More bloody noses to follow as SA’s corporate con is exposed

It’s been a terrible year for corporate SA, from the stock market to the many governance weaknesses that have muddied its reputation. There were scandals in some venerated boardrooms that served as a reminder of just how dirty business can get in this town of Johannesburg. Stellenbosch was dragged into the muck, with Christo Wiese now sitting in the naughty corner along with his self-proclaimed protégé, Markus Jooste. Wherever he is, Jooste must be taking much comfort from the continued bungling of the country’s prosecuting authorities, as seen by this week’s withdrawal of the Estina dairy case. It’s just over three years ago that Wiese addressed the Sunday Times Top 100 event as a recipient of the Lifetime Achievement Award. In his acceptance speech he lamented the appointment of “incompetent” and “fraudulent” people in key management positions at state-owned enterprises. It was a month before the “state capture” narrative would grip the nation with the midnight axing of Nhlanhla Nene as finance minister. But some two years later, Wiese would have a rude awakening to the fact that right under his very nose, and in what was up until then SA’s biggest retailer, Steinhoff International, governance had long ago collapsed and fraudulent people had found a corner office in the company’s headquarters.

Up until November 2017 this was a retailer that was heading towards becoming the emerging-markets version of famed furniture group Ikea. A story of another exceptional South African company being led by an “entrepreneurial genius” in Jooste. Being heralded as such, I wonder just how much pressure (or not) he felt, knowing that the truth of his company was hidden in a maze of accounting funnies. Only a psychology similar to Bernie Madoff’s could continue to live that lie for that long.

The dramatic collapse of a company as large as Steinhoff in a country whose private sector was being held up as an example for all to follow brought some vultures to the yard. Short sellers, specifically Viceroy

Research, emerged on the scene and have caused much angst for companies that have always had investors questioning their actual business case. Either by sheer luck or through dabbling in a bit of insider trading, as some of its biggest critics have suggested, Viceroy was first on the scene of the Steinhoff tragedy. Its research explained accounting oddities that had baffled the auditors of a stock that had grown some

1,568% since it listed in 1998.

With those credentials, Viceroy and its research emerged as a real threat as it warned that it had a list of other local companies that would be targeted with its “truth serum”. Stephen Saad’s Aspen Pharmacare was touted as potential target. It was singled out because investors had grown wary of its acquisition strategy. Instead, it was Capitec Bank, and while the company has largely been able to bat away the concerns, the bank’s shares are only 0.2% higher this year. That’s the slowest growth in a decade, showing that some mud has stuck.

This week Viceroy targeted its third victim, listed property company Nepi Rockcastle, raising some accounting concerns that sent Nepi’s shares crashing. Since the report, management has been trying to ease investor angst, primarily through attacking the integrity of the short seller. Now, there’s something to say about regulating short sellers and ensuring they don’t benefit from just stirring up rumour and gossip. In the absence of such, it’s for Nepi to clear up any doubts about its investment case. Geographic differences in accounting practices is not really a good enough excuse.

Apart from Steinhoff’s collapse, what I think has also made some listed South African corporates vulnerable is the growth of the JSE. If you strip out this year’s 15% slump, the all share more than doubled in value in the 10 years to the end of 2017. In comparison, the FTSE 100 has gained 19%. In that growth there’s some froth, and companies whose investment cases aren’t quite clear will be targeted in the years to come. With the Federal Reserve set on a path of higher interest rates for another year at least, there’s unlikely to be the sugary high of cheap money to cover up for questionable fundamentals. Jittery investors are easy fodder for short sellers with loudhailers. The key is to have a better story than merely geographic differences in accounting practices.

Other local companies would be targeted with ‘truth serum’