This is the Rational Perspective. I’m Alec Hogg.
Well, in December 2017, a previously unknown operation called Viceroy Research shot to prominence with a scathing report on Steinhoff when they put it into the public domain. The allegations made by Viceroy in that report accelerated the demise of what was then the world’s second-largest furniture group. It provided fresh impetus to a panic that had erupted among investors when auditors, Deloitte, refused to sign off the 2017 financial years account. As a direct result, Steinhoff’s CEO, Markus Jooste, resigned.
A month later the suddenly famous Viceroy turned its attention onto Capitec, South African banking disruptive force whose stock price had peaked at just under R1 100 per share in December having come from R33 a decade before. After the report was released, Capitec’s share price dropped 21% in just 2 days. Over the weekend I met with Capitec’s CEO, Gerrie Fourie, who was passing through London on his way home after a week’s holiday. What transpired was a lesson in how to successfully manage crisis communications and a reminder that to do so require total attention from the very top. But let’s start the story at the beginning. I asked Gerrie, was there any advance warning?
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We heard rumours just after Steinhoff that we could be in the firing line but it all quietened down until I think it was the 30th or the 31st January, where on that Monday evening we realised there’s going to be a Viceroy Report.
How did you realise? Who told you?
Well, what happened was that Bloomberg contacted us and wanted to have an interview the next morning. We wanted to know why and to give us information. They didn’t want to bring that out as to why. Our share price took a beating that day of about 8% or 9% and that evening on Business News the debate was that the Viceroy Report will come out the next day on us, and that was true. At 10h00 that report came out.
So, Bloomberg had the report, clearly, beforehand and wanted to talk to you about it.
For sure.
But was not prepared to tell you what it was about.
100%.
That doesn’t sound like their normal practice. Did they not elaborate more?
No, they actually refused to give us information why they didn’t want to tell us about the whole Viceroy Report. They asked for 09h00. At 09h00, when they contacted us, they had 8 or 9 questions from Viceroy, and about 18 or 19 questions from themselves and they wanted answers immediately. We said to them that we can’t answer immediately. We then worked for about an hour and promised them that we’ll give feedback by 10h00. We gave the written feedback by 10h00. Then at 10h00 the Viceroy Report came out, or just before 10h00 it came out, and then at about 10h15 or 10h20 Viceroy was on Bloomberg TV. They asked us to participate but we said we can’t because we were not prepared as to what was in the Viceroy Report.
We only then studied the Viceroy Report and worked on it the whole day, on that Monday, and at 16h00 that afternoon we had about 750 international investors and local investors that phoned in and we briefed them on our side and then from 17h00 onwards we spoke to the media and from the media on our side.
Okay so what exactly is Viceroy accusing Capitec of doing?
Well, it’s a combination of a couple of things. There was firstly, our connection with Steinhoff, VIPSG, that they tried to emphasise. Secondly, there was quite a lot of things on the court case that we’ve got with Summit but what they’ve done is just had the one side of the court case because our opposing papers were not published or shown. Then there was quite a lot on the financial ratios and assumptions on the financial side. Then there were even things like ‘we’re a low-cost bank because we’re not paying our branch managers sufficient,’ that’s information they got from a website. They said that our average branch managers are earning R13k a month and we’ve clearly shown that our branch is, on average, between R19k to R30k with an average of about R22k. It was that factual information that they just managed to just tweak or turn it slightly. What we’ve done is to actually go through all their different reports, what they’ve said, and then answered that in detail. That information is available on our SENS. They’ve done 3 or 4 other reports like this and each one of those we’ve entered and given a full report on SENS.
Why are you giving it so much attention?
Well, for us it’s very important that our investors, our media, our own staff, and most importantly our clients fully understand what they’re doing and the way we see it. So, it’s important. You can read the Viceroy Report and you can read our answers. So, it’s just part of the whole transparency of Capitec, where we’ve brought out and said, ‘here’s the factual information according to us.’ Now it’s more, where we are at this stage is actually, we don’t want to fight with Viceroy over media because we say, we want to treat them as we treat everyone else. We engage with people and they haven’t engaged with us. Engage with us, work with us, we’ll give you the numbers the way we’ll explain it to yourselves, and then you can bring out your report but they don’t want to fight it over media, and we don’t see it as necessary.
