The group's share price continued to plummet yesterday, falling nearly 20 percent to a new low of R17.80 as the market continued to discount a massive earnings decline and an investigation that might need its previous results to be restated.
This follows a more than 33percent slide in the share price on Friday, after the company said a financial review showed “certain practices” might require remedial action and PricewaterhouseCoopers (PwC) had been appointed to do an investigation.
Late last month Tongaat warned that earnings for the year to end-March would probably fall at least 250 percent. A major reason is likely to be its land development and conversion operations. At the date of its trading update, no land sales had been concluded since September 2018.
The big impact of this is on group earnings, illustrated by the fact that in the six months to end-September 2018, land development operations had already reported a R30million loss, compared with a R441m profit in 2017.
The group’s land conversion activities are situated along the North Coast and group lower profits cannot be blamed on poor market conditions.
Seeff North Coast licensee Mark Johnson said yesterday: “It’s a very buoyant market. There is a huge amount of activity in developments, particularly in the commercial space.”
A Wakefields residential property company spokesperson said there had been a tailing-off of development activity and demand since the start of the year, mainly due to the weak economy and uncertainty ahead of elections, but it was still busy compared with other parts of the country.
One industry analyst, who preferred to remain anonymous, said however that Tongaat’s problems with land development were more external than internal.
He said the group was likely to be experiencing massive problems, relating to getting municipal administration and approvals completed, and a lack of basic infrastructure capacity such as for electricity and water. These problems were compounded by the sheer volume of the land the group had released on to the market, and the weak economy in general, the analyst said.
“This industry is cyclical and my view is they have become a victim of their own growth,” he said, adding that one mistake management might have made was to rely on long-term property development for so much of their short-term performance.
In 2017 land conversion and development made up almost a third of group operating profit. Tongaat has said no further details will be released until the PwC probe is finished.
The group also has high debt - R7.7bn of it as at September 30, 2018.
One of the first jobs of the new chief executive, John Gavin Hudson, who was appointed from February 1, was to lead a review to restore shareholder returns to acceptable levels and reduce debt.
Earlier last month, two other executives, Martin Mohale, the head of the South African sugar business, and Rosario Cumbi, the head of the Mozambique operations, took early retirement. Sydney Mtsambiwa stepped down also as managing director of Tongaat Hulett Zimbabwe.