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JD Group took the unusual step of having its most recent interim results reviewed by external auditors, following talk that the furniture retailer would exaggerate a decline in profit growth, the company confirmed yesterday.

May 11, 2007

By Tom Robbins

Cape Town – JD Group took the unusual step of having its most recent interim results reviewed by external auditors, following talk that the furniture retailer would exaggerate a decline in profit growth, the company confirmed yesterday.

An overstated fall in profit growth would suit JD Group’s management team in its quest to sell out to Steinhoff International, considering that shareholders have shown little enthusiasm for the buyout.

This is because slower profit growth could tempt shareholders into selling at a lower price.

But a note put out by a major stockbroking firm after JD Group presented its results on Wednesday stated that there remained a view in the market that the group had understated earnings. “The whispers among some analysts and clients outside the [presentation] venue were cynical but had a grain of rationality,” it says.

The view is that “JD Group can show whatever numbers they want; the higher provisioning for bad and doubtful debts that hit the headline earnings per share [heps] line – while prudent – did not all have to be taken in one hit. If a normalised pattern had occurred then heps would be better.

“Now you will have brokers trimming their second-half numbers, perhaps playing into JD Group’s hands of ‘assisting’ their cause – valuation wise – to sell to Steinhoff,” the note argues.

But JD Group executive chairman David Sussman denied that the furniture and appliance retailer had exaggerated the impairment provision to assist the buyout.

Had the group not nearly doubled this provision from R68 million a year ago to R114 million, it would have reported growth in interim net profit as high as 13.6 percent, rather than 8 percent.

Sussman said it was precisely because of rumours that it would exaggerate the bad debt provision that the retailer had called in its independent auditor, Deloitte.

While provisions had increased, “provisions as a percentage of instalment sale receivables have been maintained at 27.3 percent”.

Unlike annual results, listed firms are generally under no obligation to have interims reviewed.

Deloitte chief operating officer Allen Swiegers said less than 20 percent of JSE-listed companies had their half-year results reviewed, primarily because of the cost.

Last year JD Group did not have its first-half results reviewed.

Management strongly supports Steinhoff’s takeover, arguing that there would be synergies between JD Group’s retail operation in Europe and Steinhoff’s furniture making business there.

But analysts from Stanlib Asset Management, BoE Private Clients and Imara SP Reid have described the offer of 3.6 Steinhoff shares per JD Group share as on the low side.

Top shareholder Old Mutual Asset Managers, with 19 percent according to JD Group’s website, is yet to lend its support to the deal.

The commentary on the results released this week paints a bleak picture of near-term prospects.

JD Group said there had been a “marked” change downward in the credit cycle. “Based on past cycles, we appear to be in a similar situation to that of 2001 to 2003.”

In that period, interest rates peaked at 17 percent and lenders Unifer and Saambou went under.

Imara SP Reid’s Warwick Lucas said he doubted sectoral bad debts were as severe as they were then.

JD Group fell 1.5 percent to R91.10 yesterday, while the general retailers sector fell 0.73 percent.