In­vest­ing: The lack of crit­i­cal anal­y­sis

Viceroy’s re­port had im­pact be­cause it fed a need not catered for by tra­di­tional sources, writes Ann Crotty

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But for all the con­tro­versy around the Viceroy re­port — on Stein­hoff — it’s likely that small in­vestors are bet­ter off that it did go vi­ral on De­cem­ber 6

Back in 2007 Sean Holmes, then an an­a­lyst with JPMor­gan, pub­lished a 56-page re­port ad­vis­ing in­vestors to steer clear of Stein­hoff.

As the FM re­ported some months ago, Holmes re­ferred to the group’s “pat­tern of ag­gres­sive ac­count­ing treat­ment”, its un­nerv­ingly poor dis­clo­sure, a dis­turb­ing spate of ac­qui­si­tions used to “pa­per over the cracks” and an “un­usual em­pha­sis” on min­imis­ing its taxes.

Since that fate­ful day in early De­cem­ber 2017 when the Stein­hoff share price started its pre­cip­i­tous de­cline, this dark, dis­turb­ing side of Stein­hoff has pretty much been the only side we’ve heard about.

But prior to De­cem­ber 6, few small in­vestors — who seem rep­re­sented in un­usu­ally high num­bers in Stein­hoff — were aware of this as­pect of its modus operandi. Two days ear­lier Stein­hoff had un­set­tled in­vestors when it re­leased a Sens state­ment say­ing its up­com­ing an­nual re­sults would not be au­dited. The share price dropped from above R50 to R17.

On De­cem­ber 6 came the news of CEO Markus Jooste’s res­ig­na­tion. Apart from a rather an­o­dyne ref­er­ence to “ac­count­ing ir­reg­u­lar­i­ties”, few had much idea of what was go­ing on. And then, late on De­cem­ber 6, the now-in­fa­mous Viceroy re­port ap­peared.

It made for com­pelling, if some­what per­plex­ing, read­ing. “Viceroy un­earths Stein­hoff’s skele­tons — off-bal­ance sheet re­lated party en­ti­ties in­flat­ing earn­ings ob­scur­ing losses,” screamed the badly edited head­line. The sub­head­ing was a lit­tle more in­for­ma­tive: “How Stein­hoff man­age­ment use off­bal­ance-sheet en­ti­ties to ob­scure losses and en­rich them­selves.”

Of course, it now seems Viceroy may have done very lit­tle of the “un­earthing”. Ac­cord­ing to re­search group In­tel­lidex’s rather star­tling at­tack on Viceroy re­cently, most of the “un­earthing” was done six months ear­lier by a lit­tle-known UK out­fit called Port­sea As­set Man­age­ment.

“There are sev­eral tracts and sev­eral fi­nan­cial es­ti­mates that are ver­ba­tim cut and paste from the Port­sea re­port, and the gen­eral th­e­sis and ar­gu­ment of the re­port are largely the same as Port­sea’s,” states In­tel­lidex, pro­vid­ing am­ple ev­i­dence to sup­port its al­le­ga­tion.

In the world of jour­nal­ism pla­gia­rism ranks as one of the dead­lier sins, and it’s im­pos­si­ble to know why Viceroy didn’t ac­knowl­edge the Port­sea re­port. Much about how Viceroy op­er­ates is puz­zling.

But for all the con­tro­versy around the Viceroy re­port on Stein­hoff, it’s likely that small in­vestors are bet­ter off be­cause it went vi­ral on De­cem­ber 6. Es­sen­tially, Viceroy helped to make us all in­sid­ers.

The fact is, some for­tu­nate in­di­vid­u­als seem to have had bet­ter in­sight into what was go­ing on be­fore the wheels came off on De­cem­ber 4.

When the dust set­tles and the Fi­nan­cial Sec­tor Con­duct Author­ity (pre­vi­ously the Fi­nan­cial Ser­vices Board) has fin­ished its work, we might all get to find out who the in­vestors were who sold their shares in the months be­tween the re­lease of the Port­sea re­port in June and the De­cem­ber 4 shock an­nounce­ment.

IM has been un­able to make con­tact with Port­sea As­set Man­age­ment and knows of no­body who has been able to. This surely raises the bizarre pos­si­bil­ity that Viceroy is a

front for Port­sea.

Un­til Stein­hoff’s re­cently re­leased “in­terim re­port”, the Viceroy re­port was the most sub­stan­tial source of in­for­ma­tion avail­able to the pub­lic.

Con­cerns raised by a damn­ing ar­ti­cle in Ger­many’s Man­ager Magazin in Au­gust 2017 were dis­missed by Stein­hoff chair Christo Wiese as drivel and based on mis­con­cep­tion and ru­mour-mon­ger­ing. The com­pany said it had ap­pointed le­gal and ex­ter­nal au­dit firms in Ger­many to in­ves­ti­gate the is­sues and they had con­cluded that “no ev­i­dence ex­ists” that Stein­hoff broke the coun­try’s com­mer­cial laws. Stein­hoff has re­fused to make the re­port pub­lic or even re­veal the iden­tity of the authors.

