Why everyone should be watching the JSE’s fight against Trustco

Quinton van Rooyen, the Namibian founder of Trustco, is scathing when it comes to SA’s largest stock exchange, the JSE.

“If the JSE can just tell an auditor, ‘listen, you must change your opinion, or you should have looked at a transaction in a specific way’, then I don’t want to be a JSE-listed company, quite frankly,” he told the FM this week.

These are fighting words — but you’d expect nothing less, given what’s at stake in an increasingly bitter battle between Van Rooyen’s company Trustco, one of Namibia’s largest investment companies, and the JSE. 

Last week, that clash ended up in the high court in Pretoria, where Trustco is fighting to overturn a ruling by the JSE that it “failed to comply with International Financial Reporting Standards and should restate its financial statements” for 2019.

Strip out the corporate lingo, and what the JSE is really saying is something quite far-reaching: that Trustco — a company listed on exchanges in SA, Namibia and New York with 3,723 shareholders — published financial accounts that didn’t properly reflect what’s going on at the company. Investors, in other words, are being misled.

But Van Rooyen, 57, and Trustco flatly refused to revise its accounts. Instead, they are fighting tooth and nail, arguing that any attempt to get it to overhaul its financial statements amounts to undue “interference” in its business.

In May last year, Trustco appealed against the JSE’s decision to the Financial Services Tribunal — and lost. Then, when the JSE threatened to suspend Trustco’s listing unless it complied, Trustco got an interdict to stop that, while it went to the high court to get the decision overturned.

That review application was heard last week by Judge Sulet Potterill, though no date for the judgment has yet been given.

From the outside, it might seem like an arcane scrap involving a relatively small company on the fringes of the JSE. Trustco, after all, has lost 93% of its value in the past three years and is now worth just R856m. 

However, the judgment should be keenly watched, since the outcome has deep implications for whether investors will ever be able to trust that financial statements published on the JSE’s platform are a fair reflection of reality.

Andre Visser, the JSE’s director of issuer regulation, argued in an affidavit for last week’s case that Trustco’s defiance has the potential to cause “very serious harm” to investors. 

“Any number of the recent large corporate accounting scandals demonstrates the scale of the potential harm. The recent collapse of the Steinhoff group is just one example,” he says. The JSE says Trustco doesn’t seem to appreciate that a company’s financial statements ought to be a “faithful representation” of the economic substance of what’s taking place in a company.

“Trustco imperils the JSE’s ability to protect investors, to promote investor confidence, to ensure the integrity of the market, to ensure that holders of relevant securities are given full information, and to ensure that full and timeous public disclosure is made,” he says.

Those are some pretty serious allegations.  But Van Rooyen tells the FM the JSE is simply wrong. He says two sets of accountants hired by Trustco signed off the accounts, attesting to the fact it complied with International Financial Reporting Standards (IFRS).

“You know, if a regulator tells you, listen your financial statements are not correct, 99.9% of the time, the regulator is correct, because the regulator is meant to know best. But in this instance, it is not. Simply, it does not know best,” he says.

But surely it’s the job of the JSE to scrutinise accounts, and order changes where it doesn’t believe it’s a fair reflection of reality? This imperative is even more pronounced after the accounting scandals that buffeted SA: Steinhoff’s accounts, after all, were wrong to the tune of R106bn, while Tongaat Hulett’s were overstated by R12bn. 

It’s a comparison Van Rooyen doesn’t like. “The JSE should always look out for fraud and for wrongdoing. So that’s their job, that’s why they’re there — but in this case, they’re overreaching,” he tells the FM.

“We know what happened in Steinhoff, and we know what happened in Tongaat, but to compare these transactions with those is just completely wrong. And the JSE will pay for it,” he says.

Steinhoff, he says, was a fraud “finish and klaar” — but Trustco is simply trying to disclose its financial position as best it can, and it’s being punished for that.

