Financial results published this morning by Tongaat Hulett are far worse than the company itself had projected when the bombshell first hit six months ago. The asset write-off is more than double the R4.5bn maximum that was anticipated and the financials released show a business that is hopelessly insolvent with R3bn in negative equity and over R11bn in debt. Shareholders can’t even cut their losses as May’s suspension of trading in the company’s shares has now been extended until late January. And another 8,000 employees are going to lose their jobs, But there is optimism within the management team under former SABMiller executive Gavin Hudson, and a brighter perspective also shared by the company’s long-time critic, Opportune’s Chris Logan. In this insightful discussion Logan, one of SA’s most respected money managers, unpacks the past tale of woe and future message of hope. – Alec Hogg
Hello to Chris Logan. We saw some pretty shocking numbers coming out from Tongaat Hulett published in the newspaper this morning. You’ve been waving a flag or blowing a whistle now for more than five years. Did these numbers catch you by surprise?
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Yes, certainly they were far worse than I expected. R11.8bn which results in Tongaat currently having negative equity of R3bn and debts of R11.4bn. The numbers are horrific as a result of all these misstatements.
Is that just accounting stuff? Is it still a company that could continue as a going concern? It would suggest to people who don’t understand accounting that this isn’t a company that can continue.
Yes, the board did address that. They made a clear statement by saying that there is significant headroom in the fair value of assets over the value of liabilities. By that they mean that some of their asset values are worth more than stated on the balance sheet. That’s the one reason why they are progressing with a turnaround and there’s a strong belief that they will be able to right the balance sheet by asset sales via a very considerable headcount reduction. They talking 8,000 retrenchments.
How many people are there? How big a share of the staff is 8,000 people?
Tongaat stopped disclosing employee numbers in about 2013, 2014. It was one of my fights with Peter and I would guess it’s around about 30,000. There is obviously a seasonal component but it’s a big number.
You’ve said a couple of things here that need further investigation before we go more deeply into the figures. The first thing is, the new managers are saying this is what we’re putting on the balance sheet. We’ve got minus R3bn equity and R11bn in debt, but actually it’s not minus R3bn, the assets are worth more than that. Doesn’t that make a whole nonsense of accounting if, as an outside investor, you haven’t got a clue what the assets are actually worth?
Well it makes it hugely complex. In their fair value assessment – that’s on an ordinary sale of the business – there would be their land holdings. If they put all their land holdings up for sale tomorrow they’d get next to nothing. I think they’ve got strong commitment and support from their bankers firstly, they’ve not got a debt standstill and my strong indication is that the big shareholders will follow, or someone else will underwrite.
So let’s understand this. They’ve actually got the assets there. If they were to put it on the market right now in a fire sale, the company would be worth minus R3bn. You’ve got to keep the company going otherwise you won’t realise the value of what they have on their assets. I get that. You mentioned the bankers, there was a commitment in the announcement from Tongaat that they’re going to reduce the debt by R8bn in about 18 months. Is that feasible?
Implicit in that is a 4bn equity raise.
So shareholders must put in R4bn immediately just to wipe off half of that debt. So they’re going to find another R4bn somewhere else.
Yes. Where that will come from I don’t know, but Hudson made clear that potentially everything’s for sale. There’s no sacred cows in what can or cannot be sold. I would guess there are going to be some big asset disposals.
Gavin Hudson the CEO who came in in January. You’re quite positive about the impact he’s made?
Very much. I think he’s done a tremendous job. I was told by one of the board members before joining, he interviewed each one of the board members for two hours. That’s thorough and it was within two or three weeks that he put out a SENS release saying that the numbers weren’t right. It didn’t take him long to realise something was wrong. We’ve got a board who is a quality board. He’s managed notwithstanding all this incredible turmoil to put in place a quality board. It’s not just numbers, it’s strategically. For instance one of Gavin’s big sayings is make reality your friend. By that he means you’ve got to deal with the hand you are dealt with. So rather than pray for the sugar price to go to 30c, deal with it where it is and get down the costs, so come what may, the business will survive and you can build. They’ve already put in place a lot of strategies, which give you confidence. So I really think he’s a high calibre CEO and Tongaat got really lucky that he’s there and it’s obviously been part of the reason why he’s been able to attract a good board and a good exco. The bankers and the shareholders have also come to the party, they don’t want the company to fail.
