Is this the next “Steinhoff”?

by , 11 July 2018
Is this the next “Steinhoff”?
Back in 2015 I made a quick 56% return from Trustco Holdings. Back then, the share looked like it had a lot of promise.

And had I held on, I could've made even bigger gains as the share continued rising - now sitting at R10 a share from its 2015 lows of 255c.

But my reasons for selling the share were, and are still valid.

The CEO sold personal assets to the company under questionable conditions.

Since then, my concerns have grown exponentially.

Today I'm warning you - this is the next Steinhoff.

It is a lot smaller. But it has defied gravity in the same way. All the warnings signs are there - and I for one won't be the one with egg on my face when the share crashes…
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Why 2015 signaled a sell on Trustco – despite share price momentum
In 2015, Trustco announced in a Cautionary Statement that it would acquire a company called Huso Investments.

Huso Investments was the trading company for the Northern Namibian Development Company and it holds diamond mining and exploration concessions in Namibia.

What’s perhaps more important is the fact that the ‘Van Rooyen’ family owns the company.

The same ‘Van Rooyen’ as Quinton Van Rooyen the CEO of Trustco…

Trustco’s plan was to buy Huso from the Van Rooyen’s for R3.6 billion (which it did).

But, there was no mining license secured for the operations at that stage.

CEO, Van Rooyen promised that it would be in place soon though.

What’s more, the mine was valued at only around R866 million (not the R3.6 billion paid for it).

And, the company would pay only R672 million for it immediately and then R2.895 billion once the mine starts operations.

A bargain for investors really…

Van Rooyen’s push for the deal was clearly one sided

Mr Van Rooyen at the time of the deal was quoted as saying that “Most analysts have never done any transaction greater than buying a second-hand car in all their lives. Reading about other people's transactions does not render one an expert.”

“Trustco is not a company to be viewed through ordinary eyes; only those with exceptional vision can see what great future lies ahead.”

Clearly, he was pushing hard to pocket a R600 million windfall for a worthless mine, amidst many analysts criticizing the same deal…

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So, has this revolutionary deal paid off?

On 08 December 2017, Trustco announced that it “suspended diamond mining at the Northern Namibia Development Company (NNDC), as well as diamond polishing operations at Morse Investments, pending the granting of a long-awaited mining license.”

To date, nothing has happened to indicate that the mining license will be given to Trustco any time soon.

Since the announcement, the Trustco share price is up from R7.45 to R9.99.

Suspiciously, Trustco bought R22.4 million of its own shares on the JSE in the same period…

Talk of insider trading is rife

So, the company has been one of the most prolific buyers of its own shares in the past year…

The Financial Service Conduct Authority (FSCA) said that it is investigating Trustco for insider trading in the period December 2017 to February 2018 – the same period its share price rose amidst the negative mine announcement I quoted above.

The company’s CEO denies any involvement.

He would wouldn’t he.

What’s more, Mr van Rooyen doesn’t earn a ‘salary’ from the company – and no income earned is disclosed as director of the company.

What is disclosed is this:

“Dr Q van Rooyen is remunerated in terms of a management agreement between Trustco and Next Investments (Pty) Ltd, of which Dr Q van Rooyen, is the sole shareholder.

In terms of the management agreement, a management fee is paid quarterly to Next Investments (Pty) Ltd (Next) as follows:

% of the turnover of the group;

1% of the headline earnings of the group; and

1% of the basic earnings of the group.”

In short, a company owned by Mr van Rooyen earns a management fee, for Mr van Rooyen’s services to the company. Sounds like a way to dodge the taxman if you ask me.

Digging into the financials, Next Investments earned a R14.4 million management fee and a R21 million ‘guarantee fee’ from Trustco for Mr van Rooyen’s services. R35 million in income as a CEO of a small cap company doesn’t sound that bad to me…

And what’s even nicer is the fact that this management fee ignores the effect accounting write downs would have on profits.

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What’s the real situation at Trustco?
According to a Business Live report, Trustco CEO said, following the company’s latest financials, that “Trustco is well-capitalized and poised to take advantage of a recovering Namibian economy.”

Clearly well capitalized has different meanings for different people. As this ‘well-capitalized’ company stated in its financials that: “Trustco Group Holdings and its longstanding institutional investors engaged with one another to facilitate a potential consensual restructuring of long term debt.” Effectively the company broke the debt covenants it had with lenders and had to renegotiate terms. Could this possibly spell a risk to its going concern status?

Well, a quick glance at its cash flows might give you a clearer idea:


So, in 2017 Trustco lost R72 million cash from its operations.

In 2018 it lost R317 million cash from operations!

Profit for the period was declared as “R274 million”, but that included a revaluation of property of R466m. Strip that out and Trustco actually lost R192 million during the year.

If Trustco hadn’t completed a massive deal with one of its shareholders, Riskowitz Value Fund, it would have been bankrupt this year…

Considering the pace at which it is burning through cash, I find it difficult to see how this company will last 2018 without a rights offer or massive loan.

There’s more questions than answers with the company, and I haven’t even discussed all the questionable going on’s I’ve uncovered.

I can only say be warned.

Here’s to unleashing real value

Francois Joubert
Red Hot Penny Shares 
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Is this the next “Steinhoff”?
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