Before we delve into the specifics, you might be wondering: who is this company that has taken a stand against the JSE? And why is it doing it? In his personal profile, Van Rooyen describes himself as “a prominent son of the Namibian soil” who was born in KwaZulu-Natal. He says that after completing his LLB in 1992, he joined a local law firm, “but found that simply practising law was not enough, and instead set it upon himself to brave the law from the business side”. As a result, he bought 100% of a property development company called Trustco for N$100 (about R100, because the rand is equal to the Namibian dollar) in August 1992.

Since then, Trustco has grown impressively. Today it owns the Trustco Bank Namibia, an insurance business, a property arm, an education business and, most intriguingly, a diamond mine in Sierra Leone. 

Van Rooyen comes across as a gruff, grab-it-by-the-horns CEO as his blunt LinkedIn motto — “Get up and create wealth for yourself” — suggests.

Revaluations, and profit machinations

So what is the bust-up with the JSE all about? And why is it so critical for the integrity of SA’s business environment? It all began in 2020, when the JSE said its “proactive monitoring” had flagged a number of issues in Trustco’s 2019 financial results.

This included: 

1) A vanishing R1.5bn loan

In the year to March 2019, Trustco reported a profit of R725m. But if you look deeper, you see this is mainly due to a R546m “one-off gain” it got thanks to money it owed to Van Rooyen, which was suddenly “waived”.

The story is that, in 2015, Trustco bought a company called Huso from Van Rooyen’s family (which also owns 64% of Trustco) for R3.6bn. Because Van Rooyen had earlier lent R546m to Huso, this was then carried as an “equity loan” into Trustco’s books. 

In 2019, however, Van Rooyen decided to “waive” repayment of that entire R546m loan — and, controversially, Trustco then included this as a “gain” in its operating profit for the year, vastly inflating its bottom line.

The JSE argues this should never have been classified as a “profit”, as this infringed the IFRS rules, but credited to the reserves instead. Trustco disagrees, saying its auditors double-checked this.

But a few months later, Van Rooyen’s benevolence kicked up a notch: in the accounts for the six months to September 2019, he “waived” another R1bn in loans that Trustco owed him — and again, the company reports that “gain” as a profit. 

The end result: Trustco announced a R738m profit for those six months, even though it made only R320m in revenue, and had a net cash outflow of R142m. Had Van Rooyen not written off that loan, Trustco would have made a R262m loss.

2. Big profit from reclassifying property 

In that 2019 financial year, Trustco also decided to “reclassify” properties it owned in the Elisenheim development outside Windhoek from “inventory” (which it was trying to sell) to “investment properties”, ostensibly because it had “changed its business model”. 

This had the effect of boosting its revenue for the year by an epic R984.4m (which worked out to R693m after costs), effectively cloaking what would otherwise have been a drop in revenue. 

On this point, the JSE said the IFRS rules don’t allow companies to treat these sorts of “gains” as revenue.

An act of benevolence?

The JSE then referred this dispute to a special advisory body, known as the Financial Reporting Investigation Panel (FRIP), which agreed with the JSE that Trustco ought to reverse these “errors”. Van Rooyen, seething, referred it to the Financial Services Tribunal.

But on November 22 last year, Judge Louis Harms issued a 28-page ruling agreeing with the JSE. Harms said there was “no reasonable commercial rationale” for Van Rooyen to have waived the loans. 

Strangely, after the tribunal’s ruling, Trustco pushed through a shareholder vote to endorse its accounting treatment. This apparent bid to rectify, in form at least, an accounting issue through a shareholder vote was exceedingly odd.

It was also pointless — it will ultimately be Judge Potterill who will decide if the JSE overreached, or if Trustco will have to do as it was ordered.

So why did Van Rooyen agree to simply write off R1.5bn in loans, artificially altering Trustco’s profit? After all, most people owed R1.5bn would do their damnedest to ensure they get paid — not scrap the debt.

