Rural Funds gives "zero clarity" to shareholders, claims Bonitas

Written on the 8 August 2019 by Matt Ogg

Rural Funds gives "zero clarity" to shareholders, claims Bonitas

Bonitas Research has criticised Rural Funds Group's (ASX: RFF) "we will not disclose" response to requests for its commercial lease agreements, with the US short seller standing by its allegations the agricultural land fund fabricated rental income.

The company's shares plunged 43 per cent on Tuesday after Bonitas accused Rural Funds Management (RFM) of allegedly using RFF as a vehicle to "siphon" money, stating its net assets should be worth half their stated value of $532 million.

But the Canberra-based fund saw a rebound today after its founder David Bryant told a webinar he would be buying shares. At 2:48pm RFF shares had risen almost 42 per cent to $1.93.

Bonitas Research was not so convinced.

In an email this afternoon the Texan company, founded by Glaucus founder Matthew Wiechert who was responsible for similar short sell attacks on Blue Sky Alternative Investments (ASX: BLA) and sandalwood producer Quintis, claimed investors did not receive transparency in the webinar.

"Instead, "we will not disclose" was repeatedly echoed in Bryant's drivel to investors which provided zero clarity to investors about our allegations of RFF's fabricated rental income or its increased related party transaction activity between RFM and RFF in the last 3 years," Bonitas said.

"On a hosted webinar Q&A, David Bryant repeatedly fell back on the credibility of PwC to certify the accuracy of its reported financial statements.

"RFF chose to remain silent on details about its customer relationships and its asset valuations."

Bryant said the company would adopt a strategy to respond in a way that will deliberately "lack detailed explanation" pending a report from Ernst & Young that is due in about three weeks from now. 

In response to allegations the company had inflated rental income from two major almond grower lessees by $28 million, he said the accounting for lease payments differed to that of lease receipts.

He refused to reveal commercial lease agreements on the grounds the asymetry gave the company an advantage in the market and in negotiations, thus benefiting shareholders.

"Our Report highlighted specific transactions and customer relationships with credible evidence that suggested RFF's reported profits and net assets were artificially inflated," Bonitas said.

"RFF avoided all discussion about the specifics of its rental income, instead claiming that for competitive reasons it would not disclose additional details about its customer relationships to investors."

The group also slammed RFF for avoiding discussions of alleged conflict of interests for board members who have directorships at both RFF and its responsible entity Rural Funds Management (RFM), as well as avoiding discussion of Michael Carroll who is also a director at almond grower lessee Select Harvests (ASX: SHV).

"RFF Management avoided the discussion of its conflicts of interest that RFF Management operates both RFF and RFM, yet RFF Management owns 100% of RFM and owns less than 5% of RFF's equity," Bonitas said.

"RFF Management failed to disclose to investors how RFF Management's lop-sided compensation structure between RFF and RFM is handled to ensure decisions are made by RFF Management to prioritize the best interests of RFF minority shareholders.

"RFM's business failed to generate cash from operations and has recently taken borrowings from RFF which coincided with RFM and RFM Related Fund lessees generating increasingly negative operating cash flows.  Do these look like good underlying businesses to have as customers?"

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Author: Matt Ogg

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