The African Rail Industry Association (ARIA) has warned that Transnet’s latest financial results should be scrutinised for errors and validity, particularly in terms of asset revaluations.

ARIA in November last year also spoke out about Transnet asking its customers to pay early and itself postponing payments to suppliers so that its cash position would appear better on its financial statements for the 2021/22 financial year.

The association also deemed it suspicious that Transnet swung to a R5-billion profit in the 2021/22 financial year, from an R8-billion loss in the prior year, owing to property and asset revaluations of about R11-billion, and yet there was a R27-billion underspending record on its property and asset maintenance for the last decade.

ARIA says the State-owned freight utility may well overstate, once again, the value of its property and assets.

CEO Mesela Nhlapo says Transnet’s material revaluation has increased significantly despite a drop in cash flow, operational performance and maintenance spend.

She points out that Deutsche Bahn Thelo performed a revaluation of the rail infrastructure in March 2022, which was done on the discounted cash flow model and resulted in a fair value increase of R6.6-billion.

With replacements of R3.9-billion, this resulted in a net increase (after other adjustments) in the carrying value of the rail infrastructure alone by R9-billion, or 22%.

In the same reporting period, Transnet announced total fair value increases of R13.6-billion to property, plant and equipment and a net revaluation increase of its investment property of R10.1-billion. This resulted in an increase to asset values of R23.7-billion.

In September 2022, Transnet again revalued the rail infrastructure, with it increasing by a further R7.6-billion. Together with the revaluations of March 2022, it means that Transnet has revalued the rail infrastructure by R16.7-billion, or 41%, in just 18 months.

The gearing ratio decreased to 43.7% from 45.5% mid-year, despite Transnet formally breaching its cash interest cover ratio, recording a result of 2.1 times, against a threshold of 2.5 times.

“The reason for our concern around the revaluations is that Transnet Freight Rail reported an R8.95-billion drop in operating cash flow at the September 2002 mid-year results from the prior year.

“The entity has underspent on track maintenance by at least R26.8-billion in the last ten years, according to ARIA’s internal analysis, while their operational performance has decreased significantly over the past five years – down from 226-million tonnes in 2018 to 173-million tonnes in March 2022,” Nhlapo notes.

She adds that, if cash generation and volumes are dropping and maintenance is being materially deferred, revaluations need to be carefully considered as future impairments will have a dire impact on Transnet’s gearing ratio.

The capitalised operational expenditure (copex) accounting policy of Transnet also bears mention. This can be applied in line with International Financial Reporting Standards when operational expenditure results in an asset that performs better than its original form.

“The application of copex must be very carefully managed to ensure asset values are not overstated as maintenance is capitalised instead of being expensed. This inflates both earnings and asset values,” Nhlapo says, explaining that it is not incorrect to apply copex, just like it is not incorrect to revalue assets; however, in Transnet’s current trading position it has to be done with extreme caution so as not to overstate asset values and performance.

TRANSNET RESPONDS

Transnet tells Engineering News that the “analysis” from ARIA is riddled with inaccuracies and displays a complete lack of understanding of the various parts of the Transnet business.

“ARIA has a vested competitive interest in persistently talking down Transnet. It is acting increasingly irresponsibly in its efforts to do so. We encourage stakeholders to practice caution when considering ARIA’s view,” Transnet comments.

The entity’s yearly financial statements will be audited by the Auditor General of South Africa accordingly and tabled in Parliament, as well as published for interested parties to analyse.

“Ideally, responsible associations representing good corporate citizens will await the audited statements of Transnet before publishing unwarranted and premature conjecture,” Transnet concludes.