SA company has admitted its financials are wrong – what you need to know about the crisis at Tongaat Hulett

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  • Tongaat Hulett on Friday admitted that its 2018 financial results were wrong, and overstated its assets by up to R4.5 billion. 
  • The company blamed “certain past practices” for the crisis.  
  • Professional investors are drawing comparisons to Steinhoff.
  • For more, go to Business Insider SA.

Last week, sugar producer Tongaat Hulett said its 2018 financial results will have to be restated.

Tongaat is the biggest sugar producer in South Africa, and operates several maize mills.  It also runs a vast property development agency which develops, among others, the company’s prime properties on the Durban shoreline.

Tongaat has recently been hit by cheap sugar imports, a sugar tax which reduced local demand, and a lacklustre property market. 

But the company’s admission that its 2018 financial results cannot be trusted brought back echoes of Steinhoff which in December 2017 lost 90% of its share price value after it emerged that it had inflated its books. 

Tongaat’s share price has fallen by almost 70% since the start of the year. 

In a shareholder note on Friday, Tongaat said an ongoing financial review has revealed that “certain past practices” do not reflect the company’s business performance accurately. The company’s equity (the value of the business after liabilities) in its 2018 financial results has been overstated by between R3.5 billion to R4.5 billion. 

Is Tongaat a ‘mini Steinhoff’?

In an interview with The Money Show’s Bruce Whitfield on Monday night, Opportune Investments fund manager Chris Logan said that there are similarities with Steinhoff. As was the case with Steinhoff, Tongaat misstated actual income with “huge write-downs” possibly looming. 

These were revealed as Tongaat’s new CEO Gavin Hudson undertook a review of the company’s operations in February.  

“As we got deeper and deeper into the review the news has become more and more alarming and the share price has collapsed,” Logan said. 

But the jury is still out on whether deliberate fraud was committed by the intentionally misstating of income.

“What’s happening at Tongaat is crazy,” one wealth manager told Business Insider South Africa. “Let’s be optimistic that it’s ‘just’ gross mismanagement, and not another Steinhoff. For now, we don’t have enough information.”

Tongaat said its 2019 financial results will likely be delayed to allow sufficient time to identify the “past practices” which negatively affected its books. The financial results will now possibly only be released by October 2019, the company said. In another similarity with Steinhoff, PricewaterhouseCoopers has been called in to review its accounts.

Can Tongaat survive?

Tongaat’s current market capitalisation is R2.2 billion, while its 2018 financial results show that total liabilities amount to R14.6 billion. 

Tongaat in February said its earnings will decline by as much as 250% compared to the R617 million it earned in 2018.  Tongaat blamed its decline in revenue on sugar production which had increased while local sales remained under pressure due to excess sugar which was brought into the country before a price increase. 

It also said the newly introduced sugar tax had a larger than expected impact on local demand, particularly relating to changes in production in the beverage industry. 

To stabilise the business and address debt levels, the company undertook a comprehensive strategic and financial review.  Priority areas identified include streamlining operations, and improving business performance and accountability.

It has since sent retrenchment letters to over 5,000 employees in an effort to reduce costs. 

The company said it is also negotiating standstill arrangements with several creditors to ensure it doesn’t default on its R14.6 billion debt.

Tongaat has already reached a waiver agreement where creditors have, amongst other things, agreed to waive certain of their rights if the company is unable to repay its debt in agreed upon periods. 

Tongaat share price.

Tongaat share price.

Its share price was trading at R16.50 on Monday afternoon, down from R53.17 at the start of the year. 

Tongaat share price.

Tongaat share price.

Tongaat’s share price is down 87% from November 2015, when shares were trading at a high of R173. 

Still, Petri Redelinghuys, founder of Herenya Capital Advisors, thinks Tongaat’s share price continues to be “surprisingly high” for a company whose liabilities are so much more than its assets. “I would’ve expected it to have a much sharper decline.” 

“The best thing for the company to do is admit that it made a mistake, take responsibility and try to fix things. That’s the only responsible thing to do to restore faith,” Redelinghuys told Business Insider South Africa. 

Who is to blame? 

Tongaat has blamed “certain past practices” for the apparent inaccuracies in its books, but didn’t go as far as implicating former CEO Peter Staude nor financial head Murray Munro. 

Staude served as CEO since 2002 while Murray Munro served as CFO since 2003. Both resigned days before Tongaat’s annual meeting in August 2018. 

Analysts who spoke to Business Insider South Africa said Staude should face the music. He received a total pay package of more than R13.5 million in 2018, and R20 million in the previous year – which included a R6.6 million cash bonus.

Who audited the books? 

Deloitte – also Steinhoff’s auditors before its meltdown – signed off on Tongaat’s 2018 financial results.

Tongaat’s audit and compliance committee chairperson, director Jenitha John, resigned a week ago – five days before the company admitted its 2018 financial results cannot be trusted. 

The company said John resigned because of other work commitments. She had been a member of the board since 2007. 

A stockbroker told Business Insider that the public will have to wait for PwC’s forensic report to determine exactly what happened.

“Financial accounts are notoriously complex, but the bottom line is that Staude was a central figure in all of this.” Like Markus Jooste, he was CEO for a long time and the auditors may have grown too used to his way of doing things, the broker said. 

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