Johannesburg - Steinhoff International’s role as the controlling shareholder of JD Group will be put under the spotlight next week when the furniture and automotive retailer releases its interim results with the details behind this week’s dramatic news that JD Group’s profits have been wiped out because of the need to make extra provisions for bad debts.
One analyst queried why Steinhoff, which had been a major shareholder for a number of years and became the controlling shareholder in 2012, had not taken action earlier.
“Minority shareholders are now facing a R1.5 billion rights issue, which will be underwritten by Steinhoff, and they might struggle to secure the most appropriate price for that rights issue,” the analyst said, adding that with the share price sliding this could represent an opportunity for Steinhoff to build its controlling stake.
A number of analysts have also raised the prospect of a clawback of bonuses paid to executive management on the basis of the earnings achieved in the past financial year.
In a trading statement issued on Tuesday, JD Group said it was increasing its impairment provision by R602 million to R1.6bn for the six months to December. In addition, some R495m of bad debts had been written off – up from R184m in December 2012.
Management said the company was adopting a more conservative approach because of “the deteriorating credit quality in both the secured and unsecured lending market”. Management also announced that although total revenue for the group had increased slightly in the six months, “merchandise sales in the furniture retail operations declined”.
This week’s dramatic news from JD Group came before the release of December retail sales data, which revealed a 3.5 percent year-on-year drop and highlighted the extent of the pressure on consumers. For last year as a whole, retail sales growth was just 2.8 percent compared with 4.6 percent in 2012. The December weakness occurred before the worst of the collapse in the rand and the hike in interest rates.
However, analysts said while the weak trading conditions had aggravated JD Group’s situation, its management and Steinhoff needed to explain why action had not been taken much earlier. At the annual general meeting in November last year, shareholder activist Theo Botha raised concerns about the low level of provisions, which he said was at odds with the evident deterioration of conditions in the sector. He was told that the level of provisions and bad debt write-offs were appropriate.
Yesterday Botha told Business Report that if the “more conservative” approach had been taken during the last financial year, it was unlikely that the senior executives would have been paid any bonuses as these payments were linked to short-term earnings performance.
At last year’s annual general meeting the Public Investment Corporation (PIC), which holds 8.5 percent of JD Group, voted against all the resolutions on executive remuneration. On its website, the PIC said it did not agree with the remuneration policies adopted by the board.
“The remuneration policy appears to be inconsistent with best practice; it does not have set targets with clear key performance indicators linked to weightings.” - Business Report