Welcome openness in commentary over losses

II AM A SHAREHOLDER (or at least a preference shareholder) in deep-value investment company RECM & Calibre (RAC), which really makes an effort in its financial statements to provide in-depth and frank commentary rather than the mundane corporate-speak so typical of many companies on the JSE.

I was looking forward to this year’s final results (to end March) to see how the company dealt with its disastrous investment in building supplies group Distribution & Warehousing Network (DAWN).

RAC could easily have skirted around the issue. But executive chairman Piet Viljoen was determined not to let a good disaster go to waste, reminding shareholders that RAC invested R92m in DAWN via an emergency rights issue about two years ago. He summarised: “The cash was not enough, the company was not strong enough and the turnaround did not turn around. This year we decided to accept an offer of 1c a share from a consortium in a

going-private transaction, rather than commit more capital to the business.”

He added for good measure: “Apart from the R91m of capital we lost, this investment also consumed an inordinate amount of our partner Theunis de Bruyn’s time — two very valuable assets we can never get back. Talk about a permanent loss!”

The scoreboard will show that DAWN cost RAC 139c a share in NAV.

The next challenge for RAC will be to deal with diamond miner Trans Hex. Over this Viljoen’s commentary betrays a sense of weary resignation. He notes: “We should have passed on this opportunity … Our skills in evaluating mining prospects turned out to be no better than the next. West Coast Resources looked like a fantastic project on paper. In the real world, it has consistently fallen short of even our very low expectations.”

Trans Hex has cost RAC another 150c a share in NAV.

The contrition over both Trans Hex and DAWN contrasts starkly with the matterof-fact commentary provided by another investment company, Brait, on its blowout investment in UK fashion business New Look in its latest financial report.

Two key lessons from Trans Hex and DAWN is that RAC relied too heavily on “skin in the game” from our partners as a screen for positive outcomes; and that in turnaround investments minority stakes don’t work. I trust these “school fees” will inform better deals and improved returns over the longer term.

On a separate issue, I would like to express my appreciation to the team at Intellidex for an authoritative and informative survey on the local private banking and wealth management industry. Congratulations to all the winners!