“I’m not most people,” Van Rooyen told the FM, when asked.

“If I have $1.5bn in loans, there must be a reason why it is being done. And that is because this is a family-owned business, and we take decisions for the long term. The market will see, at some stage, what we really bought with that loan — it’s a prized asset in Sierra Leone.”

Here, Van Rooyen is referring to the diamond mine in Sierra Leone, called Meya, which is owned by Huso. By writing off the loan, he says the thinking was that “we can get the mine going as quickly as possible”.

He says: “I hope shareholders will look at it, and say ‘wow, these guys [lent] R1.5bn to the mining [concession] and they’re willing to write it off, so there must be something special there’.”

The JSE, however, has a less altruistic explanation for why Van Rooyen might have written off that loan. This explanation is that, as part of the 2015 deal to buy Huso, Trustco agreed to an “earn-out” deal that would see it issue a huge number of shares to Van Rooyen, provided it met certain profit targets.

And it was only thanks to the fact that Van Rooyen waived R1.5bn in loans that it met these targets, and he got the shares.

In its court documents, the JSE says Van Rooyen “was compensated for the forgiven loan by receiving additional shares in terms of an earn-out clause.”

In other words, it wasn’t entirely about Van Rooyen’s benevolence, but rather a route to getting a greater number of shares in Trustco.

A 93% loss of value

Van Rooyen is billing this argument as the JSE overreaching, arguing that Trustco is fighting a valiant fight on behalf of all auditors whose opinions could just get turfed out if the JSE doesn’t like them.

“Trustco has not actually breached any of the JSE’s rules, any accounting standards, or indeed any regulatory framework at all. The JSE merely dislikes the result of Trustco’s accounting treatment of these transactions,” it argued in court.

It says that “far from finding any material breach or irregularity with Trustco’s approach, the JSE merely asserts that it would have done it differently”.

Van Rooyen tells the FM that if the company were to restate its accounts as the JSE wants, its financial statements might then have to be “qualified” — where an auditor expresses reservations about the financial statements. 

“There’s such a thing as the business judgment rule. If boards do the job properly, as happened in our case, they should be left to run the business. If boards are corrupt or negligent, it’s a different story,” he says. “But in our case, where your advisers and auditors are accredited by the stock exchange, and they tell you ‘this is how you should account for a transaction’, it’s difficult to do it any other way.”

Quinton van Rooyen jnr,  Trustco’s MD and son of the founder, told Radio Nova 103.5 in Namibia recently that his company can’t afford to roll over. “A qualified audit report also becomes an automatic event of default with lenders and borrowers in the group. So a qualified audit report, by default, puts the going concern status into question,” he says.

To outsiders, it might seem a little masochistic that Trustco is fighting so hard to retain its listing on the JSE, when there’s such bad blood. Why not just call it quits and delist — especially since the listing hasn’t exactly been a thumping success?

Over the past three years, its share price has lost 93% of its value, and is now at an eighth of its last stated NAV — a gaping discount that suggests the market doesn’t trust the value Trustco puts on its business.

Asked why he believes the stock has plunged so dramatically in recent times, Van Rooyen says there are a lot of factors — but the fight with the JSE is one of them.

“First, the market perception of the share price, given the fight with the JSE [hasn’t been positive],” he says.

But he says Trustco can’t simply raise the white flag, and delist while there’s a cloud hanging over it. Rather, says Van Rooyen, the company is obliged to challenge this in court.

Investors will be hoping that something happens to reverse the horrendous value destruction. A year after listing, Trustco’s share price slumped to a record low of 30c in 2010, but then fought back to a high of almost R16 in early 2019 ... before slumping again to 45c. 

At this point, Trustco is valued at R856m — considerably lower than its stated net asset value of R6.5bn in its financial statements in February.

In its half-year report, Trustco bemoaned that its compound annual growth rate (CAGR) of 84% in capital and reserves since inception isn’t reflected in the share price (which has grown only 3.89% a year). 