The latest response from Viceroy to your response to them says that’s why they don’t engage with management – that you don’t tell the truth.
Well, that’s their perception. We’ve given them a 2 to 3 paged detailed report on the questions they’ve asked, which we believe is suffice where we gave them all the information necessary. They came back and then say they are not happy with that. I don’t know if you’re not happy with it or if you don’t understand it then let’s sit around the table and we talk to the rep.
Would you do that?
We’re open. We’ve said so right from the beginning. We’ve said to them you can either engage with ourselves and if you’ve got information where we’ve transgressed or not complying to lay – there’s our regulators. There’s the Reserve Bank, there’s Treasury, there’s8 the NCR – take that information through to those people.
Right so, the Capitec CEO has told us why he’s taking the allegations so seriously but how much does he actually know about this opponent of his?
That’s a very important question to ask is who is behind Viceroy. We believe it’s not only the three people that everyone knows about. We believe there are hedge fund managers that are behind it, and they are making money out of the shorting of stock.
Just explain that – how does that work?
Well, that’s where you actually borrow shares from another investor and then you’re betting basically that the share price will drop. Then you sell it when the price is reduced and you give it back to the original investor. That margin is then actually what you make out of it. Viceroy has admitted that they’ve made money out of Steinhoff and they’ve made money out of us by bringing out the report. So, that’s their game. I think the important thing is, who is the people behind Viceroy, and I think that is what one needs to establish. For certain, there are certain hedge fund managers behind them and that’s why we’re working with the FSB because the FSB needs to work with different countries and to find out who’s behind them. We’ve got nothing against shorting stock. I think that’s part of the market balancing acts, too short and too long, but I think then you must do it on real information and don’t manipulate the market by bringing in incorrect information.
Do you think they’re manipulating?
I don’t want to be the judge but go and look at their first and second report and go and look at the detail that we’ve answered and that’s purely on financial information that’s available in our financial reports. You can clearly see they’ve missed certain things and they misunderstood certain things. If it’s deliberate or not I can’t tell.
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But if they don’t trust your answers?
Well, we get quite a lot of analysts and quite a lot of asset managers that don’t understand or needs to have more information and that’s where we’ve always sat with them, or telephonically – we go through the numbers. We’ve explained it. I think a very good indication of that was Benguela. Benguela brought out a report on rescheduling, where they said they think we’re hiding certain things under the rescheduling. Andrea, our FD, sat with them for 2 hours. We went through it step-by-step and hen Benguela brought out a report and said, they’re happy with rescheduling. I believe Viceroy could do exactly the same – we can sit around the table. We can show them what we’re doing how we’re doing, how we’re accounting, what is our policies and procedures. Then if they still don’t believe it that’s their right. We’re not going to interfere with that. But to fight this whole thing over media I think it’s not a sensible thing to do.
There can be very little doubt from what you’ve heard so far that Gerrie Fourie is definitely aiming to capture the high-ground but keeping his cool must have been pretty challenging. Given Viceroy’s story to the world is that Capitec is, ‘a loan shark with massively understated defaults, masquerading as a community microfinance provider.’ Benguela Global Fund Managers was the first SA asset manager to react publicly, it’s CEOs were like Mnguni, saying parts of Viceroy’s report resonated with his own team’s research. But as we’ve just heard Mnguni said down with the bank’s financial director, Andre du Plessis, and posed his questions and issued and then issued another statement later to say, ‘he was satisfied with the answers.’ Viceroy hasn’t done anything of the kind but what then about Viceroy’s urging to the SA Reserve Bank that it puts Capitec into curatorship immediately and the part about the bank now being summonsed to appear before the SA Parliament.
The Reserve Bank came out, I think it was about 11h00 that morning that the Viceroy Report came out. The Reserve Bank came out and said we’re liquid and well capitalised. We’ve got a very good relationship with the Reserve Bank so, yes, we appreciate that they brought out a report with Moody’s saying they support us, and they brought us back this report now again.
As far as the politicians are concerned, I see they want you to go to Government, into Parliament.
