Trustco wants to dump NSX, JSE

In addition with its trouble with the JSE, Trustco’s strong liquidity and debt headwinds were again pointed out by an international credit rating agency.

03 December 2021 | Economics

This … presents near-term liquidity risk that, if not remedied over the next 6 to 12 months, could result in another potential debt restructuring or inability to pay upcoming obligations. – Global Credit Rating

Jo-Maré Duddy – With a grim credit rating and a bloody nose from a South African financial tribunal, Trustco Group Holdings now wants to delist from three stock exchanges and is hunting for a “business-friendly international exchange”.

The Namibian-based group on Wednesday requested its shareholders to participate in a non-binding advisory vote to, among others, delist from the Johannesburg Stock Exchange (JSE), the Namibian Stock Exchange (NSX) and the OTCQX in the US. The latter is the top tier of the three marketplaces for the over-the-counter (OTC) trading of stocks in the US.

On Tuesday, Global Credit Rating (GCR) placed Trustco’s long and short-term national scale ratings of CCC- and C respectively on a rating watch evolving.

The CCC- national scale long-term issuer rating means Trustco has “vulnerable financial security characteristics, with an elevated possibility of non-payment of policyholder obligations when due”.

The definition for a C national scale short-term issuer rating states that “without a currently unforeseen circumstance, policyholders are expected not to be paid”.

A CCC and C rating at international credit rating agencies like Fitch and Moody’s means it is below investment grade or “junk”.

“On a current state basis, we consider the financial profile of the [Trustco] group to be weak,” GCR said in its latest announcement.

JSE FEUD

On 22 November, the Financial Services Tribunal (FST) in South Africa dismissed an application by Trustco to reconsider a directive by the JSE to correct and restate its financial statements for the year ending 31 March 2019, as well as its interim results for the six months ending 30 September 2019.

The issues revolves around the waiver of two loans by Trustco’s majority shareholder, Quinton van Rooyen – one of N$545.6 million and the other N$1 billion – as well as certain of Trustco’s Elisenheim properties. The JSE found that the group’s 2019 annual financial statements and its first half-year results in September 2019 did not, in material respects, comply with the International Financial Reporting Standards (IFRS).

According to the JSE the waiver of the loans resulted in gains in Trustco’s financial statements.

For the 12 months ended 31 March 2019, Trustco reported a profit of more than N$725 million, nearly 165% more year-on-year (y/y). In the six months ended 30 September 2019, Trustco’s profit totalled nearly N$738.3 million, a y/y increase of 726%.

On 23 November, Trustco released a statement on the JSE, NSX and the OTCQX, saying it didn’t agree with the FRIP’s judgement.

“Trustco reiterates that the directors, having consulted with its external JSE accredited IFRS experts, and having concluded multiple unmodified audits by two JSE accredited auditor firms, maintain their view that the transactions referenced in the proactive monitoring were correctly accounted for and disclosed,” it said.

Trustco has 180 days to bring a review application to the High Court in South Africa.

“Shareholders are advised that consultations with its JSE accredited auditors, external JSE accredited IFRS advisors as well as minority shareholders are ongoing to consider its options going forward,” Trustco said.

FINANCIALS

Its latest financial results show Trustco suffered a loss of more than N$252.8 million for the six months ended 31 March 2021, up from around N$70.1 million in the same half-year in 2020.

In its credit rating announcement, GCR said while Trusto as a group is very diversified, currently the two core operating businesses are the consolidated student lending unit, the Institute for Open Learning (IOL), and property development.

“The former hasn’t yet gained sufficient scale to significantly improve earnings (despite much improved performance year-on-year), while the latter continues to face tough operating conditions,” GCR said.

The rating agency maintained that net losses are likely to be reported in the 2021 financial year, on the back of a net loss of N$343.2 million in the previous book-year.

“The lack of meaningful earnings and cash flow traction has eroded existing group reserves, raising medium-term liquidity concerns. Furthermore, inherent longer-term vulnerabilities in the leverage and cash flow structure remain, given the quantum of debt (N$1.5 billion at March 2021).

“Without an external cash injection, we expect the very high gearing levels and strained liquidity (sources versus uses of less than 1x) to continue until the resources segment (mainly extraction and sales of diamond) starts to contribute more meaningfully,” GCR said.

