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
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