Thu, 15 Feb 2018
The South African market was shook on Tuesday when Viceroy Research released a damning report that claimed that Capitec bank “is a wolf in a sheep’s clothing and a loan shark”. Viceroy also said that the reserve bank and finance ministry must immediately place the bank under curatorship. Capitec stock fell by about 20% as a result. The group played a role in bringing to light the financial mismanagement of the Steinhoff Group last year. But what does all of this mean? The Daily Vox spoke with Michael Porter, a trader at Unum Capital to make sense of it all.
Firstly, who is Viceroy Research?
Viceroy Research is a now well-known firm that published an explosive report on the global retailer Steinhoff International Holdings, alleging financial irregularities. “The main thing these guys do is that they investigate companies, they compile a report and then they short the company. Basically they try to benefit from a falling share price,” Porter said to The Daily Vox.
Why did Viceroy play such a large role in collapsing Steinhoff?
“We have to remember that although these Viceroy guys got the Steinhoff thing spot on,” Porter said. Its report was released the day after Steinhoff announced that its chief executive Markus Jooste and that its auditors Deloitte had refused to sign off on its financial statements. That report is considered accurate and professional and largely contributed to the collapse of the Steinhoff share price.
People have been throwing the term ‘short selling’ around – what exactly does that mean?
Short selling is when you borrow shares and sell it in the market, Porter said. The main point is to benefit from a falling share price. You would, for example, sell the share at R1 000 and if it falls to R800, you buy back the share and you’ve pocketed a falling share price of R200. “It’s basically to make a profit on a falling share price,” he said.
That seems suspicious. Is that allowed?
“That’s the market. If everybody had to buy shares, you wouldn’t find liquidity in the market. Shorting is perfectly normal,” said Porter. There is suspicion clouding Viceroy because there are questions about whether it is trying to benefit unethically.
On Tuesday, the PSG Group, Capitec’s largest shareholder, issued a note to its shareholders, saying that it was “greatly concerned” about Viceroy’s intentions because it had never consulted with Capitec management to understand how the bank operates, and would launch an investigation which would include looking into how Capitec and PSG shares were traded, leading up to the release of the report.
How can Viceroy benefit unethically from the Capitec report?
Following the publicity that the firm received after outing Steinhoff, there was speculation that Viceroy would release another report on a company and that it would have another Steinhoff effect. Viceroy was aware that there would be an initial price reaction in the share prices and that it could benefit. If an unknown company released a report on Capitec, there would not necessarily be a reaction to it. However, Viceroy was spot on about Steinhoff and so everything it releases gets a lot of traction. [...]