Suddenly, it’s cloudy
Shareholders in Dawn (Distribution & Warehousing Network), who were already seeing red, have received another shock: a reported irregularity was raised in the company’s latest set of results to end March.
Earlier this week the building supplies firm dashed hopes that its turnaround effort was starting to work.
It slumped almost R760m into the red after accounting for impairments of R632m.
If having its financial statement swathed in red was not bad enough, the company, led by acting CEO and former Hudaco boss Stephen Connelly, also reported eyebrow-raising restatements of its results. The restatements were disclosed only days after FD Dries Ferreira and risk compliance officer Jan Beukes resigned from Dawn’s executive team.
Dawn’s founder and CEO Derek Tod, who last year (with Ferreira) paid back a R7m bonus, stepped down in April. COO Collin Bishop, who also received a controversial bonus payment, resigned last year.
The first restatement concerns an addendum to a lease agreement on Dawn’s Germiston distribution centre in 2009 that was not disclosed to the board.
A lease liability of almost R86m had to be restated based on a 15-year lease at an escalation of 8%/year to end in 2023.
The second restatement concerns subsidiary Swan Plastics, where the holders of the 49% minority stake had a put option (an option to sell assets at an agreed price) to sell their shares at a five times earnings multiple (based on the average of the prior two years’ earnings). This written put was not disclosed to the board either.
The third restatement is about a share-based payment obligation of R3.8m, previously accounted for as a liability, but which had to be restated as an element of equity. The JSE highlighted the incorrect treatment.
Dawn notes that the first two restatements were “initiated and executed at the time by certain executive directors and senior management” and without the knowledge and approval of the board. The company confirms an irregularity was reported to the Independent Regulatory Board of Auditors. The board has also sought to clarify Dawn’s legal position and its relationship with the people in question. This includes Dawn’s right of recourse against them.
At face value, it seems the irregularities are efforts to inflate Dawn’s earnings.
Chris Logan, CEO of Opportune Investments and a Dawn shareholder, says the developments suggest institutional shareholders sat on their hands for too long. “There is some hope, though. The company now has a ‘Rolls Royce CEO’ in Connelly and an impressive chairman in Diederik Fouché, who is not afraid of doing what is necessary to clean up the company.”
Connelly, who joined Dawn last month, has had his contract extended to 12 months.
But Fouché says things won’t get easier in the short term. Sales will remain under pressure and losses will continue in 2017 in most loss-making businesses. See pages 48 and 54