Nova: Insolvent, or in a sound financial position?

The board of the Nova PropGrow Group says the company is in a “sound financial position”, despite receiving a lengthy qualified audit report and the auditor expressing significant concern about the company’s ability to continue as a going concern.

Nova, the rescue vehicle of the failed Sharemax investment scheme, published its financial statements for the year to the end of February 2019 last week, more than a year after its year-end and in contravention of the Companies Act.

Apart from the qualification by auditor Nexia SAB&T in respect of the valuations of several properties, the statements reveal that Nova’s assets barely exceeded liabilities, a desperate cash flow crunch and that the board sold properties to fund operational expenses – including lavish executive salaries.

The statements also show that Nova was unable to secure funding from commercial banks or credible financial institutions, and was forced to borrow nearly R40 million from a bridging finance provider at the astronomical interest rate of 1% per week.

Read: Nova teetering on the verge of insolvency

Read: Irba reports Nova to Sars and CIPC

Nova response

Moneyweb sent questions related to the financial statements to Dominique Haese, CEO of Nova. Haese did not respond to Moneyweb, but issued a lengthy response as a Communique to debenture holders, which once again partly blames the author for the financial difficulties the group finds itself in.

Nova also informed debenture holders that it had lodged complaints with the Broadcasting Complaints Commission of South Africa (BCCSA) and the Press Ombud against the reportage by Moneyweb. These complaints will be defended.

Qualification

As was the case with the 2018 financial statements, Nexia qualified the 2019 statements and questioned the assumptions made to value several properties. Nexia also questioned whether Nova could continue to operate as a going concern due to its dire cash flow position. “We were unable to obtain sufficient appropriate audit evidence to conclude on management’s plans to secure additional cash resources to address the group’s ability to continue as a going concern in the foreseeable future,” the three-page audit report reads. (Read the full audit report here.)

The Nova board does not seem to share Nexia’s concerns. 

In the directors’ report, signed by Haese, the directors said they 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.”  The board also dismisses Nexia’s qualifications regarding the valuation of the properties and states that independent and qualified valuers performed the valuations. 

The board also says it “took note” of the auditors’ going-concern issues, but says it is “actively managing the process of procuring adequate financial resources to continue in operation for the foreseeable future”. (Read the full directors’ report here.)

Nova adds in the Communique that the board’s “audit committee agrees with the sentiments of the directors and does not agree with the external auditors’ report on the Financial Statements and recommended the approval of the Financial Statements to the Board.”

Financial performance

The financial statement highlights the highly precarious financial position of the company.

The income statement shows that revenue fell by 16% from R81.9 million to R68.8 million while operating costs rose 2% to R159 million. This resulted in Nova suffering an operating loss of R27.9 million (20018: R35.3 million) and a net loss of R71 million (2018: R155 million).

Cash flow

Nova’s cash flow statement reveals a significant cash flow crunch. The operational activities consumed R39.8 million in cash, which is significantly more than the R24 million the company burnt in the previous year. It also reveals that the company received R174.4 million from selling properties, which was partly used to fund the R39.8 million cash shortfall.

Nova used the balance to repay borrowings (R85 million) and debentures (R50.4 million).  At the end of the period, Nova had cash resources of R5.5 million, most of which has been pledged as collateral.

The graph below also shows that Nova has not had a positive cash flow from operations since 2014. 

Nova continued to sell properties after the end of the financial year. The board said subsequent to the year-end, it has sold or is in the process of selling the Magalieskruin Mall (R28.5 million), the De Marionette Centre in Alberton (R40 million), the Parkside Centre in Secunda (R10.8 million) and Cold Creek Developments in Polokwane. The sale price of Cold Creek was not disclosed. Cold Creek was not a former Sharemax property, and Nova acquired the property in 2013. Interestingly, Connie Myburgh, Nova’s chairman, was a director of Cold Creek from 2004, long before Nova acquired it.

Balance sheet

Nova’s balance sheet reveals an even more precarious position, with total assets of R2.616 billion exceeding liabilities of R2.613 billion by only R2.964 million. A company is insolvent if liabilities exceed assets.

The auditors’ qualification of the valuations of several properties is therefore critical, as any valuation changes may influence the company’s solvency position.

The auditors were especially concerned with the assumptions made in the valuation processes of Del Judor Mall, Flora Centre and the Waterglen Shopping Centre properties. These properties were valued by the Nova board.

Nexia said the three properties were collectively valued at R583 million in the statements, despite the valuation of an independent valuer putting them at only R309 million, or R274 million less. Nexia said that had the properties been accounted for at R309 million, the total portfolio value would have been reduced by R274 million and the deferred tax liability by R61 million. It would also have increased the non-operating losses by R274 million.

This would have resulted in a reduced valuation of the property portfolio and a significantly higher net loss, and most likely would have resulted in Nova’s liabilities exceeding its assets, thus rendering the company technically insolvent.

