🔒 Dave Woollam: Separating fact from fiction in the Tongaat Hulett accounts

Former banker turned shareholder activist Dave Woollam explains why he decided to take a deep dive into troubled Tongaat Hulett. In this excerpt from the Rational Radio webinar, Woollam tells BizNews editor-in-chief Alec Hogg that Tongaat’s financial results are a textbook case of the absurdity of the International Financial Reporting Standards. While Woollam believes that in the last 12 months the company has steadied the ship, his concern is that – even if the deal with Barloworld does go through – what is left of Tongaat? – Nadya Swart

Well, good afternoon. I’m Alec Hogg, you are with Rational Radio. Next up is Dave Woollam. Good to see you, Dave. Where are you talking to us from today? 
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I’m coming from the Midlands. I live down in KZN Midlands, and you know, I’ve been doing this Zoom thing for a while. So, I suppose, I’m not suffering as much as maybe some people are with the constant Zooming, etc.. Looking forward to also getting out more and getting to see people. 

Well, we are looking forward to coming back to our old stomping ground very, very soon – now that we are allowed to. I know we are busy looking for a pet-friendly, nice place to come to and maybe not even pet-friendly – given the issues that one wants to get out from for a while. 

Now, I’ve got something I want to just show you before we talk about what we’re going to talk about today, which is Tongaat Hulett, and I’m going to pick it up on screen in a moment. But from your perspective, what got you interested in Tongaat Hulett in the first place? Why have you been paying so much interest in this company? 

The reason for Woollam’s deep dive into Tongaat

Alec, thank you. I guess what I’ve been doing since I left the banking industry is managing an investment portfolio, and my style is to kind of really go into deep dives on companies that interest me. Sometimes they lead to a dead end and nothing comes of it. But I feel like my analytical ability and skills gives me something of an edge. It’s probably the only edge I have. I’m not an economist and probably not even close to as experienced as people like Kokkie. 

So, what I do is deep dives and I started to look at Tongaat and it just didn’t feel right. The debt was growing exponentially. I just couldn’t see how it was that this company that was taking on so much debt didn’t have much to show for it. So, I started looking at the other side, which is the assets and the profits, and it just became clear to me that they were manufacturing or misrepresenting the assets, misrepresenting the profits, and that just became a trigger for me to go and do a deep dive.

And how long ago was that? 

I started it in mid 2018. I’ve kind of watched the company for many, many years. I have a family connection to the company through my in-laws. So the sort of sugar industry is talked about sometimes around the braai or something, but I never considered myself an agric specialist. 

But in mid to late 2018, I started looking at it and it was when they put out their interims for 2018 that I really got concerned, did a very deep dive into it, approached some of the board members in late November, beginning of December 2018. And then I met with Gavin Hudson eventually in March 2019 – just after he arrived. 

As the new chief executive. And they put out financial results yesterday. In a nutshell, were you pleased with them? I did see that the debt has actually increased still further during the reporting period? 

Woollam on Tongaat’s financial results

Alec, I think one has to look at these results through two lenses. One: a sort of strategic lens, looking at what they’ve done. Bear in mind, this business was, for all intents and purposes, insolvent a year ago. Its liabilities far exceeded its assets. Now, I accept that there were assets in there that probably have a fair value way higher than their historic cost, but this business a year ago was not capable of generating anything like the operating profits to service the debt. And it was in serious, serious trouble. 

I think that if one looks at what they’ve done in the last 12 months: I think they’ve steadied the ship, they’ve revitalised the management team, I think they’ve improved governance on the board. I guess I’m a bit frustrated at the lack of progress in calling to account people who should be called to account. 

I think it’s a universal problem in South Africa – we are just very slow at bringing people to account: auditors, the boards, the management, regulators, everybody who had a say in this. It was so dramatic and so significant, and the share price lost 95% of its value very quickly. 

At a financial level: these results don’t excite me at all, to be honest. I think they try to put a brave face on it. I think I counted up seven different measures of profit when I went through the numbers, and that always worries me and it saddens me. I understand they’ve got some real complexity with Zimbabwe. 

IFRS has become, I think, a significant problem for the average person to understand financials. I think the unintended consequences of the complexity of IFRS is that the average person just really can’t get a feel for them anymore. And these Tongaat results are probably a textbook case of the absurdity of IFRS. 

So, you’ve got these huge profits that are being shown in the results, but their profits have come about almost entirely from the perverse situation of Zimbabwe with hyperinflation at a currency rate that is disconnected. 

The impact of the Zimbabwe business in Tongaat’s numbers

And so, Zimbabwe actually produced an operating profit of 2.8bn out of the 3.8bn in this period – but there’s no logic that could define that as being real. Because the currency is collapsing by the day, and even since the year end the currency has moved from 25 to nearly somewhere around 100. That’s the Zim dollar to the US dollar. And so you can get absolutely no real feel. 

