The Finance Ghost: Ailing Tongaat Hulett needs a hero

The Finance Ghost: Ailing Tongaat Hulett needs a hero
A worker operates a forklift at a Tongaat Hulett factory, 9 February 2018. (Photo: EPA-EFE / Aaron Ufumeli)

And while holding out for a hero, the company will be entering business rescue. It’s another sad chapter in a tragic story, as the current management team just couldn’t deal with the ongoing economic onslaught and the disasters in KZN.

Tongaat never stood a chance, really. After alleged financial misstatements and mismanagement by the previous management team, the business was in no shape whatsoever to deal with the toxic cocktail of a pandemic, riots and floods.

There was a good effort to reduce debt and a misguided effort to raise equity capital from a potential investor who came with reputational question marks. After that capital raise fell over, the board had to scramble to put together a restructuring plan.

With severe timing pressure to raise sufficient working capital for operations, it just wasn’t possible to get the parties over the line in time. The banks aren’t prepared to put more debt into the group and a facility of R600-million needs to be repaid.

With no other alternatives, the board has put the company into business rescue. This is yet another blow to the KZN economy and it’s not obvious whether there is much equity value left in the business.

Interestingly, the operations in Mozambique and Zimbabwe are not in business rescue as they are self-funding. The local property entity hasn’t escaped the business rescue net.

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From one bad balance sheet to another

The good news for EOH shareholders is that the company is making an operating profit. The bad news is that the quantum only looks good until you see the level of debt that is still on the balance sheet.

With R1.3-billion in debt at the end of July and only R104-million in repayments since that date, there’s still a financial mountain for EOH to climb. It’s quite clear that a significant equity injection is required to create a sustainable financial footing. What we don’t know yet is whether that will be achieved with a new investor, a rights offer or a combination of the two via a strategic underwriter in a deeply discounted rights offer.

At some point, EOH will have to spill the beans.

Foschini Group delivers happy news for retail REIT shareholders

As those who bought overpriced tech companies during the pandemic will now tell you, the world has largely normalised since lockdowns were lifted. I believe that certain things are here to say (like hybrid working environments), while others have bounced back quickly to the way they were.

The most interesting thing about the latest update from The Foschini Group (TFG) is that online shopping numbers are down significantly. Shoppers have returned to the stores, with group-level numbers showing a solid performance even on a like-for-like basis (ie, without the impact of recent acquisitions). In contrast, online sales are down.

Group online turnover fell by 6.9% in the latest quarter, with an even greater impact in the UK (down 16.2%) and Australia (down 25.9% but with a significant base effect of draconian lockdowns in that country last year).

There’s a decent read-through here for investors in retail property funds, as a return to malls by shoppers is obviously good news for landlords. It’s just a pity that interest rates are headed in one direction only, as this affects the returns these leveraged property funds can achieve.

Nothing is ever easy when it comes to business and markets.

Speaking of REITs, can Fortress retain that status?

In what would be a first on the JSE, Fortress is right on the cusp of losing its REIT (real estate investment trust) status through an inability to meet the minimum distribution requirements. This is a function of a complicated dual-share structure that perhaps made sense under normal economic conditions. As any property executive will tell you, there was nothing about Covid lockdowns that could be considered “normal” conditions.

In a last-ditch attempt to save Fortress’ REIT status (as previous efforts with shareholders came to nought), a group of institutional shareholders controlling 59% of the FFA shares and 16% of the FFB shares has demanded a meeting. This group wants an amendment to the Memorandum of Incorporation that would allow for dividends over the next two financial years that could save its REIT status.

The fight is between the FFA and FFB shareholders, as it all comes down to how the economics are split. The challenge is that nobody is quite sure what the loss of REIT status would mean in practice for investors, or what the market reaction would be, so there’s a strong argument to be made that shareholders should try and save the REIT status while they still can.

A 75% approval vote from shareholders is required to make the change. Some gentle persuasion is going to be needed to make that happen.

Keep an eye on Gemfields

The risks of doing business in Africa are well documented. Gemfields is dealing with a particularly awful situation in Mozambique, where the threat of insurgency has become far too real. Northern Mozambique isn’t a safe place and Gemfields had to evacuate its personnel when the violence reached the neighbouring ruby mine.

Under armed guard by the military, Gemfields personnel have returned to work at the Montepuez Ruby Mine and basic operations have resumed.

This clearly puts a significant part of the group at risk, so investors are likely to put a low value on the ruby operations. Thankfully, the emerald mine in Zambia is lucrative and stable.

We can only hope that the violence will stay away from the innocent people working in the mine. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.


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