First published in Daily Maverick 168

Roland van Wijnen, who took over as PPC’s CEO a year ago, must be cringing at the prospect of facing shareholders and analysts when he presents the cement producer’s results next week. Not only are the results very, very late, but they’ve been through more iterations than the UK’s Brexit deal. And Covid-19 alone can’t be blamed for the three-month delay.

It appears that the company doesn’t know how to account for its international operations. Following a big restatement in August, the firm delayed the results again this week after picking up more mistakes in its prior accounts, which naturally affect this year’s.

After deciding that its investment in Ethiopa’s Habesha Cement should have been impaired last year, it discovered this week that there was no need to impair it after all as it was already worth nothing by March last year, as Habesha had already restated its 2019 financials after shifting to International Financial Reporting Standards.

PPC also had to correct the carrying value of option contracts it entered as part of the financing arrangements for its business in the Democratic Republic of Congo. Mistakes were also made relating to non-controlling interests in the company in its financial statements.

All that doesn’t touch on the problems it faces in its home market, with another big rights offer on the cards.

Of course, Van Wijnen can’t be blamed for the accounting fiasco, which occurred before he took over last October. Nor can interim chief financial officer Ronel van Dijk, who replaced Tryphosa Ramano when she departed the group shortly after Van Wijnen’s appointment.

Like Tongaat Hulett, new management is cleaning up the mess left by their predecessors.

Between a REIT and a hard place

Shareholders of real estate investment trusts (REITs) have the Financial Sector Conduct Authority (FSCA) to thank for the dividends they will continue to receive this year – although they are likely to be lower than last year. That’s after the regulator played hardball, saying any dividend cuts should be matched with bonus cuts.

Under the JSE’s rules, REITs must pay out 75% of their distributable income to shareholders within four months of their year-end or face losing their REIT status, which comes with all sorts of tax benefits. The FSCA has already bent the rules due to the impact of Covid-19, giving them an extra two months to make the payment.

The SA REIT Association also wanted more leniency on the potential non-payment, or reduced dividends. I’ve heard that they wanted a two-year reprieve on distributions due to the severe impact of Covid-19 and the lockdown on rentals.

As a quid pro quo, the authority asked the association to get its members to agree to similar waivers of the bonuses of boards and management over the same period to align with the impact on investors. That seems fair to me. After all, investors are drawn to REITs for the lucrative payout ratio so why should they suffer if management doesn’t?

Seems they weren’t willing to go that far. The JSE, which conveyed the requests to the FSCA, said an agreement couldn’t be reached. National Treasury also turned down an appeal for tax relief.

The association says it was impossible to get consensus with all its members on the matter for a number of reasons, including governance structures, employment contracts and shareholder-approved remuneration policies – although it does say many of the REITs have variable remuneration policies linked to performance, which means bonuses will be under pressure.

For some, it’s not a problem. Fairvest’s announcement of a distribution coincided with the JSE’s announcement last week, while Investec Property Fund came forward with its delayed distribution after selling a couple of properties. Vukile Property Fund also declared a final dividend last week. Resilient REIT has remained… er… resilient, although payouts may be lower than previously guided. Attacq didn’t pay a final dividend but its interim dividend was more than 75% of its annual distributable profit. RDI REIT said in May it would hold back on its interim dividend to preserve cash and would re-evaluate its cash and liquidity position after its August year-end. The pressure is on.

The JSE, which enforces the rules, says it will remove the status of any REIT that doesn’t make payment, unless it’s due to solvency or liquidity issues. To date, that hasn’t happened.

The association isn’t giving up though, saying it will continue to engage with its regulators to explore alternative solutions for its members. 

Barloworld catches Saudi attention

Barloworld has caught the eye of a potential suitor: Saudi Arabian group Zahid Tractor & Heavy Machinery Company, which stealthily has been building a stake in the local Caterpillar distributor.

Analysts believe it could be the precursor to a full takeover – although its shares have yet to respond.

After snapping up a 5% stake in Barloworld in April, Zahid Tractor doubled its interest in July and then bought a further 5% last week, making it a significant minority shareholder in the local company.

According to Ingham Analytics, it won’t have bought the shares because it has nothing better to do with its spare cash.

Zahid Tractor’s construction machinery division is one of the biggest Caterpillar distributors in the world, so Barloworld would be a good fit as its equipment division is dominated by Caterpillar.

It’s just wrapped up the acquisition of Wagner Asia Equipment, a big Caterpillar distributor in Mongolia, which complements its other dealerships that sell the big yellow earthmoving trucks in the region.

In an update this week, it said its Equipment Southern Africa division has proved to be pretty resilient throughout the Covid-19 lockdown, while its solid Equipment Russia business managed to grow revenue due to the strong gold sector.

Trouble is, it’s also just landed Tongaat Hulett’s starch business, despite an attempt to get out of the deal due to the potential impact of Covid-19 on its financials.

If Zahid Tractor does make a move on Barloworld, chances are it may not fancy the starch business. Its motor dealerships, car rental and logistics businesses may also be surplus to requirements. Barloworld’s shares are down more than 40% this year and are trading at a big discount to its net asset value of R105.84 at the end of June. Considering the usual bid premium you’d expect in a takeover, they may be in for a recovery. BM/DM