They have tried to show the impact of the Zim business in their numbers, but to be honest, they really should have just deconsolidated it – at least from a presentational point of view. Because Zimbabwe now offers one thing and one thing only, and that’s the dividend prospects – and those are very, very low. 

I can’t see much money coming out of Zim, and so – it’s sitting the books at an NAV of multiple billions. It’s generating profits of multiple billions, and then you have all these weird reversals of currency fluctuations. The average person just gets a headache trying to figure out what’s going on. 

What I put on screen is the coggle – in other words, the mind map of these financial results. And I’ve got it there so that people can have a look at the way that we prepare, or certainly I prepare for an interview of this nature. And really, the big thing that jumps out at me on all of this is the material adverse clause in the sale of their starch assets. 

Now, I see Business Day this morning was saying that there is a plan B. Well, that was discussed in the financial results that were released on Friday – if the transaction should fail. When I last spoke to the CEO, Gavin Hudson, he suggested that it wasn’t going to fail, there was not even a thought that it wouldn’t happen. I think I asked him about it and he dismissed that as no chance. 

But if it were to fail and if there is not another buyer that’s lined up: this company is already growing its debt, the debt increased – as you’ll see on there – from R11.5bn a year ago to R12.5bn at the end of June. If they can’t get that R5bn – which the banks are demanding, because they are demanding that they reduce the debt that is owed to them – would they put it into business rescue or, indeed, into liquidation?

The Barloworld deal

Alec, yes. It is probably the single most important (certainly) factor right now in the business. The starch business, just by way of materiality, made about R600m in operating profit. And it’s net profit for this period was around R400m. So, if you take out starch, you know, it decimates the actual underlying profits of the business. 

They have shown it as a discontinued operation. But on the other hand, the positive is that the R5bn injection is a lot of free cash flow that then can be applied to the debt. They’ve sold the business at about a P/E of twelve. So one could argue that wasn’t a bad price – certainly not in this environment. 

But the MAC clause is complicated, and I don’t have a full understanding of all the ins and outs of the agreement. But from what I understand now, there was the first and a second MAC clause, and the first MAC clause was related to the period to March 2020, which is now and probably on that clause: there was not sufficient grounds, because the hurdle is 82.5%. In other words, 17.5% reduction in earnings. 

They now have triggered a second MAC clause, which is to the period 2021. Now, that’s the really thorny one, because that now covers the period from 1 April through to whenever we normalise. And we know that one of the big inputs from the starch business is the brewing industry and the confectionery industry and many other industries, and I just don’t know – that will come down to the adjudicator and that’s expected on the 21st of September. 

And they did say in there that 38% of their offtake from the starch business is in alcohol – alcohol drinks. 38% – wow. So, you wouldn’t be buying the shares now until the 21st of September – as an investor. I suppose as a punter, you may go red or black on this side. 

But if the arbitration comes in Tongaat’s favour against Barlo’s on the sale of the starch business, then you might be able to make a case. If it goes against them – and that’s really what my question is here – what are the odds of them being able to find another buyer at a similar kind of price range? 

Alec, it would be speculative to guess, but it’s a great business. I was very surprised when Barloworld came up as the buyer because, you know, they don’t have anything like this. You know, it’s a bolt on to their business. It’s got no synergies or similarities to anything they do now. 

On the value of Tongaat Hulett

But there are businesses out there that may well be attracted – this might be an attractive asset. It’s a dominant asset. It’s a great business. It’s ten year track record is fantastic. So, it’s been the real jewel in the crown. 

I would imagine it would be tough to get anything like this price. But the problem now is they’ve got very strict deadlines on their debt payments. They’ve allowed them until September 21, but these deals take a long time. And, you know, in this environment, I think it’s going to be very, very difficult. 

Saying that, the banks really control everything now on the stock, and as an equity investor, you’re really buying an option on whatever’s left over once the banks are happy. Right now, I can’t see really much value at all. And even if the deal went through, to be honest, my concern is: what’s left? 

You’ve sold Namibia, you’ve sold eSwatini, you’ve sold the starch business – you’re left with a loss making SA sugar business. You’ve got a great business in Zimbabwe, but is now being destroyed through the economics of Zimbabwe. And you’ve got a property business which really nobody knows what it’s worth, because it’s going to be a function of the economy. 

So, I’m still struggling to figure out whether there’s any value here, but I have to give credit to the management team for putting on a brave face, for putting their heads down, working exceptionally hard in incredibly difficult times and trying their best. They had a really bad hand and they did their best. 

Dave Woollam, it’s great to talk with you again – from the Midlands of KZN – the most beautiful part of our country. We believe so anyway. We look forward to picking up with you again, hopefully with some good news on Tongaat.