Even if the company remains solvent, it is clear from the balance sheet that Nova is not in a financial position to repay debenture holders according to the scheme of arrangement.

Nova’s board rejected the auditors’ qualification.

In the directors’ report, Nova said the properties were valued by independent valuers. However, the statements indicate that an independent valuer did not officially value the properties in the 2019 financial year. The last independent valuation was done on February 28, 2018, the final day of the preceding financial year.

In the Communique, Nova acknowledged that the board had valued the properties.

“The upward valuation by the Nova board of Waterglen and Flora is supported by an external independent valuator and by an independent calculation by architects, which include an appropriate value given to remaining bulk. The upward valuation of Del Judor Mall is supported by upgrades, an expected increase in demand for space and a renewal of the lease agreement by an anchor tenant with an expressed intention to take up additional space.”

Read: Nova properties auctioned off

Read: Is the Sharemax landmark worth R1.6 billion or R616 million

The valuations of the vacant Villa and Zambezi malls – Nova’s largest assets, which do not generate any income – were also significantly increased, by R380 million to R1.33 billion.

In the Communique, Nova said: “Both Villa and Zambezi were valued by external independent qualified valuers who used valuation models in accordance with those recommended by the International Valuation Standards Committee and which are consistent with the principles of IFRS 13 [International Financial Reporting Standards].”

Nova added: “With reference to the valuations of Villa and Zambezi, these valuations (Assets) whether valued up or down, have a direct impact on, and equates to, the related Debenture Values (Liabilities). It is therefore not possible for Nova to go into a position of insolvency, by virtue of upward or downward valuations of Villa and Zambezi, as net assets equal net liabilities, upon any valuation increases and/or decreases.”

Borrowings from Beneficio

The financial statements also reveal that Nova acquired funding from the Pretoria-based bridging finance group Beneficio at an interest rate of 1% a week, which ostensibly shows Nova was unable to acquire funding from commercial banks or financial institutions. Beneficio is owned by Dr André Laäs.

Read: Standard Bank has closed Nova’s bank accounts

On February 28, 2018, Nova owed Beneficio an amount of R39.8 million (21% of Nova’s total borrowings of R185 million), which means Nova has to pay a weekly interest bill of R398 000. The Beneficio loans are secured against The Village Mall and Courtside Centre in Nelspruit, two of Nova’s quality assets.

Nova blamed this author and Moneyweb for being “forced” to approach Beneficio.

“Nova was compelled to make this loan at a high interest rate, because Nova could not obtain ordinary commercial funding from the banking industry, as a result of the continuous negative, incorrect and damaging reporting by Ryk van Niekerk of Moneyweb, in regard to Nova and its directors, for many years, creating so called ‘Reputational Risk’, which impacts negatively on Nova’s ability to obtain funding, all of which impact negatively on Debenture Holders’ interests. Beneficio has been and is being repaid in accordance with arrangements in this regard,” Nova said in the Communique.

Salaries

Despite Nova’s precarious financial position, the company continued to pay lavish salaries to its executive directors. The three executive directors, who did not receive increases, earned a combined total of R12 million in basic salaries, 13th cheques, and commissions – which means the executives were paid 16% of the R73.5 million cash the company received from its customers, which is remarkably more than the company’s net asset value of R2.9 million.

According to Moneyweb’s calculations, Haese has received R28 million and Myburgh R26.9 million in remuneration since 2012. Collectively, the two directors have earned R54.9 million, or 31% of the R177 million Nova has paid towards debentures since 2012.

Nova executives
	Basic salary	13th cheque	Commission	Gross salaries
D Haese	R4 035 695	R332 750		R4 368 445
C Myburgh	R4 038 042	R332 750		R4 370 792
MJ Osterloh	R2 427 605	R286 000	R543 594	R3 257 199
	R10 501 342	R951 500	R543 594	R11 996 436

The non-executive directors received a collective R1.2 million. A company typically has four board meetings and various sub-committee meetings a year, and if this was the case here, the non-executives received between R39 000 and R52 325 per board meeting. In addition to this, they received between R46 000 and R52 900 for other services rendered.

Non-executives
2019	Fees for services rendered	Board meeting fees	Total
N Adriaanse*	R46 000	R208 000	R254 000
LM Mbethe	R46 000	R156 000	R202 000
CNS Rembe*	R46 000	R208 000	R254 000
JG Smit	R52 900	R209 300	R262 200
J Phiri	R46 000	R208 000	R254 000
	R236 900	R989 300	R1 226 200
* Resigned

As a comparison, the salaries of Nova’s executive directors compare well with those of JSE-listed property group Attacq, which manages a property portfolio of R20.5 billion and made a profit of R600 million in its most recent fiscal year.

