IR suggesting that loans to these entities were made to ‘Chinese Suppliers’. We, of course, incorporated this into our own work.”
Intellidex does not find this explanation convincing, as the similarities are ‘far more than data’.
“Viceroy appears to suggest that this data was received anonymously,” Intellidex notes. “We find it curious, however, that all of Portsea’s data tables are marked as being ‘Portsea analysis’ while the Viceroy report versions, containing identical data, are sourced as ‘Viceroy analysis’. The reference to ‘transcripts of a call to IR’ is also curious considering that the reference in Viceroy’s report seems to be a reworded version of the Portsea comment on a call to IR. Viceroy’s response also seems to suggest that Viceroy relies on anonymous tip-offs which it does not seek to verify, but uses without disclosing that they were received anonymously. The reliance on unattributed and unverified information in reports in our view further compromises the quality and professionalism of the research.”
These similarities have previously been reported on in German media, but this had not been picked up by the English press.
The reputation that Viceroy was able to earn from its Steinhoff report has therefore followed it to the release of subsequent reports on other companies. In South Africa particularly, it published a report on Capitec at the end of January this year that had an immediate and significant impact on the bank’s share price.
However, Intellidex believes that this report had several problems, including unsubstantiated comparisons between Capitec and African Bank, and anecdotal and untested input from former employees.
“Seen in its entirety, it is our view that Viceroy’s Capitec report exhibits a failure of professional standards in research,” Intellidex notes. “It is not objective in that it cherry picks negative information, which it then interprets in the most negative way possible. It does not consider alternative interpretations of the same information, let alone positive aspects to Capitec’s performance. It fails to provide a reasonable basis for the conclusions that it draws. It provides no proper valuation of Capitec.”
This, Intellidex believes, is a feature of most of Viceroy’s research since the Steinhoff report. It argues that the company has produced research that selectively highlights available negative information, to support an convictions that are not well-founded.
“In our view, at least some of Viceroy’s research does not appear to represent well-founded and genuinely held beliefs of the writers,” Intellidex notes. “The purpose of the release of such research reports rather seems to be to manipulate market prices instead of the self-expression of genuinely held beliefs. However, we think it would be difficult to conclude that this amounts to illegal market manipulation as such a finding would turn on intent.”
Since a ‘significant proportion’ of Viceroy’s research appears to come from other, undisclosed sources, Intellidex raises the possibility that the firm has been playing a role for other institutional short sellers.
“The one common feature of the diverse range of targets Viceroy chooses is that there is always substantial interest from short sellers,” Intellidex points out. “Therefore there is a significant profit to be made on the short side in Viceroy’s targets, even if Viceroy is not making any of these profits directly through positions of its own.”
It adds that:
“The second value that Viceroy offers this community is as an outsourced carrier of legal risk. Some hedge funds are concerned about potential litigation that may follow from research they produce.
However, if a third party such as Viceroy acts as the publisher of the information then that legal risk is somewhat dissipated and deflacted.”
Intellidex was commissioned by Business Leadership South Africa to analyse short selling activities, particularly those of Viceroy.
UPDATE: Viceroy has since posted a response on its website, read it here.
The full Intellidex report is available here.