Sugar-coating unpalatable facts

So why did Investec really apologise?

How embarrassing: Investec issued a rapid-response apology to Tongaat Hulett’s long-serving CEO, Peter Staude, for any “embarrassment” caused by one of its analysts suggesting that he step aside.

The suggestion, contained in a note to clients, does seem like one of the more useful insights made by Investec on a company it has had a “buy” recommendation on for much of the past 10 years. This is puzzling, given the weak share price performance over that time. Staude has been Tongaat’s CEO for 16 long years.

In his defence, Staude has had to contend with a difficult trading environment, fluctuating global prices, varying import and export volumes, uncertain government policy and, most recently, a sugar tax.

Despite the poor profit performance and weak share price, Staude has received an extremely generous remuneration package.

It does seem the analyst may have suffered a moment of blinding clarity after studying the annual results. A 37% slump in headline earnings and an almost halving of the dividend wasn’t quite what had been promised in November. Perhaps he felt uncomfortable about all the earlier “buy” recommendations. Given the context, it was quite gentle, a sort of nod to friends to take him off the stage.

“After 10 years of negative cumulative free cash flow, declining returns (ROE now 6% from 19% in FY12A) and nil cumulative earnings growth or share price appreciation, we think it’s time for the CEO since 2002 to step aside.”

Staude, who turns 65 this month, is due to retire in April.

What prompted the apology from Investec? It is not known for its sensitivity to anything other than making money, so it’s difficult to imagine that it was concerned about Staude’s feelings. And as a long-serving, well-paid CEO of a listed company, Staude must have some familiarity with the cutand-thrust of corporate life.

Perhaps Investec deserves brownie points for being so forthright in its apology. “To the extent to which it has caused embarrassment to Mr Staude, with whom we have had a long and fruitful relationship, we apologise.”

This prompts a closer look at the Investec report. At the bottom of page 1 readers are warned the report has not been prepared in accordance with the rules in the Financial Conduct Authority’s Conduct of Business sourcebook “designed to promote the independence of research, and is also not subject to any prohibition on dealing ahead of the dissemination of research”.

Then, at the bottom of page 8, we’re presented with details of that “long and fruitful relationship”. It seems Investec has received compensation from the company for investment banking services within the past 12 months and expects to receive or intends to seek compensation from the company for investment banking services in the next six months. Investec is also a broker and adviser to Tongaat Hulett.

Somebody is owed an apology here; it’s hard to know who.