Had the share price mirrored the growth in capital, it would be trading at R68.30 a share, Trustco said, adding that “this is an issue that needs to be addressed by the board as soon as possible”.

That seems a wildly optimistic valuation. After all, a R68.30 share price would put the value of Trustco at close to R110bn — twice the size of Old Mutual’s market value, 30% bigger than both Remgro and Bidvest, and about the same size as Nedbank. 

Analysts are deeply sceptical over these values.

Anthony Clark, the top-rated analyst for small cap shares, consistently refuses to cover Trustco.

“I’ve been wary of Quinton van Rooyen and the way they ran the business for a long time,” he says. “And of course, the constant drama of restated numbers, questions over the value of the property assets, the diamond investments and Van Rooyen himself was a red flag to me.”

Clark says Trustco was persona non grata among most of the established blue-chip investment funds, and this was “principally because of the uncertainty of the accounting practices that it would regularly engage in”.

Part of the problem is that for years Trustco hasn’t been able to generate reassuring cash flows that match its profits — always a red flag for investors. Much of the profit gains have been achieved by revaluing real estate, changing the status of assets or, in recent years, writing off loans.

Nor is this just an issue of the 2019 results. Trustco’s half-year results to February this year aren’t any more comforting. Here, it reported a profit of R579m, but its revenue was just R52m. This was because its investment income was R103m, while it also recorded a R551m inflow from a “gain upon disposal and reacquisition of subsidiaries”. 

And, despite the bumper profit, there was no income tax recorded. Cash flow was negative to the tune of R39m, and the cash balance had been whittled down from R71m to R38m.

This is the same worrying pattern as previous years.  In 2016, it reported R420m in profit, yet produced R4.7m of operational cash flow; in 2017, R514m in profit was juxtaposed with a net cash outflow of R73m; in 2018, its R246m in profit contrasted with a cash outflow of R319m. And that infamous 2019 year saw R725m in profit, against a net cash outflow of R149m.

Asked about this, Van Rooyen says any sophisticated investor would “go and look at the sensitivity analysis” to get a breakdown of where its money comes from. “You can’t just look at the revenues ... the disclosures are part of the financial statements. If you don’t read a number with a disclosure — and it sounds like that’s what you and thousands of other people have done — you [don’t get the full picture],” he says.

‘A fight for market transparency’

Despite these anomalies, Trustco still has its backers.

Most notable of them is New York-based Sean Riskowitz,  a big investor in the company.

Riskowitz has been beating the drum for years and, in 2018, he said investors “really need to do the work to understand the brilliance of the business model”. 

He added: “The company is dynamic and opportunistic, creative and ambitious, and has created a vehicle with one of the best capital allocation records of which I am aware.”

The valuation of Huso (see sidebar) as well as other deals might suggest otherwise. 

Small cap expert Keith McLachlan, investment officer at Integral Asset Management, for example, dismisses Trustco in one word: “uninvestable”.

Albie Cilliers, an independent investor, first raised red flags about Trustco in 2012. “Any investor still buying Trustco, after doing just a little bit of research, only has themselves to blame for their results,” he says.

He points out that the JSE first raised questions about Trustco’s accounting in 2012, leading to the company restating its 2010 and 2011 financial statements.  

On the court case, he says IFRS accounting standards are often an issue of opinion, so it’s hard to say whose opinion the judge will find more persuasive.

“That’s why it’s so important to have trust in the ethics and moral standards of business people you deal with, and in whose shares you invest.  That’s why I invest a great deal of time in background checks,” he says.

At this point, it seems Trustco’s fate rests in the hands of the North Gauteng High Court.

If the JSE wins the fight, and Trustco is forced to restate its accounts, one source in the Namibian financial services sector tells the FM he is worried this could cause nasty ripples in the fragile Namibian economy.

