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2017 was a watershed year for ethics and its impact on financial results and share prices in South Africa. A whole raft of companies reported financial irregularities or misrepresentation of numbers being discovered and addressed. Of course most notably was Steinhoff International which saw the dramatic fall of a market darling after it announced there were financial irregularities in their books and financials published as far back as 2015 cannot be relied upon and will need to be restate. But Steinhoff was not the only one.
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Poor ethics and financial reporting hurts Steinhoff, EOH and Rolfes
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So which other listed entities had financial statement irregularities or serious ethical issues?
Well there was Rolfes (RLF) which reported financial irregularities and numbers that had to be restated. The following was written about it online at Businesslive.co.za
"Chemical and mining group Rolfes has re-stated its expected headline earnings for the year to end-June after the identification of accounting errors and understatements of impairments relating to prior periods.Accordingly, the results for the year ended June 2016 and the interim results for the six months ended December 2016 will be re-stated. Normalised headline earnings per share (HEPS) for the half-year to December 2016 has been re-stated to 28c to 32c from 37.8c, and to 39.9c to 48.1c from 55.9c for the year to end-June. HEPS for the year to end-June is expected to be between 38.3c to 46.8c, a variance of -7% to 14% from the re-stated data. The group is expected to report results at end-September."
"Chemical and mining group Rolfes has re-stated its expected headline earnings for the year to end-June after the identification of accounting errors and understatements of impairments relating to prior periods.Accordingly, the results for the year ended June 2016 and the interim results for the six months ended December 2016 will be re-stated. Normalised headline earnings per share (HEPS) for the half-year to December 2016 has been re-stated to 28c to 32c from 37.8c, and to 39.9c to 48.1c from 55.9c for the year to end-June. HEPS for the year to end-June is expected to be between 38.3c to 46.8c, a variance of -7% to 14% from the re-stated data. The group is expected to report results at end-September."
Then there is EOH. The IT market favourite whose share price has been slowly declining from the dizzying heights it reached. And then all of a sudden (in early December 2017, around the time of the Steinhoff revelations and collapse, EOH lost around 35% in a day. At which point the share was down 72% for the past 12months). But it went largely unnoticed as all market participants were focused on the pounding Steinhoff was receiving.
According to businesslive, "In April, investigative journalism unit amaBhungane implicated the company in wrongdoing involving information technology contracts at the social development department. The article was later amended to reflect that no evidence was found to prove that EOH had acted unlawfully in winning such contracts — an allegation the group strongly denied."
Owner and author of smallcaps.co.za, Keith Mclachlan was quoted by businesslive as saying the following "The market is saying it doesn’t trust that EOH has communicated the full picture," he said. "I stopped going to their results presentations a few years ago because they gave no detail [and] answered direct questions with vague answers." McLachlan estimated that a fifth to a quarter of EOH’s business came from the public sector"
According to businesslive, "In April, investigative journalism unit amaBhungane implicated the company in wrongdoing involving information technology contracts at the social development department. The article was later amended to reflect that no evidence was found to prove that EOH had acted unlawfully in winning such contracts — an allegation the group strongly denied."
Owner and author of smallcaps.co.za, Keith Mclachlan was quoted by businesslive as saying the following "The market is saying it doesn’t trust that EOH has communicated the full picture," he said. "I stopped going to their results presentations a few years ago because they gave no detail [and] answered direct questions with vague answers." McLachlan estimated that a fifth to a quarter of EOH’s business came from the public sector"
And of course 2017 in the markets will always be remembered as the year in which Steinhoff got itself beaten into submission after the announcement of financial irregularities, and subsequent announcement regarding the size of the "hole" in Steinhoff's books being around R96billion. And an even later announcement that Steinhoff Internationals financials from as far back as 2015 cannot be relied upon and will have to be restated.
The graphic below shows the share price fortunes of the three not so ethical businesses share price performances over the last 3 years. And it should send a very strong and clear message to other directors running listed companies on the JSE. The market has no tolerance for such behavior. Now if only directors involved in illegal or unethical conduct will start to be prosecuted properly.
The graphic below shows the share price fortunes of the three not so ethical businesses share price performances over the last 3 years. And it should send a very strong and clear message to other directors running listed companies on the JSE. The market has no tolerance for such behavior. Now if only directors involved in illegal or unethical conduct will start to be prosecuted properly.
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