Sickly sweet

How did Investec persistently recommend this share as a buy?

Right now Investec should be, but probably isn’t, feeling very happy that its analyst Anthony Geard sug gested that Tongaat Hulett’s then CEO, Peter Staude, resign. Geard was prompted to gently make the suggestion (in what he thought would be a tightly circulated note) by the “appalling” financial 2018 results released in late May last year.

Apparently, he was particularly irked by the 37% slump in headline earnings, which didn’t quite gel with the positive earnings and cash flow promised by management a few months earlier. In the context of the prolonged destruction of shareholder value, Geard’s comment — “We think it is time for the CEO since 2002 to step aside” — was equivalent to suggesting Jacob Zuma’s presidency was not conducive to the development of a vibrant democracy.

That’s not quite how Investec saw it. In less time than it takes to down a sugar-loaded soft drink, one of the country’s largest investment managers apologised to Staude: “To the extent to which it has caused embarrassment to Mr Peter Staude, with whom we have had a long and fruitful relationship, we apologise.”

How do you begin to describe the awfulness of that statement? Imagine if amabunghane apologised to Iqbal Survé for Sam Sole’s reports on Ayo Investments?

Anyway, a few months later Staude did shuffle off, a long overdue move that seemed to spark a flurry of truly grim trading updates and dismal interim results in November. The headline loss of R87m was a jaw-dropping turnaround from the previous interim’s headline earnings of R661m. Shareholders were not impressed, though some analysts still recommended a buy – presumably for its recovery potential. As with many other “poor-performing” companies, analysts are reluctant to issue a “dump the shares and run” recommendation.

Tongaat shareholders have just received a trading update that would have justified such a recommendation. It took the new CEO only three weeks to realise how bad the situation was, with the starch and glucose business offering the only ray of light. Headline earnings for the year to end-march will be down a mathematically impossible 250%, which means a loss of around R1bn — before impairments and other issues still to be assessed.

The standout bad news in the update was a paragraph dealing with “land conversion and development”. In the past 10 years Tongaat has been as much a property company as a sugar producer. Since 2008 it has generated R8bn from the sale of very valuable land around Durban. That would have helped to cover much of its sugar capex, which amounted to R11bn in the same period. Puzzlingly, despite the property sales Tongaat was loading up on ever-more debt and now sits with R10.7bn of borrowings.

The trading update answers some of that puzzle: land was sold on credit and some “buyers” have not paid up. How was this possible? Did the board approve these deals, which were washed through the income statement and helped boost earnings and justify generous remuneration packages?

As the Tongaat review process digs deep into this sugary mire perhaps it will uncover some of the details behind the “long and fruitful relationship” Staude had with Investec, which apart from the “step aside” aberration, persistently recommended this share as a buy.

Its apology to Staude, for the analyst’s suggestion that he step aside in view of Tongaat’s appalling results, was truly awful