By the num­bers

Financial Mail - - MARKET WATCH - @mar­chasen­fuss

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

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