“The company employs thousands of people. If the adjustments that the JSE insist on are put through, Trustco’s NAV could reduce dramatically. The rate at which the company has burnt cash over the past years means that the restated NAV could be eroded very quickly,” he says.

Nor does it help that Trustco was ordered by a UK court last year to pay R357m to UK-based investment group Helios, which lent Trustco $40m in 2016. (Trustco has, however, appealed against that ruling.)

But the way Visser sees it, this issue is about far more than Trustco. It’s a fight for market transparency, and for greater accountability among listed companies.

“Trustco failed — and continues to fail — to appreciate that IFRS requires financial statements to be a faithful representation of the underlying economic substance and events,” he said in the court papers.

Substance should always trump form in a company’s financial accounts, the JSE says — something it doesn’t believe is happening at Trustco.

For Van Rooyen, this is a red herring. “If you comply with the rules of IFRS, then substance over form is incorporated into it, because then the rules are the same for everyone,” he says.

Either way, Van Rooyen is right when he says that soon enough, the court will decide on what rights the JSE will have to order a company to restate its results, and what rights companies will have to ignore this. It’s an inflection point for a corporate sector seeking to reassert its moral authority. 

In diamonds they trust

Diehard believers in JSE-listed Namibian investment company Trustco will be holding thumbs that its ambitious diamond mining plans pan out. With cash fast running out, it’s one of the few bright prospects it has. 

The company dodged a bullet when it proposed a deal in late 2019 to buy Constantia Insurance from Conduit Capital for a whopping R2bn, which never materialised. Last month, Constantia was placed under curatorship by the Reserve Bank, and then went into provisional liquidation. (Conduit now has a market value of just R23m.)

As a result, Trustco’s immediate prospects appear to hinge largely on its mining business, Huso, which it bought from the family of CEO Quinton van Rooyen for R3.6bn in 2015. While Huso’s Namibian mining assets are now under care and maintenance and seem to be worth a fraction of the purchase price, the focus has shifted to its Sierra Leone diamond mining business, Meya.           

Van Rooyen is clearly expecting big things from Meya, since Huso is valued at a hefty R3.7bn in the company’s most recent results — more than five times the market value of the entire Trustco.

While Trustco paid just $1m (just over R17m) for an initial 51% stake in Meya, it has invested $115m (more than R1.8bn) in the mine over the past five years. It estimates there’s a potential resource of 7-million carats at Meya, and has highlighted that five of the world’s largest stones were discovered in the immediate surroundings.

One investor enamoured of the diamond venture was Sean Riskowitz, who recently stepped down as the CEO of Conduit.

In March 2020 the Riskowitz Value Fund (RVF) paid R79m for a 1.35% stake in Trustco Resources, and took an option for a further 3.7% at R225m. If that investment was played out, it then inferred a value of almost R6.5bn for Trustco Resources.

In early 2020, Riskowitz posted a commentary on LinkedIn headlined “The Financial Mail’s biased and misleading narrative is poisoning investors”. Riskowitz argued that RVF’s own analysis “indicates the mining operations of Trustco, which we have vigorously tested through independent miners and geological experts, exceed R10bn”.

Fortunately, there are more recent transactions with which to re-test the valuation of the diamond assets — and particularly Meya.

Recently, India-based private equity group SJSL has taken an interest in Meya. In a staggered investment deal, SJSL could become a 70% shareholder for $50m (about R870m). The initial investments — for about $10m of Meya — should, according to the deal timetable, be completed this week. The $10m will secure SJSL 30%, but the remaining 40% option — to be exercised only after the Meya resource statement has been signed off by SRK Consulting — will cost $40m. 

In total, the investment would infer an $85m value for Meya, or about R1.5bn. In the deal sheet, Trustco put the value of Meya’s net assets, as at audited results for the 11 months ended August 2021, at just under R1.2bn.

The next few months will be critical in testing Trustco’s valuation. For Riskowitz, much is at stake.