/ 16 February 2018

Reports erode faith in Resilient

Explaining to do: Des de Beer
Explaining to do: Des de Beer

Three separate analyst reports in the last 11 days highlight serious concerns about the JSE-listed Resilient Group. The most alarming allegation is that it has artificially propped up its share price.

The property group flatly denies the claims but this has not allayed some fears of a Steinhoff-like redux as market players await the outcome of a JSE investigation.

The reports, not intended for the public, were produced by assets managers Navigare, Arqaam Capital and 36One Asset Management. The latter’s was the most extensive and the most damning.

The 36One internal research report, leaked to the market last Friday, concluded that the premium valuation of Resilient Group’s shares, often described as overvalued, arose from “insider-directed and insider-related transactions in group companies’ shares to deliberately inflate share prices and volumes traded”.

By doing so, Resilient could keep its stock in the Top 40 Index, which added to its value and where index tracking funds would be forced buyers of the stock, the report alleges.

This was made possible, first, because of a convoluted group structure within which four companies in the Resilient stable — Resilient, Fortress, NEPI Rockcastle and Greenbay — own stakes in each other and trade inter-group shares frequently, according to both 36One’s and Arqaam’s analysis.

Group company shares are also traded through its black economic empowerment (BEE) trusts. These have not been consolidated into the group and this may not comply with International Financial Reporting Standards (IFRS), 36One claimed. It suggested this was done to create other related parties through which share prices and volumes could be manipulated but also, if consolidated, would be a drag on growth within the group, “representing a headwind for the cycle to continue”.

Arqaam’s report said the non-consolidation potentially distorts the economic substance of the structure by inflating income, and the BEE structure could be underwater.

In a 12-page response document, the Resilient Group justified the trades and said “36One’s untested allegations of concealment, deception and share-price manipulation are not substantiated and we believe will not stand up to independent scrutiny”.

The group’s share price dropped 7% after the 36One report was leaked last week but its market valuation has dropped by more than 30% over the past month, wiping R11-billion off its then R55-billion market capitalisation.

The company accounts for about 34% of the listed property sector’s market capitalisation. Its unusually fast-growing dividend has made it particularly attractive to investors. The Public Investment Corporation, which manages the Government Employees Pension Fund, holds the largest share — 10.81% — of the Resilient Group.

Resilient said the views of 36One are being informed by its large short position on Resilient stock (meaning they stand to profit if the share price drops) rather than by objective analysis.

Short-selling is a common feature of global markets. Asset managers go short on a share because they are negative about a company.

But the reports on Resilient come at a time when short-sellers are being viewed with suspicion after a recent report by short-seller Viceroy Research made damning, but very flawed, claims about Capitec bank. The bank’s share price was knocked on the day of the announcement but the only permanent harm appears to be to Viceroy’s reputation. Before the release of the Viceroy report, there was speculation that it could be on the Resilient Group.

Regarding Capitec, it appears Viceroy didn’t issue a well-documented report, said Wayne McCurrie of Ashburton Investments. “36One is very different. They are well-respected and there are true professionals in there. I don’t think they are doing a Viceroy on us simply to get the price down.

“As we stand now, we don’t know who is right. That must still be judged,” he said. Only an independent investigation can reveal the facts, he said.

The JSE’s market regulation division is looking into the claims and it could refer the matter for investigation by the Directorate of Market Abuse at the Financial Services Board (FSB).

To trade on insider information, or with the primary aim of getting the share to be included in an index, is illegal, said McCurrie.

A good indication of whether this is the case ishigh trade volumes, as one expects management to take up these shares as a long-term investment,
he said.

The Mail & Guardian contacted a number of analysts of the listed property sector but the majority declined to comment. An Arqaam analyst asked the M&G not to refer to the report but did not provide reasons.

Those who did comment would only do so on the basis of anonymity.

When asked whether these concerns about the Resilient Group had come out of the blue, one asset manager said: “There has been chit-chat among traders but the buy side doesn’t really get too vocal.”

Another said the market had been aware of a number of issues raised in the reports, such as the non-consolidation of the BEE structure and the cross-shareholding of the companies, which were “well understood by the sell side, although it was not happy with it”.

But allegations of insider trading, if substantiated, would derail the investment case, the analyst said.

If the allegation of improper trading stands, “it would be a catastrophe,” said McCurrie. But he is comforted by the fact that, because of the nature of a property company, the damage would be more limited than Steinhoff.

“If management is caught manipulating the share price, management gets fired. It would be catastrophic for the share price but it won’t be down 90% like Steinhoff’s,” said McCurrie.

Property companies have actual assets, such as buildings and land, and earnings of rental income are often cash, which limits the scope for overstating net asset value and income, he said.

Some asset management industry insiders have said the Resilient Group are quick to cut off their critics.

“There is general consensus on the sell side that you do struggle to get corporate access if you put out a negative review.”

36One would not comment on the report. It said a version of it had been leaked and an investigation was underway to see how this happened.

But it said the firm had been uninvited from the Resilient result presentation last month and so could not engage with the company.

Resilient chief executive Des de Beer said the position of 36One was understood and a one-on-one meeting was deemed preferable — an opportunity which the asset manager did not take up.

One analyst said: “Resilient has been good in a sense that they are engaging with investors and addressing issues and have given the public a forum to address concerns. But it doesn’t clear their name. The FSB needs to come out with a report, as does the [Resilient Group’s] audit committee.”

The M&G has not seen the four-page Navigare report but the company said media had incorrectly reported that it had made allegations relating to the net asset valuation of the company and suspicious trading activity.

Murray Dicks, the reputation and risk leader for Deloitte Africa’s legal counsel, said the firm is aware of the reports about the Resilient Group but “stand by our audit processes and the quality of our audit services to our clients, and will continue to meet and exceed our obligations as auditors”.