GCR expects cash flow and liquidity to remain “highly constrained in the absence of a significant shift in the earnings trajectory”.

“This, coupled with high leverage, presents near-term liquidity risk that, if not remedied over the next 6 to 12 months, could result in another potential debt restructuring or inability to pay upcoming obligations,” GCR said.

According to the agency, Trustco is considering material cash and equity transactions – “monetising part of Trustco’s ownership stake in the resources business” - which could result in substantially improved liquidity levels and growth capital in the short term.

SHAREHOLDERS, PRICE

According to Trustco’s latest integrated annual report (IAR), Van Rooyen owned 63.94% of the group directly or indirectly on 20 September 2020.

The report doesn’t mention any major Namibian institutional shareholding.

Trustco’s headlines earnings per share (HEPS) – a profitability gauge – for the period 1 April 2019 to 30 September 2020 was -19.1c, according to the IAR. For the 12 months ended 31 March 2019, HEPS of 64.2c was reported. The highest HEPS since the 2009/10 financial was 70.8c in 2016/17.

Net asset value (NAV) per share for 1 April 2019 to 30 September 2020 was 205c, compared to 387c for the 12 months ended 31 March 2019 and the peak of 504c in 2017/18.

The IAR 2020 shows the volatility of Trustco’s share price.

The highest share price for the period 1 April 2019 to 30 September 2020 was N$11.35, while the lowest was N$1.79. For the 12 months ended 31 March 2019, it was N$16.00 and N$6.15 per share respectively. In 2017/18, the price fluctuated between N$10.00 and N$2.61 per share.

Trustco’s closing price for the period 1 April 2019 to 30 September 2020 was N$3.15 per share, compared to N$10.47 for the 12 months ended 31 March 2019 and N$8.75 in 2017/18.

Trustco on Wednesday closed at N$1.79 per share on the Overall Index of the NSX.

VOTE

In its announcement on Wednesday, Trustco reiterated its position regarding the JSE directive.

The group, however, added: “Trustco’s professional advisors confirmed that the dismissal of its application for reconsideration puts the board in an untenable position whereby the board is instructed by the JSE … to report in a manner that would not be in compliance with IFRS.”

Trustco said “the unwarranted interference of the JSE is an attempt to usurp the responsibilities and fiduciary duties of the board without any accountability towards shareholders”.

“This undermines the independence, accountability and integrity of the board,” according to Trustco.

The group requested all shareholders, excluding Van Rooyen as the majority shareholder and his associates, to participate in a non-binding advisory vote and to submit their votes by 6 December.

According to the Harvard Law School Forum on Corporate Governance: “The main difference of non-binding voting from the conventional binding voting mechanism is that the vote tally does not, at least directly, determine the outcome. Instead, the management has the discretion to decide whether or not to implement the proposal, even if the majority of shareholders support it.”

MATTERS TO CONSIDER

Matters shareholders have to vote on include endorsing and confirming Trustco’s accounting treatment of the transactions queried by the JSE, like the N$1.546 billion loan write-offs by Van Rooyen.

Shareholders are also asked to support the board’s position that “Trustco’s current listings are not in the best interest of all shareholders”.

Shareholders have to vote to remain in an unlisted environment until Trustco relists on an international stock exchange within a period of not more than 36 months from the date of delisting from the JSE.

Should Trustco fail to list elsewhere within the period, shareholders may give notice of their intention to sell their shares to the group at a price of 10% above the average volume-weighted average (VWAP) price of the group’s share between 1 January 2021 and 30 November 2021, plus 8.5% compound interest from the delisting date to the end of the 36-month period. A VWAP price is the ratio of the value of a share traded to the total volume of transactions during a trading session.

According to the IAR 2020, Trustco’s VWAP for for 1 April 2019 to 30 September 2020 was 6.5c, a drop from 9.98c for the 12 months ended 31 March 2019.

Shareholders can also elect not to remain a shareholder after delisting. Trustco will then acquire the shareholder’s Trustco shares within 36 months from the delisting date at a price of 10% above the average VWAP price of share between 1 January 2021 and 30 November 2021.

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