Chris Logan: Where Tongaat has gone, Hulamin, Nampak are following.

Back in 2014, independent money manager Chris Logan spoke out publicly against the strategy being followed by KZN's leading company, Tongaat Hulett. He urged the board and executives to drop their approach of selling off prime commercial real estate to pump the cash into the sugar sector – an area Logan reckoned was the worst commodity to bet on. In this episode of Rational Radio he describes what happened as a tragedy; had those controlling the purse strings pursued a different strategy, Tongaat would still be a flourishing business. Logan has similar misgivings about Hulamin and Nampak, companies that he reckons are also guilty of massive mis-allocation of capital. – Alec Hogg.Chris Logan joins us now. Chris good to talk to you. Another update on Friday about Tongaat and this is a story that you've been following very closely for a long long time. I was looking back in the research and in 2014 – there was a story in Business Day – where you warned the Tongaat guys that they were on the wrong path. What exactly was concerning you then?.___STEADY_PAYWALL___.Thanks Alec. What was concerning me was they were selling off their land holdings, their great coastal landholdings – areas like Umhlanga Ridge – which are one of a kind, and taking all that cash and deploying it in sugar capital expenditure plus more. So they were taking a huge bet on sugar which I thought was reckless. It was a double whammy because they even were on record as saying coastal land appreciates by more than inflation in the long term. So you're taking money out of that and putting it into sugar which is a terribly cyclical commodity and it's probably the worst commodity in the world to invest in because there's no price discipline. Normally when a commodities price declines, supply drops off, sugar is different because when prices decline, sugar being generally such an important industry to countries, are given protection or subsidies. So you can get the price declining but no restriction in supply. There's periods where the price declines but supply increases. So it's a horrible commodity. And there were already all these health concerns where the World Health Organisation was linking sugar with obesity. I thought it was just reckless in the extreme..And no one listened to you back then?.No, no one listened to me..Are they listening now?.Well unfortunately we now have a tragedy and we have a company which had all the hallmarks of being great, they were a cash sugar cow. By that I mean their yearly investment in new Capex was less than depreciation and if they'd been clever with their land holdings, this could have been a fantastic company. We sit in this horrific situation – and there's no other way to describe it – other than that it's a tragedy. I hear that the village of Tongaat is decimated. There's 5000 retrenchments taking place. People are being kicked out of their houses. Huge decimation for the Natal economy. Peter Staude's a very bright guy and he could be very charming, very persuasive and look what he's now faced with..What is he faced with Chris? Is it real that the board will try and get him into jail? If they are referring him – and the other nine – to their National Prosecuting Authority and the South African police, there can only be one intention..I think under the financial markets act, if you misstate results or make misleading statements, it's a criminal offence and it's a serious offence. If you think it through, people have gone and bought Tongaat based – on the audited annual financial statements and all the presentation material put out – and have been totally wiped out. So I don't think we can underestimate what's going on in terms of severity – not just for Tongaat – but once again the equity risk of investing in South Africa has gone up. If you're a foreign investor you're reading Tongaat, you're reading Steinhoff, you're reading EOH, you think why bother with this market? And as you know we need investment..You said Peter Staude's a smart guy. Why did he do this? Why did he take such a clear punt on sugar when the writing was on the wall elsewhere? The way you've articulated it and from what the PwC report tells us, it's pretty clear what he was up to. Did he have a view that the sugar price was was just temporarily low?.He had a very strong conviction that the equilibrium price for sugar – in the medium to long term – was 30 US cents per pound, I think he even tabulate that way back in about 2013 in the annual report and this was the justification for this massive investment into sugar production. I would like to draw a bit of a distinction if I may, between what went on here and what went on in Steinhoff. I don't want to underestimate the severity of what's been done here, but I think the implicated executives – certainly the CEO and the CFO – wasn't so much personal enrichment, they weren't self dealing. Yes they benefited from very large bonuses and remuneration packages, but I think they got on this treadmill of taking this huge bet – which was going against them – and then I think they fell into the trap of fudging the figures..But then other people have got to be implicated. The internal auditors KPMG and external auditors Deloitte – who were also involved with Steinhoff – surely they must have some culpability? I didn't see their names being mentioned in the PwC report..Precisely and I think it's broader than that. The one thing that this report says – and it makes it clear – is that its been prepared for litigation against some of the implicated executives. They're obviously expecting people to sue them so it's a serious situation. Let's say once the first shareholder lodges claims against Tongaat – let's say it's a 2% shareholder – the rest almost feel they've got to jump onto the bandwagon because if the 2 % shareholder wins then there's less for the rest. So you get caught in this catch 22 situation..What does it do with the investability of a stock like Tongaat?.Given this expected litigation – and I'd love to hear what they've got to say about this – but it potentially makes the company un-investable. Until you've answered that, if all the shareholders who bought this company over the last year or two – based on these false statements – issued summons, what is left? It's a terrible situation. They need to address that, how they're gonna handle that – because they've alluded to it in this report – in no uncertain terms. It's a mess..Chris, from your perspective, while you were waving the flag there, we also spoke about Hulamin, which is I suppose a sister company of Tongaat, are there others that you are concerned about at the moment? Other companies listed on the JSE that we should be taking a closer look at?.Yeah, touching on Hulamin, it's quite interesting because essentially exactly what happened to Tongaat happened in Hulamin earlier on, this massive capital misallocation. Another one of course is Nampak, a blue chip supplying the likes of SA Breweries. Look at the capital misallocation there, the company's being decimated..But hang on there Chris. Now we've got the CEO of Nampak – de Ruyter, who's going off to run Eskom which is a national issue..Sure. I think somewhat in his defence, the big bets into Nigeria and Angola were taken before he got there, but it's a mess – not only capital misallocation – they are running a model there which is the only packaging conglomerate in the world to do this. All other packaging companies have focused. I'm sure you've seen it's at R5 – I think we talked about doing something when it was R12 – and it's falling like a stone. I think Alec, what we're seeing is a lack of rigour across the board in how companies are managed and operated – you can't just blame the boards and the management – at Tongaat, the shareholders supported the previous board and the management, the culpability is widespread it's systematic. They voted for misaligned incentives which targeted sugar production. So poor Peter was actually incentivised to ramp up sugar production..Chris Logan from Opportune Investments who blew the whistle – if you like – on Tongaat five years ago and nobody was listening then, they surely are listening now.

Chris Logan: Where Tongaat has gone, Hulamin, Nampak are following.

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