By the numbers
Jebb Mcintosh, CEO of perennially profitable vehicle retailer Combined Motor Holdings (CMH), is hardly mellowing with age. In recent years, his commentary accompanying the firm’s financial results has become increasingly sharp around political and economic issues.
In CMH’S latest set of results, Mcintosh lashes out at ever-changing number-crunching rules, raising concerns around “the disturbing impact which some accounting principles can have on the economic realities of business”. Specifically, he raises the ridiculous way in which the company has to account for its numerous property leases: an accounting principle requires the rental charge to the income statement to be equal for each period of a longterm lease.
As he succinctly notes, no allowance is made for the fact that lease payments are adjusted annually to recognise the effect of inflation and high interest rates on property values and required returns. While the degree of distortion is negligible in major economies where inflation and interest rates are negligible, in SA this can materially distort earnings in local businesses, where the rental charge forms a high component of operating expenses. Mcintosh points out that in the case of a 10-year lease with 7% annual escalations, the charge to the income statement in year one will be 138% of the cash rental paid.
This meant CMH suffered an extra R8.8m rental expense compared with the previous year — equivalent to a fall of 8.5c/share.
What’s more, during the latter stages of each lease, the distortion is reversed, and earnings are overstated.
The issue for Mcintosh is that from March next year, CMH will have to adopt a new principle for property lease accounting. This will lead to an even greater distortion.
Under the new method, the year-one charge to the income statement for the same 10-year lease will be 161% of the cash rental paid.
No bountiful dividend (yet)
Readers may remember that in late
2014 Psg-controlled agribusiness investor Zeder had its hands full trying to convince some (feisty) minority shareholders in unlisted Agri Voedsel to participate in a buyout through a shareswap arrangement.
One of the reasons some minorities vigorously resisted Zeder’s advances was that Agri Voedsel — which owned a sizeable stake in Pioneer Foods as its main asset — was a rather good dividend payer. To placate those shareholders, Zeder indicated it would reevaluate its dividend policy.
Well, the record will show that for the year to end-february Zeder, which is not exactly ploughing up new deals to diversify its portfolio, pegged its payout at 11c/share. That’s a modest yield of about 1.8% — and a fair way off the 3% yield on Pioneer Foods.
Former Agri Voedsel shareholders can’t be delighted, especially with their Zeder shares now trading lower than the indicative value (611c/share) at the time the deal was proposed.
Burning down the house
Dutch investor association VEB’S head of relations Armand Kersten called for an atmosphere of “contrition and atonement” at the Steinhoff AGM last week. He also called for more information about the financial standing of the company to allow shareholders to make investment decisions.
Sadly for Kersten, it seems unlikely that audited information will be available before the year end. The only helpful gauge might be the release of unaudited results in June, which means at least another 10 weeks of uncertainty around the solvency of Steinhoff.
Steinhoff chair Heather Sonn — who described the firm as a “burning building” — argued that the board of directors’ contrition and atonement was their commitment to “get through this crisis”.
While it’s noble to remain inside the burning building, the big question lingers: who allowed certain executives to play unsupervised with matches?
Mcintosh has raised concerns about the effect some accounting principles have on the economic realities of business