Tongaat must restate its 2018 figures. But will it end there? This article first appeared in Moneyweb.
Just when we thought the worst was behind us, along comes Tongaat Hulett with an announcement that it overstated its 2018 figures and will have to adjust them downwards. Then there was the public spat between retailer Choppies and its suspended CEO. But we’ll come to that in a minute.
Alarm bells started ringing in February when Tongaat’s share price slumped nearly two thirds to 1650c over a period of days. From a purely timing point of view, it seems some people had wind of this before others since the price drop occurred well before the financial year-end.
No doubt the JSE will take a close look at this. Tongaat will have to restate its equity by between R3.5 billion and R4.5 billion due to the incorrect recognition of revenue and profits in terms of International Reporting Financial Standards (IFRS).
Also to be revised are “growing cane valuations” and it will be forced to reverse costs capitalised for cane roots, projects, maintenance and inventory.
Based on last year’s reported revenue of nearly R17 billion, Tongaat will have to shave this by 20-26%. Profit figures will also take a pounding once the numbers are restated. Deloitte, the auditor, will have some explaining to do, and will surely dread the comparisons already being drawn with dog-in-the-manger Steinhoff, of which it was the auditor at the time accounting irregularities were first reported.
Tongaat’s debt-equity ratio has been climbing steadily over the last four years and will have to be pared back through asset sales.
In 2018 IFRS amended its revenue recognition criteria for land sales. Without more detail from Tongaat, it is difficult to surmise what went wrong other than Tongaat not adhering to the new accounting standards.
IFRS deals with a number of revenue recognition scenarios, particularly where there are concerns about the collectability of money from property that is being co-developed with outside partners. In simple terms, it was easy to fudge the figures under the old accounting standards and report revenue that was neither cash-based nor collectable with certainty. Property deals in the works are inherently complex, with multiple legal contracts and their associated liabilities that make it difficult to assess when revenue should be recognised and by whom.
Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says red lights were flashing when Rob Aitken stepped in late last year as an acting chief financial officer, a position that was made permanent in February this year. A new CEO, John Hudson, was appointed in February.
“Connecting the dots between the CEO, CFO and auditors reveals the Bermuda Triangle of financial reporting,” says van Wyk.
“In this case it’s not ships and planes that disappear but billions in shareholder value due to this unholy alliance.”
He adds: “What facilitates this is the misreading of the Companies Act vis-à-vis financial reporting standards. Corporate executives and their auditors forget that the Companies Act trumps IFRS. The act places the needs of users above that of the directors. IFRS allows directors to apply judgement as to when revenue and expenses should be recognised.
“The act requires adherence to IFRS when preparing financial statements but also requires that these statements are fairly presented, not misleading and not incomplete. It’s clear that neither the auditors nor management passed muster when it comes to the Companies Act even though the low bar of IFRS may have been passed.”
The company recorded revenue of R8.8 billion for the six months to September 2018, and R17 billion for the full year to March 2018. The last interim results show it collected R630 million from land sales in October 2018, leaving land debtors of R1.934 billion, “most of which is expected to be collected over the next 12 months, as administrative, planning and other conditions are fulfilled,” according to the results announcement.
This is possibly one source of the revenue misstatement, particularly if the planning and administrative conditions were not fulfilled.
Tongaat is a huge landowner in and around Durban, and has released more than 3 500 hectares of formerly agricultural land for sale and development. It has been a major supplier of land for new development areas around King Shaka International Airport, Ballito and Ntshongweni (west of Durban).
Indications of potential trouble in the property portfolio were flagged in September last year when it conceded that the current economic climate was not conducive for land sales. The company negotiated two sale agreements and said it was taking steps to obtain the necessary planning approvals to conclude those transactions, while focusing on collecting proceeds from previously concluded land deals. It’s likely that some of these fell through the slats and revenue was counted before the deals were hatched, which looks good come executive bonus time.
There are now calls for the repayment of executive bonuses tied to misstated profit figures.
Tongaat holds a substantial asset base including controlling interests in sugar operations in SA, Swaziland, Botswana, Namibia, Mozambique and Zimbabwe. It also has an extensive property portfolio, which it has been selling and developing in recent years, as well as starch operations.
Assets to be sold
The company says it is committed to selling certain assets and is making progress in reducing interest-bearing debt, which stood at R5 billion in March 2018. This will strengthen the balance sheet and improve its liquidity position. “The company has obtained independent valuations of its various businesses as well as its land portfolio, which is currently reflected in the financial statements at historical cost,” says the statement issued by the company this week.
It has been negotiating with its debt funders to waive their rights arising from any breach of financial covenants contained in the facilities agreements for the measurement date falling on March 31 2019.
Negotiations with its funders for a moratorium on repayments – other than interest on its long and short-term SA debts – are at an advanced stage. Annual interest payments have climbed from R609 million to R878 million over the four years to March 2018.
What’s also alarming, but on a smaller scale, is the very public spat between retailer Choppies and its suspended CEO Ramachandran Ottapathu.
Choppies shares have been suspended on the Botswana Stock Exchange and JSE since November last year after it failed to produce its 2018 annual report on time.
What makes this mess even more convoluted is that Ottapathu is the company’s largest shareholder, with nearly 20% of the shares. He was suspended “as a result of an aggregation of activities and conduct” which the company would make public in due course, according to a Sens notice released on Monday.
Ottapathu told the press he has had to defend himself against unstated charges and would bring the matter of his suspension to court at the soonest opportunity. The latest results for Choppies date back to December 2017 when it reported a 23% increase in revenue for the six month period, and a 22% increase in profits. There are concerns over the retailer’s reporting of its inventory, but that’s a story for another day.