Lessons to learn
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