EDINBURGH — Investors in Aspen have been bracing for a report from Viceroy Research slamming the company’s financial reporting. But Viceroy Research hasn’t yet divulged analysis about another South African company that it believes has been run along the same lines as multinational retailer Steinhoff – which is teetering on collapse after it emerged that it is under investigation for questionable accounting. Aspen shareholders need not wait for the Viceroy report. South African stockbroker Nigel Dunn has unpicked the numbers and compares Aspen to Steinhoff. Frankly, Nigel Dunn has painted a scary picture. Like Steinhoff, Aspen has been on an aggressive global acquisition trail. Like Steinhoff, Aspen’s figures do not look rosy. – Jackie Cameron
By Nigel Dunn*
Is Aspen next? Flushed with success over Steinhoff (SNH), nothing to do over the festive season or has a rich seam been struck in South Africa? Whatever the reason, Viceroy tweeted in late December it has another leading South African company in its sights.
Despite not mentioning a name, the market is awash with the rumour it is Aspen (APN). This has prompted the company to issue a statement saying full year earnings are “completely clear” and the company has nothing in common with SNH.
A superficial comparison of APN and SNH show some similarities:
- Both are acquisitive businesses that have transformed themselves from primarily domestic to primarily international companies over the past decade.
- SNH funded acquisitions through a combination of debt and equity; APN mostly through debt.
- Both operate in multiple jurisdictions, having operations on every continent.
- Both had long-standing CEOs who drove the expansion; Saad in the case of APN, Jooste in the case of SNH, until his recent resignation.
However digging a little deeper we find they share other common characteristics.
Those who read my previous post will be familiar with the simple ratio ROAM, (return on assets managed). ROAM is derived from two ratios:
ROAM = EBIT margin * Asset turn.
– EBIT: (earnings before interest and tax)
– Asset turn: revenue/opening + closing total assets/2
The ratio marries up the income statement and balance sheet, which too many often view in isolation. Analysts tend to fixate on earnings (income statement), often ignoring the health of the balance sheet, which in effect is the engine of the business. One must look at both to ensure the business is being optimally run.
I looked at some of APN’s metrics for the period June 2004 – June 2017.
Although APN enjoys a healthy margin, +20%, (Figure 1), the trend is a little disconcerting, as it has been falling since 2008. The real concern comes in marrying the income statement with the balance sheet (Figure 2): asset turn has more than halved over the period, falling from above 1.0 to less than 0.4.
The combination of a deteriorating EBIT margin and asset turn has resulted in ROAM falling from above 25% to below 10% (Figure 3). Casting one’s mind back to SNH: the EBIT margin was 14%, up from 11% in June 2005; asset turn was very similar to APN, falling from 1.0 to 0.5; ROAM fell from 11% to 7%.
In essence the operational metrics for APN are worse than SNH over a not dissimilar timeframe. Bear in mind the SNH numbers may change once we see the restated figures.
I need to touch on two other areas: debt and the growth in revenue vs. total assets.
Growth in debt has been explosive as it has been the primary source of funding acquisitions; the number of shares in issue only increasing 20% over the period. The debt/equity ratio is currently high at 86%; the most recent interest charge was R2.4bn vs. PBT (profit before tax), of R6.2bn. Interest cover is starting to look a little light; especially in an era of abnormally low interest rates.
Another concerning trend: in 2004 APN had revenue of R2bn vs. total assets of R2bn. Today’s comparatives are R41bn vs. R116bn. I have no basis of knowing if APN is being looked at by Viceroy and, if so, what they have found. What is worrying: the graphs (above) paint a picture of an indebted business trading on a PE of 19x trailing HEPS, (headline earnings), with deteriorating metrics across the board.
APN bulls might argue the company accumulated a lot of companies in a relatively short period of time as they looked to build an international presence. Management have been reviewing their portfolio over the past eighteen months, disposing of assets not regarded as strategic and perhaps not as profitable as they might have liked, and adding to those they believe are.
ROAM might start to recover on an improving margin and/or increasing asset turn in the years ahead, thus reflecting and vindicating the remedial action taken in realigning their suite of businesses. The prudent might prefer to wait and see if that is the case. Finally a look at the share price to put it all into context: the current support level must hold, if not 20000c and 16000c come into play.
- After graduating with a B Com Honours, Nigel Dunn moved into stockbroking close on three decades ago. He has been a registered member of the South African Institute of Stockbrokers since 1994. He started his career in 1987 advising individuals, moved to research, company specific and of a strategic nature, before settling in fund management, both for private clients and pension funds. He was a partner of Anderson Wilson, subsequently acquired by Standard Bank, where he became a director of Standard Equities. Thereafter he moved to Investec Securities where he managed funds for private clients, family trusts and helped on the corporate broking desk. Most recently he has been managing discretionary funds for clients, proprietary trading in addition to generating his own corporate research. Of late he has started to write articles of a market related nature intended to stimulate thought and debate.