Nova teetering on the verge of insolvency

The latest financial statements of the Nova PropGrow Group, the rescue vehicle of the failed Sharemax investment scheme, show the company is on the verge of insolvency.

The financial statements, which were published three months late, also received a qualified audit opinion from the group’s new auditor, Nexia SAB&T. The qualified opinion not only questioned the assumptions on which Nova’s property valuations were done, but also raised concerns about the company’s ability to continue as a going concern.

However, Nova’s directors expressed their belief that the group has adequate financial resources to continue as a going concern.

Despite the audit opinion and going-concern issues, the board approved the payment of bonuses of more than R1.1 million on top of their salaries of R15.8 million for the period (see table further on).

Financial position

The financial statements show that Nova suffered an operating loss of R36 million (2017: R87 million) and a net loss of R155 million (2017: R127 million) for its fiscal year to the end of February.

The balance sheet shows Nova had assets of R2.6 billion (2017: R2.8 billion) and liabilities of R2.557 billion. The technical definition of insolvency is when a company’s liabilities exceed its assets, and in Nova’s case, the assets barely exceed the liabilities, which makes Nexia’s qualified audit opinion related to the possible overvaluation of its property portfolio even more concerning.

If the property valuations were reduced by more than R75 million, liabilities would exceed the total assets, resulting in it being technically insolvent.

The group’s cash flow position is also dire.

Its operational activities burned another R23.7 million in cash (2017: R43.5 million). It is likely that Nova will only be able to continue operations from the further sale of properties and using the proceeds to cover operational expenses. This process seems to be ongoing. During the period Nova sold Checkers Virginia for R36.4 million and announced that subsequent to year-end, three additional properties were sold for R284.5 million. These properties are Silverwater Crossing, Benoni Hyper, and properties related to Brookfield Investments.

In the board report, signed by Nova CEO and company secretary Dominique Haese, Nova states that its financial position was not as bad as it seems as the net loss of R155 million includes accounting adjustments and once-off extraordinary items, which, if excluded, would have seen the group earn a profit of R8.9 million.

Auditors report and qualified opinion

The 2018 financial year was Nexia’s first audit of Nova and follows the resignation of BDO after it signed off the 2017 statements.

Nexia’s qualified audit opinion is a serious indictment of the financial statements as it means the auditor is in disagreement with the directors’ assertion of the financial position of the company.

The qualification relates to the assumptions used to value the underlying properties, especially assumptions related to vacancy levels and capitalisation rates, two critical factors affecting the valuations.

Nexia writes in the auditor’s report: “Having assessed the various key assumptions applied in the valuation process, we were unable to satisfy ourselves that the assumptions applied accurately reflected the existing conditions of the investment properties.”

Going concern

Nexia also questions whether Nova is in a financial position to continue as a going concern. Nexia writes in the auditor’s report: “… a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern” (author’s emphasis).

Nexia bases this conclusion on Nova’s net loss and its cash flow position.

Nova’s board disagrees with Nexia’s concerns.

In the director’s report, the board expresses its belief that the group has the resources to continue operating as a going concern. “The directors have satisfied themselves that the group is in a sound financial position and that it has access to sufficient resources to meet its foreseeable cash requirements.”

Delay in the publication of the statements

Nova only published the financial statements at the end of November, nine months after its year-end and three months later than the Companies Act prescribes.

Haese  said in response to questions that the “delay was occasioned by the fact that this was the first year of audit for the group’s new auditors, who needed to acquaint themselves with the group.”

Nexia did not want to comment.

Claims of ‘irregularities’ from dismissed financial director

Nexia’s qualified audit opinion follows similar claims made by Liezl Gildenhuys in court papers related to an unfair dismissal case before the Labour Court. Gildenhuys was appointed in November 2017 as the group’s financial director but was dismissed four months later.

Read: Former finance director claims Nova ‘misrepresented’ its financial position

She claims she uncovered serious irregularities in the financial statements, accounting practices and management of Nova, and that possible fraud was committed by misrepresenting  Nova’s true financial state.

She claimed these irregularities relate to the overvaluation of properties and that the proceeds from the sale of properties were used to fund operational expenditure and not to repay debenture holders or upgrade properties.

Gildenhuys alleged that she was fired after she reported these irregularities to the Nova board, Nexia and the Independent Regulatory Board for Auditors (Irba).

In responding papers, Nova strongly denied any wrongdoing. “In particular, the allegations regarding fraud, accounting irregularities and going concern issues are specifically denied and rejected,” Haese said at the time.

Salaries

Despite the precarious financial position of the group, the executive board members continued to receive significant salaries. The table below shows the salaries disclosed in the financial statements:

According to Moneyweb’s calculations, the board’s salaries represent 23% of the total cash the group received from customers in the 2018 financial year, as well as 10.9% of total operating expenses. This means the board pocketed nearly R1 of every R4  the company received as rental income from the investment properties.

These salaries seem exorbitant, especially if compared to other property companies. For example, Pieter Prinsloo, CEO of international property group Hyprop, earned a basic salary of R4.1 million for the company’s financial year to the end of June.

Hyprop manages a property portfolio of more than R30 billion and owns prized retail shopping centres such the Rosebank Mall, Hyde Park Corner, Clearwater Mall, The Glen Shopping Centre and Canal Walk. The company also earned a profit of R2.5 billion for the period, which contributed to Prinsloo earning a performance bonus of R3.5 million.

Moneyweb sent a list of questions related to the financial statements to Haese, Connie Myburgh (executive chairman) and Charles Rembe (chairman of the audit committee). Rembe acknowledged receipt of the questions and said management would only be able to respond to the questions when they return to the office, which may only be next week. Moneyweb will publish the response when it is received.

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