Siboniso Nxumalo discusses the implications of the resignation of PWC as external auditors for Oceana, as well as results from MMI, Bidvest and Adcorps and the current global economic environment.
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Siboniso Nxumalo discusses the implications of the resignation of PWC as external auditors for Oceana, as well as results from MMI, Bidvest and Adcorps and the current global economic environment.
Thanks for listening! Follow us on Linkedin.
Bruce Whitfield 00:00
Siboniso Nxumalo is a Portfolio Manager at the Old Mutual Investment Group. We saw something unusual today, and that's the resignation of an external auditor at a company. The guys who can Lucky Star Pilchards is Oceana Group, there's been a whole bunch of shenanigans there in recent times. And now PwC, as external auditor of Oceana, says it has resigned with immediate effect. It says the relationship has become strained. It has - PwC has said that it has flagged accounting issues that lead to a delay in the publishing of company results. We've seen executives leave, we've seen suspensions, we've seen a great deal of discomfort happen at Oceana. Siboniso Nxumalo, this is never a good sign when the auditors run for the hills as PwC has done this particular occasion.
Siboniso Nxumalo 00:59
Yes, Bruce. I mean, this is obviously deeply concerning. And every now and then, the financial markets provide us a soap opera. And this one has definitely read like one. I mean, auditors, especially external auditors, are independent. And they're there to provide assurance for shareholders and investors that their accounts are above board and the company has conducted itself in a trustworthy manner. And so, the idea of seeing a reputable Big Four auditor say, you know what, I'm out of here. That's not a good thing.
And as you said, Bruce, there's a lot that's built up to this point. I mean, I think last year, we saw the CFO, the Chief Financial Officer, suspended, and then the CEO resigned. And then we had the company secretary also left the company. And we've heard some stories here in terms of the finances. PwC raised concerns about signatures on a document relating to a $4 million insurance claim that was paid out to Oceana. The auditors were concerned that this claim was recognised in the incorrect financial year. And I think the company and the auditors then clearly were seeing the world from a different side. The JSE threatened to suspend their listing, because they're saying, hey, your financials need to come out on time, and those financials were increasingly delayed. And so, very, very concerned. And actually, also Bruce, where in the last AGM, we saw 38% of the shareholders voting against the reinstatement of the auditors. So, this... ja, it just doesn't smell good.
Bruce Whitfield 02:34
No, definitely smells fishy. That's for sure. MMI came out with a really strong trading update today, and that's encouraging to see.
Siboniso Nxumalo 02:43
Yes, it is, Bruce. I mean, I think on the headline basis, it does look like a good recovery. So, Metropolitan Momentum, we saw headline earnings up 59%, and we saw a very strong recovery. One of the things that they said, where they started talking a lot about, hey, we are seeing a normalisation of Covid claims. Obviously as an insurance company and in the world of Covid last year, the period that they're comparing to, they're saying, hey, we're seeing this normalising quite a bit.
But Bruce, there's a few things that were concerning in this particular trading update, actually, if you delved into the detail. I think the margins - because the new business margins were far weaker than the competitors. And there was this thing called persistency, which also looked a little worse for the wear. And so therefore, it looks like the ability to sign on clients is one thing, but to keep those clients paying, well, that's proving a little bit more difficult. And so, on the look of it, yes, there's a recovery. But actually, the quality of that recovery here is not as great as the other competitor insurers. And so, the devil here is in the detail. And I'm not sure from our opinion that these results was as good as expected.
Bruce Whitfield 03:57
Okay, thank you for that one. What about Bidvest and I think ADvTECH also with results out today. Bidvest first, was there an update from them?
Siboniso Nxumalo 04:06
Ja, there was an update from Bidvest. And now, Bruce, this particular update, usually when companies issue what they call a voluntary trading update for the 10 months. And this particular one, there are lots of words, there are no numbers. But all the words are saying that things are running well, and performance is excellent, and it's getting better. So, there's a recovery there. Except Bruce, there are no numbers! So, I can't tell you anything about a single number. But the words tell a fantastic story. So, let's wait for the numbers.
Bruce Whitfield 04:38
Exactly. The numbers always tell a better story - well, a more accurate story. Not that there's anything to mistrust of course, about the nice people at Bidvest, but numbers would be nice in an update, a trading update, not just words, they speak so much louder. And then on to the other big one, of course, and that's ADvTECH, which came out with results. These are the guys who do temporary jobs, and in a low employment environment, a company like ADvTECH must be struggling.
