Quinton van Rooyen: Appears to be shaping up as the lender of last resort at Trustco. Picture: RUSSELL ROBERTS
Quinton van Rooyen: Appears to be shaping up as the lender of last resort at Trustco. Picture: RUSSELL ROBERTS

Recent bouts of adventurous accounting — think Steinhoff and Tongaat Hulett — should have investors much more determined to ask "What’s wrong with this picture?" when perusing financial statements.

It would be difficult for any seasoned analyst to scan the latest financial report to end-March for Namibian investment conglomerate Trustco without a few serious misgivings. And that’s probably putting it politely.

Trustco’s results are presented as a triumph, with CEO, founder and majority shareholder Quinton van Rooyen claiming the group’s "diversified business model — both in revenue streams [insurance, mining, property and banking], geographic regions and asset spread — again proved its worth".

Group consolidated revenue increased by 85% to R1.48bn, with profit after tax increasing by 165% to R725m. Headline earnings per share jumped to 70c.

This resounding performance, however, was not capped off with a generous dividend that would befit such levels of profitability, which brings us to the nub of the problem at Trustco.

In spite of the enormous profits booked in the financial statement, these are not seen commensurately flowing through in the cash flow statement.

Cash flow is the lifeblood of any business, especially one purporting to be growing at a great lick.

So any respectable investor would question the quality of Trustco’s earnings, with the cash flow statement actually showing a net leak of almost R150m.

The lack of cash flow is not the scariest part of Trustco’s latest financials. Rather it is the way in which the profit figure has been compiled that should really spook shareholders.

Two matters stand out.

The biggest involves a bit of accounting magic with Trustco’s properties. In 2014 Trustco bought a property development company with properties to be developed and sold. These properties were deemed to be inventory, but now Trustco says the decline in the Namibian property market has prompted management to "review its plan" and develop "a new strategy as regards the extraction of value from these assets".

So, Trustco will now hold the properties for longer-term capital appreciation and not for short-term development and sale.

Accounting for the reclassification of these assets from inventory to investment properties sees Trustco recognising "deemed sales of inventory" as revenue, to the tune of R984m (being the fair value of the property assets) and R291m as "deemed cost of sales".

The bottom line is that an accounting gain of R693m was recorded, which helped inflate Trustco’s profits enormously.

With the Namibian property market still all a-jitter, one cynical pundit on Twitter asked: "What could possibly go wrong?"

Then, in surely one of the most bizarre accounting entries seen in a listed counter, Trustco also deemed it prudent to include profits from a sizeable loan waiver in headline earnings.

Next Investments, a company controlled by Van Rooyen, waived a loan of R546m — a portion of which was a short-term working capital support facility previously provided to fund the operations of the recently acquired Huso diamond mining group.

So for this incredible act of philanthropy by the founder — because there was no repayment in cash or scrip — a gain was duly put through the income statement. This may be a permissible entry by accounting procedures, but it rather deviously obfuscates Trustco’s real operational performance.

More succinctly, it also prompts the question whether Trustco, which is cash flow negative, could repay or even service the Next loan.

If these two large noncash profit gains are stripped out, there is a far more ominous hue to the income statement, with markedly higher operating expenses at R708m (R542m) and finance charges at R202m.

In other words, Trustco was in rather desperate need for the funding that Van Rooyen provided in the form of a R1bn loan that was raised by the founder selling sizeable parcels of shares (sometimes well below market price) on the open market.

Van Rooyen appears to be shaping up as the lender of last resort at Trustco, which is understandable since commercial banks might not take too much reassurance from the company’s cash flows. Optimistic shareholders could argue that Van Rooyen is giving Trustco the breathing space needed to develop its diamond mining interests, and that the founder is confident of recovering his waived loan over the longer term in share price gains.

As it stands, a (prolonged) restructuring of Trustco’s debt with its international lenders has been completed. A debt standstill arrangement expired on June 15 but Trustco says transactions have been concluded with five of its 11 lenders, and claims the remaining six will have restructuring terms concluded shortly.

The devil will be in these details.