Warning to non-execs: After R63m loss, Eqstra mulls suing Protech directors

The final chapter is yet to be written in the shambles at liquidated JSE-listed Protech Khutele. It is a sad tale of an incompetent directorate supported by compliant analysts who signed on behalf of auditors PWC.  After writing off its R63m investment in Protech, Eqstra CEO Walter Hill says the loss would have been avoided but for the actions of the former board and its advisors. He's been talking to the liquidators – and his lawyers. The new Companies Act puts hefty fiduciary responsibility on the shoulders of directors of public companies. Just how significant the personal liability could soon be tested in court. – AH

ALEC HOGG: Welcome back to Power Lunch. Eqstra saw a 26 percent drop in full-year headline earnings per share. The logistic group was hit by an impairment of 63-million in its investment in Protech Khuthele. Walter Hill, the Chief Executive of Eqstra is with us in the studio. Maybe we should start with Protech Khuthele. Walter, it's a really sad story and last time you were in the studio we had chat about PwC giving the Board of Protech Khuthele some insight into what it thought it was worth. Of course, it was worth a lot less and your initial bid that you'd put in was then turned down. In a way, I suppose you're happy that your bid didn't succeed, but in another way, you've really lost a pile of money here.

WALTER HILL: Alec, I think that deal cost us 63-million and we do believe that had the Board of Protech gone ahead with the transaction, today the company would still be performing and 1000 jobs would have been saved. Regrettably, I think management was ill advising their Board and the Board was subsequently removed, with new directors to salvage it. I think that's sad because it was a good company.

ALEC HOGG: You're a 32 percent shareholder. We know that in the New Companies Act, there are many responsibilities – fiduciary responsibilities of the directors. Isn't there an opportunity here to make a case?

WALTER HILL: I think time will tell.

ALEC HOGG: But you are talking to your lawyers.

WALTER HILL: We are talking to the liquidator and establishing the facts. Yes, there is fiduciary responsibilities on the directors and it is a matter that will have to be tested and proven.   Yes, we are keeping the options open and settling down with the liquidator to establish exactly why the original offer was not accepted and how they came about the 90 cents per share offer versus what we believe (till today) that 60 cents was good, but today it's worthless. We limited our exposure to 30 percent but we believe that it was a company that could have fitted well into the Eqstra stable and could have added to the portfolio.

ALEC HOGG: Is there anything there now that's worth picking up?

WALTER HILL: Sadly, I think it's going to be a fire sale, it will be cherry picked, and the vultures will be there for the stripping. We assessed the contracts while it was in Business Rescue. We found none of the contracts to be salvageable, the equipment, is equipment that's available on the market, and if we want to pick it up, we will pick it up at fire sale values now in the open market.

ALEC HOGG: Either there or somewhere else if you need it.

WALTER HILL: The market has a lot of that equipment available, which is a very bad time to put that equipment on the market. Sadly for shareholders (such as ourselves), there's not going to much salvaged out of that because the market on that equipment is currently down.

ALEC HOGG: You've had a pretty rough year. The strikes: when we spoke six months ago, you said that knocked your headline earnings by about half. You've had another strike in the second half of the year.

WALTER HILL: We weren't impacted. With the platinum strike, we had no direct impact. The earnings down 26 percent… One must bear in mind that our contract mining business is now, give or take, 40 percent of the Eqstra business. They had a torrid year. It was the strikes and bad rainfall. We exited loss-making contracts, so I think that if you look at it – the headline earnings down 26 percent – you would have expected far worse. That is on the back of the other divisions that actually had very good years. Our feed management logistics business had a very good year. They were up in margins. They were up in profitability. Our industrial equipment did very well, as well. Sadly, the thing that knocked us is that the economy slowed down and the South African forklifts was 19 percent down.

ALEC HOGG: Okay. That's important because this is an economic indicator that many analysts watch – South African forklift sales – and it's been rather accurate in projecting what's going on.

WALTER HILL: It's been too accurate.

ALEC HOGG: Around 19 percent.