Yes, we’re seeing on the 20th, if I’m correct, the Financial Committee of Parliament, where we’ll talk about the way we see the landscape and the way we see Viceroy so, that’s going to be quite interesting to address Parliament.
How do you prepare for something like that?
I think it’s a very interesting question. I’ve just been on leave for a week so when your mind goes, and then you start thinking. But If you look a Capitec – I think one of the things that you need to say is here’s a company that started from nothing. We were 2 000 – there was basically nobody working for ourselves. Today we’ve got 13 500 people working for ourselves. We’ve got over 9-million clients. So, we’ve got a very nice story to tell on how we’ve built a company basically after apartheid, after ’94.
There’s also a lot of noise in the market in SA. On the one hand, you’ve got the Steinhoff issue. They also happen to come from Stellenbosch where you come from has that played part of it, do you think?
Yes, everyone was talking about what’s happening in Stellenbosch. For us, people sometimes talk about the Stellenbosch-mafia – I don’t know where it’s coming from but for us, we’re working on what is right for Capitec.
What’s your relationship with Steinhoff or what was it?
We had no relationship with Steinhoff. Markus was on our board in early 2011/12.
Why?
Well, at that stage we always had the mission to go international. Steinhoff was international players so, we wanted to add that international exposure on our board. Then Markus or Steinhoff bought the JD Group and they owned ‘Unsecured Lending.’ We then said it’s a conflict of interest and we mutually agreed that he step down. I think that was, if I can remember correctly, it was 2012/2013 so that was the only relationship with Steinhoff.
Because there is that relationship between Markus Jooste and Jannie Mouton, and Jannie Mouton certainly there was a friendship between the two of them. Jannie Mouton is obviously very instrumental in the whole Capitec story.
Yes, I think Steinhoff, if I’m correct, had a 20% shareholding in PSG. I know Jannie was on the board at Steinhoff but he resigned 2 or 3 years ago.
And Markus was on the board of PSG.
Yes, so there was that connotation but, in our case, Piet Mouton was on our board from PSG. We had very little contact with Jannie or with Markus.
Why was Piet Mouton on your board?
Well, PSG is our biggest shareholder, with just over 30%.
But can you see why people are joining those dots?
Yes, that’s why they’re linking it but I think the important thing is we’re not working with Steinhoff. We’ve got no relationship with Steinhoff.
Were you surprised at what happened at Steinhoff?
I was surprised because it’s a big company. Everyone looked at Steinhoff as a South African company that did exceptionally well. I think, for me, it was always interesting if you buy so many companies then what they’ve done is where do you get the management to manage that, that was always the question I asked myself? Yes, I think we were all, in SA, surprised of what’s happened and I think one needs to give the time for auditors to do the whole forensic investigation and then really understand what’s gone wrong there.
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On reflection, it looks to me that Viceroy has assessed Capitec like it would any bank with old legacy systems. It hasn’t given credit, I think, to this bank’s unique structure. One, which is built on a powerful technology base where credit processes are centralised. So, nobody amongst the 13 000 Capitec staffers that they are in the stores – note, the call them stores and not branches, would be able to carry or rollover the loans of problem clients, which is where Viceroy says the big problem lies.
Also, in I’s analysis, little cognisance appears to have been given of Capitec’s management information systems, which are so deep and efficient the company’s financial results are released within a month of its financial year-end. That’s around half the time taken by its peers. For the last 6 weeks Fourie and CFO, Andre du Plessis, have handed over all their operational responsibilities to focus on what they see as an exotestal threat because with a bank reputation is everything. A break down in trust can quickly be followed by a collapse of the entire organisation so, the stakes couldn’t be higher. Even so, Capitec’s CEO clearly hasn’t lost his sense of humour.
What comes to your mind when the word ‘Viceroy’ is thrown at you?
Well, remember, I come out of the liquor days. I was in the old SFW (Stellenbosch Farmers Winery) and then Viceroy was a competitor because it was a brandy. I thought when I left that 17 years ago I’m finished with brandy. Now, I’m fighting with it, in a different area.
And are you consuming brandy to get over this.
No, I’ve changed to whiskey.
This has been the Rational Perspective. I’m Alec Hogg. Until the next time, cheerio.