Jour­nal­ists, in­clud­ing from Bloomberg, have done some ex­cel­lent in­ves­tiga­tive work in re­cent months. Much of it re­in­forces al­le­ga­tions con­tained in the Viceroy re­port.

The in­terim re­port is the first doc­u­ment from Stein­hoff that went be­yond coy ref­er­ences to “ac­count­ing ir­reg­u­lar­i­ties”, though it has re­tained a cer­tain vague­ness. “It has emerged that the over­state­ment of prof­its … im­pair­ment of loans, to­gether with in­creased dis­count rates ap­plied in valu­ing good­will and brands re­sult­ing from in­creased risk pro­files, has re­sulted in ma­te­rial ad­di­tional im­pair­ments of good­will, in­tan­gi­ble and other as­sets,” said the Stein­hoff board in early July, re­fer­ring to a stag­ger­ing €10.9bn eq­uity wipe­out. It then goes on to make a state­ment that would sur­prise few who read the Viceroy re­port: “The re­state­ments re­flect man­age­ment’s best es­ti­mate of the re­cov­er­abil­ity of cer­tain non­arm’s length loans, re­ceiv­ables and as­sets.”

It may even be that when all the dust set­tles the non-arm’s length trans­ac­tions will turn out not to have de­stroyed as much value as feared. But that could be a long shot.

So in the midst of the con­tro­versy about Viceroy’s re­port on Stein­hoff, the re­ally big ques­tion we should be ask­ing is: where were the crit­i­cal re­ports on Stein­hoff?

It is now well known that Jooste used a mix of bul­ly­ing and ca­jol­ing to con­trol cov­er­age of Stein­hoff, which may ex­plain why noth­ing neg­a­tive was on gen­eral re­lease since Holmes’s re­port in 2007.

It also ex­plains why Viceroy’s re­port had such a huge im­pact — it fed a need that had not been catered for by tra­di­tional sources.

We may also ask where the crit­i­cal re­ports on Re­silient were.

The SA mar­ket is gen­er­ally dom­i­nated by buy-side an­a­lysts work­ing for in­sti­tu­tional in­vestors whose in­ter­ests are inevitably best served by ris­ing share prices. In­di­vid­ual in­vestors rarely get ac­cess to “short-side” an­a­lysts’ re­ports, which al­ways tend to be more ag­gres­sive.

As a mat­ter of course, “buy” rec­om­men­da­tions out­num­ber “sell” by about eight to one. Even “hold” rec­om­men­da­tions are rare. The ten­dency to is­sue sup­port­ive rec­om­men­da­tions is height­ened by per­sonal and com­mer­cial re­la­tion­ships that ex­ist be­tween the in­sti­tu­tion and the tar­get com­pany.

This was high­lighted re­cently when an In­vestec an­a­lyst had to back­track on a re­port that sug­gested it was time for Ton­gaat Hulett CEO Peter Staude to step aside. Given the re­mark­able de­struc­tion of

“As a mat­ter of course ‘buy’ rec­om­men­da­tions out­num­ber ‘sell’ by about eight to one. Even ‘hold’ rec­om­men­da­tions are rare

share­holder value that Staude had over­seen in re­cent years, and given the reg­u­lar “buy” rec­om­men­da­tions is­sued by In­vestec dur­ing that pe­riod, the re­port was re­fresh­ingly frank with­out be­ing bru­tal.

How­ever, within hours of the re­port go­ing pub­lic, In­vestec had apol­o­gised to Staude. “To the ex­tent to which it has caused em­bar­rass­ment to Mr Peter Staude, with whom we have had a long and fruit­ful re­la­tion­ship, we apol­o­gise,” said the bank.

A close look at the re­port re­vealed the need for the cring­ingly fast apol­ogy. In­vestec is a bro­ker and ad­viser to Ton­gaat, and pro­vides in­vest­ment bank­ing ser­vices to the su­gar pro­ducer.

Key de­ci­sion­mak­ers at Corona­tion Fund Man­agers, San­lam and In­vestec are known to have had close per­sonal and busi­ness ties with Jooste. This may help to ex­plain the short­age of crit­i­cal anal­y­sis of Stein­hoff.

To the list of di­rec­tors, au­di­tors, bankers and lawyers who have failed in their over­sight role, should we be adding an­a­lysts? And, if so, is it any won­der we em­braced the sus­pect Viceroy re­port with such en­thu­si­asm? ●


of Stein­hoff For­mer CEO Markus Jooste used a mix of bul­ly­ing and ca­jol­ing to con­trol cov­er­age

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