Swimming against the stream

MD’S upbeat comments on the future of the Namibian economy and his firm’s prospects raise concerns

Namibian investment company Trustco continues to defy investment logic, with its share price surging 10% last Friday despite poor results for the year to end-march.

The share price then plunged more than 20% at the time of writing on Monday — another example of the volatility that has raised the eyebrows of market watchers in the past 12 months.

In commentary on the past year, Trustco MD Quinton van Rooyen seemed oblivious to the company’s weak performance, which pushed the bottom line down almost two-thirds. He said Trustco managed to “maintain its strategy to accelerate growth and development in its nascent segments”.

Refraining from commenting on the obvious operational hitches, he preferred to point out that Trustco’s share price had climbed from 404c at the end of the prior financial year to 875c at the end of the current year. He said this was mainly the result of a ground-breaking transaction with major shareholder Riskowitz Value Fund, which acquired 20% of the group’s insurance segment for R1.2bn.

The FM suspects Trustco’s willingness to repurchase its illiquid shares also played a role. The group purchased about 3m shares at an average price of 758c/share — possibly accounting for a sizeable portion of the number of Trustco shares traded in the financial period.

Instead, Van Rooyen said Trustco is wellcapitalised and poised to take advantage of a recovering Namibian economy.

But his upbeat comments contrast starkly with those of Gerard Swart, chair of Nictus, a retail and financial services company listed on the Namibian Stock Exchange.

Commenting on just-released financial results, Swart noted: “I anticipate the [Namibian] economy will still be in dire straits for some time to come, but with a moderate recovery projected for the next two to three years.”

Swart said there was “a virtual stagnation in the economy” in the 2018 financial year, mainly due to a moratorium on government spending. “Many a project came to a complete standstill as there was almost no cash flow. The influence of this could be felt throughout the economy.”

Considering Swart’s dour outlook for the economy, it seems absurd that Trustco — which spans mainly the insurance, banking, property and mining sectors — should be trading on a trailing price:earnings ratio of more than 40.

Such a market rating pencils in a huge surge in future profits but ignores worrying issues that the FM believes shareholders should think carefully about in the months ahead.

Purely on a performance basis, it is somewhat alarming that Trustco’s turnover has dropped 35%, while its gross and pretax margins have been squeezed down to 65% (85% previously) and 30% (from 47%).

With Van Rooyen reporting that Trustco’s recently acquired diamond mining operations in Sierra Leone contributed R275m in revenue and R139m in profit, one has to ponder the poor performance of the traditional Trustco operations in insurance, banking and property.

While the Sierra Leone operations seem to be chipping in, there has been no progress on the R3.6bn Huso diamond-mining deal in northern Namibia. As far as the FM can ascertain, the mining licence for the Huso mining business is still outstanding, almost two years after the “game-changing” transaction was first mooted.

Once again, the property operations remain contentious. This time Trustco — despite the parlous state of the Namibian property market — put through a hefty fair-value gain on its real estate assets of R466m. A note in the financial statements cites the rezoning of the Lafrenz industrial township as the reason for the increase.

If this fair-value gain were stripped out, Trustco would have been more than R190m in the red for the financial year.

Cash flows were again underwhelming, with reported pretax profits of R241m contrasted with operational cash flows of just R33m. Net cash used in operations was about R380m, with Riskowitz Value Fund providing much-needed fresh capital of more than R1bn (including a loan converted to equity worth R250m). Without Riskowitz’s willingness to pump in fresh capital, Trustco might have found itself in a squeeze.

There is an ominous note in the financial statements that discloses that Trustco was, at the end of the financial reporting period, in breach of certain covenant ratios. The company indicated that the loan terms had not yet been renegotiated.

Under the “going concern” heading, Trustco said that, subsequent to the financial year-end, the group and its longstanding institutional investors engaged to facilitate a potential consensual restructuring of the long-term debt arrangement.

It noted: “Management have received correspondence from the lenders group reserving the rights currently in place, both in terms of the covenants set out [and] the repayment terms.”

It said it had assessed and reconsidered the restrictive financial covenants, “as certain of these are deemed to be outdated as they were entered into as far back as 10 years ago”.

There are plans to replace the original covenants with updated covenants that are “more aligned to Trustco’s current capital structure as well as development and dynamic nature of its operating segments”.

Noting the unconvincing cash flows from operations, the outcome of these discussions will be most interesting. Actually, whatever Trustco does in its new financial year will be worth keeping close tabs on.

I anticipate the [Namibian] economy will still be in dire straits for some time to come, but with a moderate recovery projected for the next two to three years Gerard Swart