Lessons to learn

Financial Mail - - MARKET WATCH - @mar­chasen­fuss

Pem­bury Life­style Group, which is cur­rently sus­pended on the JSE, prob­a­bly de­serves a C+ for is­su­ing its unau­dited in­terim re­port only 3½ months af­ter the close of its June year. His­tory will show that com­pa­nies that are sus­pended on the JSE of­ten be­come a lit­tle lax about is­su­ing reg­u­lar re­ports to share­hold­ers. So it seems Pem­bury is keen to re-es­tab­lish its JSE list­ing — even though the mat­ter of the share’s pro­longed sus­pen­sion is not openly ad­dressed in the in­terim re­port.

The half-year num­bers show the pri­vate schools divi­sion reg­is­ter­ing a pre­tax profit of R8.2m and turnover of R45m, with di­rec­tors ebul­liently re­port­ing that “eight of the 11 cam­puses are op­er­at­ing at a pos­i­tive earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion [ebitda] and are thus through the J curve”. I put the ebitda mar­gin at be­low 22%; sat­is­fac­tory, rather than spec­tac­u­lar.

Pem­bury had pre­vi­ously pen­cilled in a tar­get mar­gin of 37% by 2020. That might be achiev­able, but I have my doubts that the com­pany’s schools seg­ment will reach the tar­geted rev­enue of R388m by fi­nan­cial 2020. The bal­ance sheet re­mains brit­tle with cur­rent li­a­bil­i­ties of R45m dwarf­ing cur­rent as­sets if the pre­pay­ment fig­ure of R74.5m is stripped out.

Share­hold­ers would have noted with some dis­may in Pem­bury’s 2017 an­nual re­port that au­di­tors Moore Stephens drew at­ten­tion to the com­pany in­cur­ring a net loss of R26.5m af­ter tax and that cur­rent li­a­bil­i­ties ex­ceeded cur­rent as­sets (again ex­clud­ing pre­pay­ments) by more than R32m.

The au­di­tors said a need was iden­ti­fied for fur­ther fund­ing for the next 12 months — and in­di­cated a ma­te­rial uncer­tainty ex­ists that could cast sig­nif­i­cant doubt on Pem­bury’s abil­ity to con­tinue as a go­ing con­cern.

Moore Stephens also iden­ti­fied re­portable ir­reg­u­lar­i­ties — most no­tably that Pem­bury breached JSE list­ing re­quire­ments by re­pur­chas­ing its own shares on the open mar­ket with­out hav­ing a spe­cial res­o­lu­tion in place.

The di­rec­tors did not per­form the re­quired sol­vency and liq­uid­ity test be­fore em­bark­ing on the share re­pur­chase — a scary omis­sion con­sid­er­ing that the au­di­tor had raised a “go­ing con­cern” flag.

Don’t bet your pen­sion

But that’s not all, folks. New sub­sidiary PLG Re­tire­ment Vil­lages en­tered into agree­ments whereby ten­ants ac­quired life oc­cu­pa­tion rights against pay­ment of an agreed con­sid­er­a­tion. Moore Stephens noted that the Hous­ing De­vel­op­ment Schemes for Re­tired Per­sons Act re­quires that the deeds con­cerned be en­dorsed at the deeds of­fice, but this was not done.

Re­tire­ment Vil­lages did not com­ply with sec­tion 20(4) of the VAT Act, be­cause in­put VAT was claimed on ex­penses that were not valid tax in­voices. This non­com­pli­ance was, ac­cord­ing to Moore Stephens, sub­se­quently re­me­di­ated. Still, the 2017 an­nual re­port gave the im­pres­sion of am­a­teur hour, and per­haps it is pru­dent that Pem­bury re­mains sus­pended while ex­ec­u­tives get their ducks in a row.

The in­terim re­port ex­plains that “the cor­rec­tive ac­tion taken dur­ing the ear­lier part of the year has re­sulted in a vast im­prove­ment in the ac­count­ing and con­trol en­vi­ron­ment, which had pre­vi­ously hin­dered the com­pany”.

Nev­er­the­less those who pitched into Pem­bury’s prelist­ing share of­fer early last year must still be fret­ting.

If any­thing, the schools divi­sion — at this early stage — ap­pears to have po­ten­tial … per­haps even enough up­side to at­tract an of­fer from a big­ger ed­u­ca­tion player.

What is per­turb­ing is the de­ter­mi­na­tion to di­ver­sify into re­tire­ment vil­lages be­fore the schools seg­ment re­ally had a chance to gain proper trac­tion. Pem­bury’s Re­tire­ment Vil­lages gen­er­ated rev­enue of R27.6m and in­curred op­er­at­ing ex­penses of R31.6m in the half year to end-june. The pre­tax loss was R4m off an as­set base of R56m.

The mind bog­gles.

What is per­turb­ing is the de­ter­mi­na­tion to di­ver­sify be­fore the schools seg­ment re­ally had a chance to gain trac­tion

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.