Trustco’s rebound defies dour mood
The market rating of this ‘Namibian success story’ seems disconnected from its underlying fundamentals
Shares in Namibian investment company Trustco Group Holdings have made an eyebrow-raising bounce of more than 120% over the past three months.
In early October Trustco shares had retreated all the way back to 620c after spiking to 1,349c at the end of August.
The startling rebound — which values Trustco’s insurance, banking, mining and property investments at over R15.5bn — defies the overriding dour market mood for Southern African investment counters. In contrast to Trustco’s rousing rally, stalwart diversified investment counters like Remgro and Hosken Consolidated Investments have taken serious strain in the weaker regional economy.
Trustco’s market rating also appears disconnected from its underlying fundamentals. The group now trades on a heady earnings multiple of more than 50 — the type of rating reserved for counters that the market believes are capable of producing strong (and high-quality) earnings growth over the longer term.
Trustco’s earnings track record over the medium term has been iffy, and the quality of earnings is hardly reassuring.
The interim numbers to end-September, which were released over the holiday break, once again raised more questions than answers.
No matter the serious challenges facing the Namibian economy, Trustco CEO Quinton van Rooyen remained as ebullient as ever.
He noted the Namibian economic downturn was marked by a general lack of credit extension and was exasperated by low commodity prices as well as erratic or low rainfall patterns.
But he reminded shareholders that Trustco was one of Namibia’s "most prolific post-independence success stories and has been recognised as an above-average achiever both in growth and wealth created for its stakeholders".
Some important contextualisation is required for Van Rooyen’s contention that Trustco is lowly geared and stoutly capitalised … as well as the somewhat disingenuous comment that cash on hand increased by more than 100% to R218m during the half-year.
The lowly geared and cash-on-hand position is certainly not due to Trustco’s operations pumping big cash profits. The cash-flow statement shows an outflow of R143m, which turns into a positive trickle of R30m after working capital changes are taken into account. Interest paid was over R88m, a significant number considering the group’s interim revenue of R254m.
The reason Trustco can show cash on hand of R214m is because of fundraising efforts and not operational cash generation.
The cash-flow statement reflects a R360m inflow as a "transaction with minorities".
Perhaps a more impartial comment on the state of Trustco’s balance sheet can be found in a recent credit rating notice from Global Credit Ratings (GCR) — which commented on the standstill Trustco needed to arrange with its lenders. While GCR lifted its ‘"LD" (limited default) rating on Trustco, the agency felt that until the restructuring of debt had been finalised it was prudent to keep the group’s ratings at "CCC" to reflect the ongoing credit standstill. That "CCC" is far below investment grade.
What is cl ear from the half-year results is that if fresh funding had not flowed into Trustco, via transactions with its 33% shareholder Riskowitz Value Fund, the group would have found itself in an uncomfortable squeeze.
Not surprisingly, Trustco is looking to further shore up its balance sheet.
At last count proposals had been tabled for Van Rooyen — who controls 55% of the group — to lend up to R1bn to the group via Next Investments. This curious arrangement will lead to Van Rooyen raising the funds for the loan by selling Trustco shares, and being repaid in cash or scrip over the next handful of years. Perhaps Van Rooyen is now the lender of last resort for Trustco. But his faith in Trustco, on paper, might be misplaced. For one thing, it hardly looks like an earnings machine these days.
The interim report reflected earnings of 14.8c a share and headline earnings of 10.55c a share. On a diluted basis this reduces to 7.85c a share and 5.82c a share respectively.
These half-year earnings numbers do not support a share price of more than 1,500c.
But the earnings numbers require deeper delving. The income statement shows revenue and gross profit down markedly at R254m and R145m respectively (2017: R408m and R316m) — but the bottom line shows sprightly growth thanks to a big jump in "investment and other income" to R272m (previously R41m).
Notes to the interim statement make for intriguing reading around the breakdown of Trustco’s profit before tax — including a R42m reversal of impairments on property, plant and equipment and R36m foreign exchange gain.
The reversal of impairments stems from the group’s aircraft, where the fair value was written up in line with the Namibian dollar weakening against the US dollar. Trustco reckons the recoverable amount on aircraft is R220m, based on the methodology in the International Recognised Blue Book for aircraft valuations.
But the standout number regarding profit before tax is a R215m "loan forgiveness". This relates to an agreement Trustco reached with Van Rooyen-aligned Next Investments to write off a short-term working capital loan facility that was due from its recently acquired diamond mining subsidiary (more on this later).
The amount written off was disclosed as investment and other income in the income statement — which is all rather convenient for fluffing up the bottom-line number.
Developments at Trustco’s two X-factor plays — its property and fledgling resources — also don’t provide the kind of rich prospects that would support the lofty share price.
The group pegged the value of its investment properties at R1.48bn — notwithstanding the depressed state of the Namibian property sector. Some might argue this is optimistic.
Yet Trustco argued that property prices across the portfolio had remained intact in anticipation of improved market liquidity and the recovery of the economy.
Trustco indicated it had fully serviced stands with a market value of around R400m available for sale — which represented less than 1% of the group’s total available land.
Trustco said it had applied to the City of Windhoek for permission to establish the township of Herboth’s Blick, claiming that once this approval was obtained the value of the property was expected to "increase dramatically".
The resources segment makes for more startling reading — especially the detail provided on Huso, diamond exploration and polishing assets acquired from Van Rooyen for R3.5bn in a deal to be settled by a staggered scrip settlement.
Trustco has already made a payment of R672m to Van Rooyen, issuing 143-million new shares at 446c a share.
The interim report, though, shows Huso holds a mere R15m worth of property plant and equipment and intangible assets of R150m. Clearly these diamond assets are a long way off achieving the target of R250m in earnings before interest, tax, depreciation and amortisation and after stock adjustments that triggers the next scrip payment to Van Rooyen.
Revenue generated by the mining segment in the six months to September was just over R40m, with reported profits of R222m presumably bolstered by Van Rooyen’s Next Investments providing loan forgiveness to Huso of R215m after the Trustco acquisition was officially clinched.
Once again there is more promise and conjecture than real profits and cash flows at Trustco. How all this can stack up to a R15 share price is anyone’s guess.