WALTER HILL: It's 19 percent, so that is a lead indicator and it has been indicating a downward trend for the past year and it's indicative of where the economy is going, so the reality is that it shows the South African economy is going in for a rough ride and we are preparing for that. Our forklift business did well, notwithstanding the number of sales in the country in all forklifts has been down. We were well prepared. As the market declines, there's a bit of a ramp up the stock because unfortunately, you can't stop the ships from coming in. That did affect our interest cost in that division because you have to pay for the stock and it ramps up. However, that's normalised now so we're entering the new year with normalised stock.

ALEC HOGG: But you say in your results that the South African forklift operations are now under half of that division and that the U.K. is now starting to kick in.

WALTER HILL: Yes. One must bear in mind that when they started this business, it was 100 percent Toyota Forklifts in South Africa. That is now less than 50 percent and the U.K. forklift business, which has Caterpillar forklifts, has now gone up to 24 percent. Then we have the heavy lift business and we have other distributor businesses that complement that business, so the business has become quite diverse – that division.

ALEC HOGG: But a theme that's been coming through with Chief Executives, particularly in the manufacturing sector, is that they're looking outside of South Africa now for investments. Are you in the same frame of mind?

WALTER HILL: Cautiously, yes. I think many people have pushed and said 'why not into Africa'. We've been very cautious. We've made money in Africa. We've been very cautious about that growth there and we haven't gone gung-ho into Africa. It's the same with the U.K. The U.K. gave us good returns. They gave us 19 percent return on equity in Pound Sterling and that was an indicator for us on the board that we will use that to systematically, look at Europe. Europe is not quite ready yet, but there are opportunities for us to expand the U.K. operation into Europe.

ALEC HOGG: Obviously, you don't have the dominant share in the U.K. forklift market as you do here, but is it giving you some kind of indication of that economy doing better perhaps, than the negative here?

WALTER HILL: The U.K. is definitely on the uptick. There is a marginal growth in the U.K. economy. We can see it in the forklift sales. In addition, we track the exact number. We do track and publish the U.K. forklift sales and there is a consistent improvement, so the U.K. market is doing well.

ALEC HOGG: Walter, the share price of Eqstra is down at R6.30. It wasn't long ago in fact, towards the end of last year, that it was at R9.00 so your market cap has fallen. The enjoyment that the investment community has with Eqstra has subsided somewhat. Is this the worst of times for you now? Are you going to start coming out of the trough?

WALTER HILL: I think contract mining is the bane of our lives. I have taken over. The CEO and the CFO of that business…

ALEC HOGG: Yes, I see. He departed. Amicably?

WALTER HILL: Well, amicably, but it's tough times. At some point in time, good people have to leave as well and I think he realised that it needed something different to change that business around.

ALEC HOGG: So you've personally gone into contract mining.

WALTER HILL: I've personally taken over that portfolio. The plant rental division: I took that over earlier on. That has already turned…embedded in the loss, it made a 60-million loss this year. Going past, it's already showing profitability in the first two months. It took some hard work to get it there. Whilst we're recruiting an international CEO for that division, I've personally relocated and I've taken over that business.

ALEC HOGG: Relocated to….

WALTER HILL: Into Midrand, into the operation there and taken charge of that business.

ALEC HOGG: So you're doing a lot more travelling.

WALTER HILL: A lot more travelling and I have to knuckle down and do some hard work there.

ALEC HOGG: What was going wrong there? What do you fix?

WALTER HILL: The reality is just the operational issues that we need to get on. We have the contracts. We need to get on top of our contracts. The equipment: we need to improve the utilisation in that business. We have to be ahead of the curve in the labour front. I do believe we pay our workforce 40 percent higher than the agreed rates, so our workforce is in a very privileged situation. We have to get a model that works there because we cannot afford to have another torrid year as we had this year.

ALEC HOGG: Well, I'm sure that in the next six months, we're going to be sitting and talking about a good turnaround in your contract mining side. Hopefully, the forklift sales, which show a wonderful economic indicator for South Africa, do turn up after that 19 percent decline. That was Walter Hill, who's the Chief Executive of Eqstra.