Steinhoff, Tongaat, Omnia... Here's the dead giveaway that you should have avoided these companies, says an asset manager
- Tongaat Hulett has joined a growing list of South African corporate disasters.
- Peter Armitage, founder of asset manager Anchor Capital, says they all share a common denominator: a combination of large debt and slowing earnings growth.
- He has identified a long list of companies that are in a similar compromised position.
- For more stories, go to Business Insider SA.
This week South Africa’s largest sugar producer, Tongaat Hulett – a company that was founded 127 years ago – was suspended from the JSE amid accounting irregularities.
The company has admitted that its financials can’t be trusted, and has asked for trading to be suspended while experts go through its books. Meanwhile, its business is in serious trouble, and some believe it can’t survive.
Tongaat is just one more name on a growing list of recent corporate disasters. Since the implosion of Steinhoff at the end of 2017, some of South Africa’s oldest companies have collapsed – among them Group Five, Basil Read, and Aveng.
- 10 years ago, this company was the largest construction firm in SA. Then it lost 99.5% of its value. Here’s what happened
- A decade ago, Basil Read was SA’s top company. It has just gone bust.
- Once proud construction company Group 5 says a fire sale of its assets is now the only option
Others are teetering on the edge of a grim fate – chief among them the fertiliser and chemicals firm Omnia, once a market darling, which has lost more than 80% of its value. Aspen, the embattled pharmaceutical company, is trying to ensure its future survival while selling some of its assets, while the investment firm Brait, which has lost 90% of its value over the past three years, is bleeding on all fronts.
See also: SA’s biggest medicine company is in meltdown - here's everything you need to know about the crisis at Aspen
There’s one thing common to all of these companies, which should have alerted investors to stay far away, says Peter Armitage, founder of the asset manager Anchor Capital. The dead giveaway was the combination of being heavily indebted and seeing slowing earnings growth.
Armitage, a chartered accountant who has been managing investments for more than thirty years, says other companies that fit this bill include:
All of these companies have seen large declines in their share prices, but Armitage isn’t buying yet.
“Tongaat has been a reminder that you have to be cautious of heavily indebted companies where there is a sniff of earnings being under pressure.”
In the end, these companies are often forced sellers and of their best assets – those that are easiest to sell, with the highest valuations, says Armitage.
“If you have to sell something in a hurry (enforced by the banks), you often won’t get anywhere near a fair value.”
Tongaat, with R8 billion of debt, will probably be forced to sell assets after its R14 billion equity is written down, he reckons.
The alternative is to raise capital, like Omnia. Investors reacted with fury last week after the chemicals company announced a rights issue of R2 billion – after ruling out the option in April. The company is struggling with a debt burden of R2.7 billion, while its total market capitalisation is now only R3 billion.
A rights issue means that more shares will be issued in the company, which dilutes the value of existing shareholders.
“These are done at very low values, and existing shareholders are materially diluted if they do not participate,” says Armitage.
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