EDITORIAL: Tongaat disaster increases pressure on JSE to raise its game
JSE CEO Nicky Newton-King would do well to interrogate the roles of what she terms the guardians of governance in this value destruction
It’s far from the jaw-dropping disaster Steinhoff has been, but the apparent collapse of JSE-listed sugar producer Tongaat Hulett to a market capitalisation of a mere R4bn, from more than R12bn less than a year ago, hints at problems of a systemic nature.
JSE CEO Nicky Newton-King, who is intent on rebuilding public trust in her institution, would do well to interrogate the roles of what she terms the guardians of governance (Gogs) in this value destruction. On the basis of what is known so far, the Gogs do not emerge well.
Once included in the unwieldy Anglo American empire, which may explain some of the difficulties, Tongaat was for many years one of the equity market’s favourite food stocks. In recent times, the sale of some of its extremely valuable property near Durban has helped to counter the bottom-line impact of the declining fortunes of the sugar industry. This made Tongaat more a property than food company and helped to prop up the share price.
But even as it sold off its property portfolio, Tongaat tried valiantly to reverse its shrinking sugar yields by pumping billions of rand into the industry — to be precise, R11bn between 2008 and 2018.
Investors who bothered to look might have been comforted by the thought that much of this capital expenditure was covered by the R8bn generated from land sales over the same period. But those who looked a little closer might have been puzzled by the steady increase in borrowing over the same period to R10.7bn by halfway through the 2018 financial year.
The group’s recent trading update represents a chilling reality check for shareholders and provides some explanation for the increasing debt. It seems land was sold on credit and some of the “buyers” have not paid up. That wasn’t the only shockingly bad news contained in what seems to be the first reality-based communication produced by the group in a long time. Tongaat, headed by a new CEO, is on track to report a R1bn loss for the year to March 2019 and even higher debt levels. Inevitably the share price tanked, to a low of R30, a little more than a third of the net asset value in September.
The warning is starkly at odds with the comparatively upbeat comments from management at the release of the interims in November.
It is also starkly at odds with the almost traditional “buy” recommendations put out by most analysts covering this company.
The standout exception to this tradition was the suggestion by Investec analyst Anthony Geard, in May 2018, that it was time for long-serving CEO Peter Staude “to step aside”. It was a reasonable suggestion in the context of Staude’s 16-year reign as CEO and the just announced 37% slump in headline earnings. Geard’s bosses at Investec evidently didn’t see it that way. Within minutes of the statement going public, Investec issued a stunning public apology to Staude.
So, here’s the thing. On the one hand we have an elite group of individuals who have scored handsomely out of this tragedy, and on the other a large group of unwitting investors who’ve lost out. This cannot be put down to the “buyer-beware cut and thrust” of the markets.
The elites who benefited were in privileged positions, including Staude, whose remuneration since 2008 was well in excess of R125m and was boosted by share awards.
The investors who suffered were “outsiders” relying, foolishly as it now turns out, on audited information provided by the board and essentially endorsed by analysts. This smacks of nothing short of a systemic crisis that no amount of corporate-governance box-ticking, which seems increasingly pointless, will protect investors from.
Clawing back undeserved bonuses would be more effective and the JSE needs to institute a detailed investigation, if only to protect its own reputation.