The chief investment officer of Integral Asset Management, Bruce Williamson, has been a long-time follower of KZN’s iconic and now embattled corporation Tongaat Hulett. The veteran analyst, who has held senior positions at stockbrokers SBC Warburg, ABN Amro Securities and Imara Asset Managers (whose team left to form Integral), reckons investors should have paid more attention to the “perfect storm” of bad news that has knocked Tongaat over the past couple years. He supports the view of many that long-time CEO Peter Staude is a most unlikely fraudster – and says he would be shocked to discover the man he knows really well played any role in misleading investors. He spoke to me on Rational Radio. – Alec Hogg
A warm welcome to Bruce Williamson. He is the chief investment officer at integral Asset Management. Bruce, thanks for joining us. You’ve been doing some work on the story of the moment – Tongaat. Have you been an investor in the company?
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Alec yes. We were looking at it and going back a couple of years, when we had the sugar price running from a low in the third quarter of 2015, it looked like a really low price down at 10 US cents per pound.
We were interested then and it had a terrific run. After that – mid to the end of 2016, the price run had been just a bit too strong and that’s when we started watching. We were getting a bit nervous. And so we followed it closely. We haven’t been invested for a while. We don’t know what’s going to be happening with the investigation as to what went wrong, but as the market observer and follower, there were a lot of headwinds that I think investors need to take on board. There were many reasons why there were headwinds that management were betting against. But that has got nothing to do with the report that is due to come out.
You know Bruce, let me just tell you where I’m coming from. I’ve known Peter Staude the ex chief executive of Tongaat for a long long time. Well, I suppose I also knew Marcus Jooste. But Peter’s a very different kettle of fish. He’s a modest man. He’s got his feet on the ground. He has a lot of integrity from the community in that area. He’s not a flashy guy. It just doesn’t seem to make sense. How well do you know Peter Staude or how much have you had to do with him?
I can say I know him well. I’ve known him for a long time.
Give us your thoughts then, your insights into the man and what people are saying.
I would be staggered, shattered if there was anything deliberately untoward. You referred to Steinhoff. I think this is very different because we know that there were a lot of off balance sheet things happening in terms of funding, financing, structuring, whereas from what we can see there is no such thing with Tongaat. It’s not the off balance sheet stuff. So it then suggests that it is an asset valuation. The one that you might want to look at is crops and the growing of the sugar crops. I’ve known Peter and interacted with him for a long time and I cannot think that there’s anything untoward. There may have been differences in opinion of how to value some of those assets, but that’s another discussion.
The sugar price ran up in late 2016, it hit nearly 24 cents per pound. Then by late 2018 or even the third quarter of 2018, it was down to 10 cents. That was a huge drop. At the same time they had been through droughts. They had been pleading and working with government on tariff protection. There was something coming in from the UAE when I last looked. I don’t know that the UAE was a sugar producer but tonnages were coming in, also from India. I think it was almost 500,000 tons that came in. Government did not put the necessary tariffs in place and then, very belatedly, they did, which was nowhere near what the sugar producers were asking for.
We had an economy that was getting slower and slower. There was massive pressure on jobs. And then of course if you look at the property side. When you have a chunk of property as big as Tongaat, you have to engage at a national, provincial and municipality level to see how you could include communities. When you add all of that up, as well as the currency moving around all over the place, there were a lot of headwinds. There was hardly a tailwind. All of us were hopeful that of course political news was going to improve and therefore property deals will happen…
Well the opposite happened. The economy didn’t improve and property went nowhere.
So Bruce, from where you sitting there’s no doubt that there was going to be a big write off anyway on Tongaat’s asset values given what’s happened in Zimbabwe, Mozambique with all the chaos and corruption going on with the finance minister being jailed here in South Africa. What’s the upside? Is there any upside because Deloitte are coming in for an absolute hammering because they were also involved with Steinhoff – (also mitigating circumstances there which we can’t get into now) but they’re coming under pressure. Peter Staude the former CEO has been given a very rough ride … Is there any upside in all of this?
Just to pick up on what I was saying. I had forgotten to mention that Mozambique is just an incredibly difficult place to operate. Although Tongaat established very stable, good operations but you still had this broader uncertainty. Zimbabwe was just frightening. Great crops and great business worked well with local industries. They developed outgrowers in Zim, but I think by late last year there was about 170 million dollars of dividends sitting there and I think management and investors were hopeful that, that money would flow. That equated then to two point to two point four billion. And of course we know what’s happened to Zimbabwe so that was just another massive headwind. Yeah, I agree with you. Having known Peter so long, there would be no untoward issues. Sure we can argue valuations a bit up and down and when times change you going to get a write down, it’s a non cash flow item etc. I really don’t know and I’m very eager to see what comes out.
