A cosy club of analysts soft on managers

CORPORATE SA is a fan of the write-off — and we’ve had some whoppers: Tiger Brands (R954million), Standard Bank (R1.6billion), Anglo American ($4-billion) and Exxaro (R5.76-billion)

But who actually pays? Sasfin’s David Shapiro explains.

Where do these write-offs go?

They come off shareholders’ funds. In other words, they come off the company’s capital base.

In the case of Exxaro, if you go to their balance sheet you’ll see that shareholder funds have dropped. That tells you the true picture of the business. Most analysts focus on the income statement and today accounting is designed to allow those errors to vanish. And anybody looking at a balance sheet from one year to the next misses that.

My big gripe is that analysts are much too soft in South Africa on these write-offs and management gets away with it far too easily — justifying why it happened and never ever taking the blame. We never see heads roll.

I sometimes question the role of the nonexecutive director and whether they act as rottweilers or maltese poodles.

So it’s shareholders who pay?

Of course. We take the pun- ishment. And the numbers are quite enormous.

What irked us about the Tiger Brands and Exxaro write-offs is that they come, not in 15 or 10 or even five years, but almost immediately. From the time Tiger handed over the money, everything went south.

Here is a company that has a long history in dealing in fastmoving consumer goods, why were they suckered in? What processes were followed? Did the nonexecs, the guardians of our capital, did they just give a quick approval? Did they ask questions? Did they visit the plant? Or was it a deal brought by an investment banker that they just approved. The biggest one has to be Exxaro. Think of the process: You buy a business, you hand over the money before you have secured the ability to actually take the product to the coast and ship it. Surely you secure those contracts first?

But if businesses aren’t able to write off assets, what would they do?

Proper accounting means you write down your assets to their intrinsic worth. That’s what a lot of the mining companies are doing. You pay for a business but because of a change in circum- stances, the value of the asset is not what is stated in the books and so you write it back.

In those cases, it IS okay? Is that fair?

There’s nothing wrong with that, but you still ask the question, why did management pay so much? Why did Cynthia Carroll pay so much for Minas Rio, for example? They might be justified in the sense that yes, these were our projections at that stage. But where it’s negligent, or there’s poor oversight, we’re entitled to ask questions.

My big issue is that we’re too much of a cosy club here. The whole investment industry is too cosy. We don’t want to offend people, we allow them to get away with a lot without really challenging some of the deals that have gone through.

We shouldn’t have to do that: management should own up. I don’t mind if management say: “Look, we really cocked up here, but these are the reasons why . . . and for that, we are going to forfeit our bonuses.”

How should directors take the pain?

This is over 10% of the market cap — so you would like to know who was responsible. Maybe it highlights poor judgement, that they are not really competent to assess a project.

When they write it off, it comes off shareholder funds, therefore the return on shareholder funds — or equity — in future years, discounts their mistakes, wipes them out, pushes them aside.

Say I take over a portfolio of R1-million. I make a mistake and write off R200 000 but from then on I only work out my returns on the remaining R800 000. So I could say, “This year we’ve done brilliantly — our return was 12%!” — but that only takes us back to R900 000. So we’re still down.

We never punish the management team for that.

Exxaro chairman Len Konar declined to be interviewed on their write-down.

Talevi is a BDTV presenter