But that’s a little bit upside down for a CEO to get board members. Surely that’s not the way it should be working, you should have the board first appointing a CEO? How can he do the opposite? Is there not too much power in one man’s hands?
I don’t know the precise mechanics but the old board has gone. That would be a good question. Who drove the realignment? I certainly think he was pretty key to it. I certainly wouldn’t have gone on a board like this unless I had confidence in the CEO given the misstatements and the precarious financial position. I think Gavin inspires confidence, he’s down to earth.
Louis von Zeuner is also pretty down to earth – the former ABSA deputy CEO – but he’s a banker. What he knows about sugar I guess is only what he drinks in his Coca-Cola but is that – given the circumstance that they’re in – is that the right kind of appointment to have as chairman? Because really now they’ve got to negotiate with the banks?
Louis is on the board of FirstRand, he was at the results presentation, it was a show of strength and commitment. We tend to forget it was only in February that Gavin joined and that the first SENS came up that something was rotten.
Talking about rotten, the auditors KPMG, the internal auditors, Deloitte the external auditors, so far not a heck of a lot has been said about them.
Correct. For want of a better term, the sins of the past – whether they were committed by the employees, the executives or the internal, external auditors – must be addressed. These weren’t sophisticated misstatements like Steinhoff, they were unsophisticated. The fact that Deloitte and KPMG didn’t pick this up defies belief. The investing public want to see some form of justice here. You can’t have shareholders paying an arm and a leg on audits and then this type of thing happens. There has to be a reckoning there. It’s also to show that they’ve moved away from the old Tongaat culture because the old Tongaat culture was the old boys club. Once you were part of the club you just retained your position forever.
Also interesting from the previous report that came out from PwC was that they have given information to the Hawks and to the South African police services and the National Prosecuting Authority about the former executives and they even named ten of them including the chief executive Peter Staude. If you’re going that far, are these new controllers of Tongaat committed to putting those people in jail?
I certainly think they’re committed to seeing justice done. This is about the equity risk of investing in South Africa. I certainly think the credibility that they’ve built up, will be lost if they don’t act fairly regarding these sins of the past.
What about things like pensions? If you have a look in detail at the financial statements, big chunks that the company pays on behalf of the company itself – cost the company – is in the pension fund of the executives. Are these protected or might that even be attacked by the company if the executives are criminally liable?
I’m not sure Alec, I think that’s protected. I would really encourage the people of wrongdoing to come forward and give an honest account and put everyone in the position to move forward as quickly as possible. It sounds like Peter’s adopting the approach though that, he just made some misjudgments. It’s going to be interesting.
So what happens to the listing of Tongaat Hullet?
They issued a statement this morning saying that originally the trading was expected to resume after the results in March 2019 were released but they have now said Tongaat applied – to make the resumption – only once the interim period to September 2019 are published which is expected to be in January. Part of the reason they’ve given there is because these results are so complex and I think that’s probably fair and how one factors in all these other moving parts – possible equity raises or necessary equity raises, shareholders suing Tongaat because of the misstatement – so I think it’s fair that there is another delay.
To close off, looking from an external perspective, shareholders or those people holding Tongaat shares, will look at the top line and the operating profit went up from a R142m to R1.2bn. They might even start celebrating, but in reality when you go further down they had a headline loss of nearly R1bn. How are those two reconciled? Is this just because they’ve got to pay the banks so much money, that whatever profit they’re making is kind of irrelevant?
That is a big component. Their finance costs of R1.4bn exceeded the operating profit of R1.2bn. I think there were some quite marked recoveries in sugar production which went up quite markedly in 2019 – a result of the drought ending – and then the loss for the year of R792m, a figure of foreign exchange differences R2.7bn which is the Zimbabwe currency devaluation. So that’s where the negative R2.7bn largely comes from and once again, very complex with a lot of moving parts, a lot of unique complexity, not easy to understand or price.
But looking back on it, a big punt on Zimbabwe and a big punt on sugar and both of them went really wrong.
Correct. But as you know both Gavin and Simon – the head of sugar – said sugar can still be a good business if you’re down at the bottom of the cost curve because the markets – the protected domestic price – is way above the international. So you can still make decent returns.
Thanks Chris as always bringing us up to date with one of the most controversial of the listings on the Johannesburg Stock Exchange at the moment.