Attacq executives
	Guaranteed package	Short-term incentive	Benefits	Total
Melt Hamman (CEO)	R4 351 000	R3 094 000	R258 000	R7 703 000
Raj Nana (CFO)	R2 278 000	R1 000 000	R156 000	R3 434 000
Jackie van Niekerk (COO)	R2 450 000	R850 000	R188 000	R3 488 000
Remuneration excludes long-term incentives. Amounts above are cash components comparable to the Nova remuneration.

The total salaries of Attacq executive directors represent 1.25% of total cash receipts from operations.

In the Communique sent to debenture holders, Nova said the salaries were justified and market-related. “The remuneration of the executive directors, paid since the inception of the business of Nova, is market related and is required to be paid for the services rendered, under the exceptionally taxing circumstances surrounding the business of Nova, exacerbated by the difficulties created by the continuous negative, incorrect and damaging reporting and the negative consequences thereof, by Ryk van Niekerk of Moneyweb, which need to be mitigated on a continuous basis, so as to ensure best possible implementation of the schemes of arrangement and Debenture Holder repayment to the best possible extent, under the circumstances.”

Property portfolio

According to Moneyweb calculations, Nova took control of 28 former Sharemax properties valued at R1.45 billion in 2012. Nova acquired one additional property during this period through a related party transaction, the Cold Creek development in Polokwane. Since 2012, Nova has sold 18 of the 29 properties.

An analysis of Nova’s current property portfolio and the individual valuations appear in the table below.

Remaining properties in the Nova portfolio
		Valuations
		2018	2019
1	Amogela Mall (Liberty Mall)	R125 250 000	R27 000 000
2	Athlone Park	R32 430 000	R28 600 000
3	Carletonville Centre	R51 895 000	R21 600 000
4	Carnival Centre (Rangeview)	R21 360 000	R16 700 000
5	Del Judor Mall (Witbank)	R218 700 000	R182 395 744
6	Flora Centre	R238 720 000	R174 958 600
7	Courtside (Tarentaal)	R76 310 000	R77 090 000
8	The Villa Retail Park	R616 000 000	R848 000 000
9	The Village Mall	R49 450 000	R45 425 000
10	Waterglen Shopping Centre	R114 130 000	R232 464 000
11	Zambezi Retail Park	R332 500 000	R480 000 000
		R1 876 745 000	R2 134 233 344
This table excludes properties sold post the February 28, 2019 year-end.

In the financial statements, the Nova board acknowledges that properties to the value of R324.4 million have been sold since inception. This amount excludes the proceeds of the properties sold since February 28, 2019. The table below shows the 12 properties that have been sold since 2012.

Properties sold
1	Benoni Hyper
2	Checkers Virginia
3	Cold Creek Development (Convey Assist)
4	De Marionette Shopping Centre
5	Die Meent
6	Hazel Court
7	Homemakers Village
8	Leeupoort Street
9	Magalieskruin Mall
10	Nelspruit Hyper
11	Oxford Gate
12	Parkside Shopping Centre
13	Rivonia Square Shopping Mall
14	Secunda Plaza
15	Shoprite Secunda
16	Silverwater Crossing Centre
17	The Fern Shopping Centre
18	Town Square (Lydenburgh shopping centre)

Nova also owns several vacant residential properties earmarked for development. These include Berg en Dal, Mont Rouge, Theresa Park, Steenboks Crossing, Stonewood Estate and Waterfall Estate.

Read: Nova board sidesteps disclosure obligations

Read: The dark underbelly of the business rescue industry

Reportable irregularity

During the audit process, Nexia reported a reportable irregularity (RI) to the Independent Regulatory Board of Auditors (Irba). Irba later referred the RI to the Companies and Intellectual Property Commission (CIPC) and the South African Revenue Service (Sars).

In the Communique, Nova did not inform debenture holders of this referral and denied that either institution had initiated an investigation. However, Joey Mathekga, head of Corporate Compliance and Disclosure Regulation at the CIPC, confirmed that the commission is investigating Nova following its receipt of the RI. He further confirmed that Nova is also being investigated for “possible reckless trading and its going concern capacity”.

In addition, Moneyweb has established that if Irba referred a RI to Sars, it will trigger a preliminary investigation.

Purported resignation by debenture trustee 

Nexia SAB&T also raised an emphasis of matter regarding the resignation of Derek Cohen as the trustee of the Nova Debenture Trust last year. His resignation should have forced the Nova board to convene a meeting of debenture holders to elect a new trustee.

However, and despite Moneyweb obtaining three independent legal opinions to the contrary, the Nova board states in the financials that “it has taken legal advice regarding Mr Cohen’s purported resignation as Trustee of the Debenture Trust. The advice received that Mr Cohen could not resign and that his resignation was unlawful and void. No action is due to be taken by the Nova group.”

Nexia SAB&T

The audit industry has received significant criticism in recent years, mostly for not flagging misconduct and discrepancies at prominent companies.  However, Nexia SAB&T has qualified Nova’s statements for the second year in a row, and this should raise the red flags with all regulators, investors and other stakeholders. Maybe it is time to listen to the auditors.