Fierce re­sponse to claims

Viceroy’s crit­ics say it makes money from gen­er­at­ing a neg­a­tive price move based on shaky facts

Financial Mail - - MONEY&INVESTING - War­ren Thomp­son thomp­[email protected]­

Listed prop­erty com­pany Nepi Rock­cas­tle last week be­came the third tar­get of a re­port by con­tro­ver­sial re­search firm Viceroy. Un­like its Stein­hoff re­port, though, the re­ports on Capitec and then Nepi ap­pear to have come up short on cred­i­bil­ity — rais­ing more ques­tions about what the firm’s true mo­ti­va­tions are.

De­spite hav­ing its Capitec re­port de­bunked by the bank and fail­ing to per­suade the mar­ket of its mer­its (Capitec’s share price is now higher than at the time of the Viceroy re­port), Viceroy has again tried to strike fear into the hearts of lo­cal in­vestors with its lat­est re­port, ac­cus­ing Nepi of dras­ti­cally over­stat­ing prof­its from its Ro­ma­nian sub­sidiaries.

Nepi is the prod­uct of a merger be­tween two com­pa­nies that came out of the Re­silient sta­ble. The com­pany op­er­ates pri­mar­ily in East­ern and Cen­tral Europe, with over half its net rental and re­lated in­come be­ing gen­er­ated in Ro­ma­nia.

Viceroy’s blus­ter ap­pears to have worked, ini­tially. Nepi’s share price fell 14% on the day the re­port was pub­lished, wip­ing R9bn from its mar­ket value and evok­ing an in­censed re­ac­tion from the com­pany. “It’s sim­i­lar to shout­ing ‘bomb’ af­ter hav­ing boarded a plane,” says Nepi CEO

Alex Mo­rar.

Viceroy ac­cessed in­di­vid­ual fil­ings for each of Nepi’s sub­sidiaries in Ro­ma­nia and com­pared the cu­mu­la­tive re­sults to the con­sol­i­dated num­bers in Nepi’s an­nual re­port. Prop­erty com­pa­nies like to “ringfence” in­di­vid­ual prop­er­ties from oth­ers in the group by hold­ing each prop­erty in its own com­pany.

Based on its anal­y­sis, Viceroy es­ti­mated that the “true” loss be­fore tax for 2017 amounted to ap­prox­i­mately €41m. But Nepi’s 2017 an­nual re­port shows a profit be­fore tax of €284.8m from its Ro­ma­nian op­er­a­tions, lead­ing to a dif­fer­ence of about €325m.

Mo­rar’s re­buke was swift.

“Viceroy claims it sees the world dif­fer­ently. We can cer­tainly agree on that. We have never been con­tacted by Viceroy and this has led to con­clu­sions that are mis­in­formed.

“I ac­cuse it of ma­nip­u­lat­ing in­for­ma­tion for its own ben­e­fit,” he says.

The com­pany points to the dif­fer­ence be­tween the way the books are pre­pared for the an­nual re­port (in which in­ter­na­tional fi­nan­cial re­port­ing stan­dards are ap­plied) and the Gen­er­ally Ac­cepted Ac­count­ing Prin­ci­ples used in Ro­ma­nia at the in­di­vid­ual sub­sidiary level.

“Viceroy’s claim that Nepi Rock­cas­tle’s earn­ings fig­ures are over­stated is bla­tantly in­cor­rect,” it says.

Nepi pro­vided a rec­on­cil­i­a­tion for the ap­par­ent dis­crep­ancy, show­ing the dif­fer­ences were at­trib­uted to the way the value of prop­er­ties is ac­counted for, how de­pre­ci­a­tion is ap­plied, the treat­ment of in­ter­est in­curred when de­vel­op­ing prop­er­ties, and the ac­count­ing of for­eign ex­change gains and losses.

“Viceroy’s re­port ap­pears to have cher­ryp­icked per­ceived is­sues in or­der to try to paint a bleak pic­ture, where none ac­tu­ally ex­ists,” says Gar­reth El­ston, a port­fo­lio man­ager at Reit­way Global, which spe­cialises in off­shore real es­tate prop­erty funds.

Viceroy it­self came un­der at­tack in Septem­ber, when re­search firm In­tel­lidex ac­cused it of pla­gia­ris­ing its ear­lier re­port on Stein­hoff. In­tel­lidex also ques­tioned how the com­pany is com­pen­sated for its work.

Its crit­ics sug­gest that it ben­e­fits from “short and dis­tort” cam­paigns, es­sen­tially build­ing a “short” po­si­tion in a com­pany ahead of a re­port de­signed to be as dra­matic and sen­sa­tion­al­ist as pos­si­ble, so as to en­gi­neer a big move in the price of the un­der­ly­ing shares be­fore qui­etly

ex­it­ing its po­si­tion.

In eval­u­at­ing this claim it is worth high­light­ing an im­por­tant point about the way Viceroy con­ducts its anal­y­sis. It chooses not to en­gage di­rectly with the com­pany on the is­sues it dis­cov­ers, which in the case of Capitec and Nepi would have avoided mis­con­stru­ing is­sues.

The firm says it does not en­gage with man­age­ment be­cause “they don’t an­swer our ques­tions”.

But even the most so­phis­ti­cated in­vest­ment man­agers need to clar­ify and un­der­stand the de­tail be­neath pub­lished fi­nan­cial ac­counts be­fore they make a call on a com­pany in either di­rec­tion.

The ab­sence of any in­ten­tion to un­der­stand how those spe­cific com­pa­nies put their num­bers to­gether seems to add weight to the ar­gu­ment that Viceroy doesn’t re­ally care about the de­tail be­cause it makes money from gen­er­at­ing a neg­a­tive price move — and you don’t need the facts to do that, just a good story.

Af­ter fall­ing 14% on the day of the re­port, Nepi’s share price be­gan ris­ing. At the time of writ­ing, it had re­cov­ered to R109 a share, still R5 off the price it was trad­ing at prior to Viceroy’s in­volve­ment.

“The wild swings in the price [of Nepi] un­for­tu­nately show the ten­dency of cer­tain in­vestors to over­re­act to ac­cu­sa­tions in­stead of facts, or at­tempt to force prices down for the ben­e­fit of their own po­si­tions,” says El­ston.

“It un­for­tu­nately shows how easy it is to po­ten­tially ma­nip­u­late the mar­ket by re­leas­ing re­ports that make the claim of be­ing ‘for ed­u­ca­tional pur­poses only’ but are re­leased to sup­port a po­si­tion that has been taken in the mar­ket either by Viceroy Re­search or its clients.”

The 49,000m² Prom­e­nada in Novi Sad, Ser­bia’s sec­ond-largest city, is Nepi Rock­cas­tle’s new­est re­tail de­vel­op­ment in Cen­tral and East­ern Europe

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