Siboniso Nxumalo 05:06
Yes, no, Adcorp came up with some pleasing results. We saw a recovery -
Bruce Whitfield 05:10
Was it Adcorp or ADvTECH? Sorry, I'm getting my ads, education, sorry. I'm getting my wires crossed!
Siboniso Nxumalo 05:17
If you hadn't mentioned it, Bruce, I would've just looked straight past it, but it's okay.
Bruce Whitfield 05:21
It's okay, I need to correct myself, because when you make bluffs, you need to correct it, you see.
Siboniso Nxumalo 05:27
Fantastic. So, we saw revenue - very pleasing update, this particular one - concerning obviously, Adcorp is the workforce company that obviously is about facilitating employment and linking skills to companies. So, revenue from operations recovered, I mean, it decreased 1.7% relative to last year, but management actually did quite a stellar job in trying to stabilise this company. And that's what they talk about in this particular result. They talked about how they were focusing on earnings, they're focusing on a balance sheet, and they're focusing on returns. And actually, we can see some of that work coming through in a very, very tough environment. And so therefore, at the end of the day, though, we saw earnings recover 206%.
But again, Bruce, it's a very, very weak base. And again, management is focused quite a bit on the balance sheet, and saying, hey, we want good quality earnings, we want the earnings to lift the recovery, the return on invested capital. And actually, in a tough environment, we just need to do the basics well, and actually here, I think, in the context of the environment, actually, this is a pleasing result. And I think the market likes that too.
Bruce Whitfield 06:43
Good. Now, the whole - if you look at it slightly, if we zoom out a little bit, I mean, for the first time in years, everybody is saying you should sell in May and go away. Geez, they were feeling smug because they were getting it right for the first time ever. And now, as the month draws to an end, we start seeing a lot of people coming back into the market, we're seeing money flooding in. We closed above what, 72/70,000 on the day.
Siboniso Nxumalo 07:05
Yep, ja, ja, no, Bruce, it's been a fascinating month. Because at the end of the day, what had happened is we go back to the start of the month, the market got spooked by the Fed raising rates, and obviously, because inflation was much higher in the US and in Europe than what people had anticipated, and it was higher and more sustained, because everybody said, oh, no, it's transitory, it's transitory. It turns out that transitory is lasting quite a long time. And so, with the Fed raising rates, that's usually not good for equity markets, because the higher the rates are, then there is an alternative outside equity markets. That means non-equity investment instruments offer an attractive return, and money then will flow there. And it discourages a risk-on environment. And so, in this particular instance, we saw in the beginning of the month, I think the market was very nervous.
Also, China's zero Covid policy, this is obviously, America, the Fed, biggest economy, second biggest is China. And we saw China's insisting on the zero Covid policy, where they're locked away Beijing and Shanghai, and these are cities that in combination have 50 million people. So, it's a lot of people which then obviously disrupts the world. And so that also causes concern about a slowdown. But as I think the month has progressed, with markets starting to come to grips with this, and I think the market is sensing, hey, wait a minute, maybe this is not going to be as bad. But you know what, Bruce, there are real dangers here if you take a longer term view, I mean, we don't invest on a month-on-month basis, we look far out, and we look years ahead and we say what is going on here. So, we are acknowledging that the market, actually, especially if you look at the American market, it's come up quite a bit. But Bruce, we still think this market is very expensive in America. The earnings are very high, and so therefore, that is a market that I think, as rates rise, should probably continue to come off, especially in the tech sector. That's in America. In China, we're starting to see China now talk a lot more about some form of stimulus and easing reserve requirements and all of that.
So, China, because it has intentionally slowed down its own market, and obviously locked down its biggest cities, now it's talking about opening and reopening, and then therefore for that, they're gonna have to provide some form of stimulus in the market to excite the market, and then drive a recovery. And with that, Bruce, we're starting to see the commodities come back. The commodities are looking at this and saying, well, we like China, because China consumes a lot of commodities, and whenever China stimulates, commodities tend to go with that. And so, therefore, the market then hence we've seen such a strong recovery in the month for the commodity sectors.
Bruce Whitfield 09:53
We most certainly have, Siboniso Nxumalo, thank you. Nice summary there. Portfolio Manager at the Old Mutual Investment Group, Siboniso Nxumalo. And Goldman Sachs today, it's quite interesting. This whole commodity story, we're seeing reports suggesting that commodities can't withstand the headwinds of the global economy, but at the same time, and maybe reflect on Davos in just a moment, because I got a sense of the demand of commodities in the next decade.