Cash will always be king

Accounting profits vs cash

By Japhta Mamalema

Acsion (ACS) is a listed property developer and landlord.

As at 19 December 2019:

The company's market cap is R2.84 billion versus profits of R935 million for the financial year ended 28 February 2019 (2018: 823 million),
giving a PE ratio of 3.11;

Using the 2019 profits,
the company is generating a return of 30% on its market cap of R2.8 billion.

It looked cheap.

Excited and wanting to dig in and find out more about the company:

I shared this with my mentor.

“Look closer” he said

Look closer I did and boy was I disappointed.

ACS builds properties such as Mall@55 and then leases them out.

Under accounting rules this qualifies them as Investment property.

A company must record its investment properties in its books as follows:

  • Initially at cost.
  • The company must then estimate annually what its investment properties are worth and
  • Update its recorded amount to the estimated fair value of its investment properties.
  • The adjusting amount is treated as an income or expense depending on whether the recorded amount of the property is increasing or decreasing respectively.

Say ACS builds a mall in Mankweng at a cost of R200 million.

At the end of its financial year it estimates that the mall is worth R220 million.

The R20 million fair value adjustment is treated as income in the income statement.

The property is reported at the amount of R220 million on its balance sheet.

The problem with fair value accounting adjustments is that
  • There is no movement of cash,
  • Its open to management abuse,
  • Sudden macro-environment factors such as a “Brexit” can send property prices tumbling and make landlords financial statements look bad.

Absolute bonkers!

For 2019, ACS made fair value adjustments of R837 million (2018: R744 million).

If we were to exclude the fair adjustments the profit of ACS would be R331 million, leaving the company trading at an earnings multiple of 8.6 times and enough to leave me less enthusiastic.


In my opinion:

Fair value adjustments are hot air and inflating of asset values and must be looked at with caution.
PDF File: Acsion_20_Dec.pdf