Sekhametsi’s shocking financial health exposed

… Massive profits mask deep operational crisis, audited statements reveal

Sekhametsi Investment Consortium presents a Jekyll-and-Hyde portrait in its 2021 financial statements. On one hand, a profitable investment consortium with M1.27 billion in assets, growing membership, and a strong stake in Stanlib Lesotho. On the other hand, an operationally bankrupt entity whose core business loses millions, whose expenses are spiralling out of control, whose accounting is unreliable, and which is technically unable to pay its bills. The only thing standing between the consortium and financial ruin is its stake in Stanlib Lesotho. If that investment were to falter, the entire house of cards would collapse.

On paper, Sekhametsi Investment Consortium looks like a success story. In reality, it is a company in crisis.

Its latest financial statements, signed off in March 2022, audited by New Dawn Chartered Accountants, and obtained by Newsday recently, paint a portrait of profound contradiction: impressive profits masking a deeply unwell core business.

The consortium, established to provide Basotho with investment opportunities, according to the statements, was entirely dependent on its investments to stay afloat while its own operations haemorrhaged cash.

THE NUMBERS THAT LIE: Profit of M62.7 million hides operating disaster

At first glance, Sekhametsi Investment Consortium appears prosperous, reporting a profit after tax of M62.7 million, an impressive 42 percent increase from the M44 million posted in 2020.

But beneath this veneer of success lies a terrifying reality. The company’s core operations lost M5.6 million during the year.

How did the consortium manage to report a massive profit while its actual business haemorrhaged cash?

The answer to this question reveals a dangerous dependency. M19.9 million came from dividend income, and a staggering M53.2 million was generated from the share of profit from equity accounted investments, primarily from the company’s 25 percent stake in Stanlib Lesotho.

Without these investment windfalls, Sekhametsi Investment Consortium would be reporting a catastrophic loss, Newsday has learned.

The company that exists to provide Basotho with investment opportunities cannot make money from actually providing those opportunities, the statements show.

CASH CRISIS: Operating cash flow collapses 80%

Even more alarming than the operating loss is the company’s cash position. Despite reporting a massive profit, cash generated from operations plummeted from M52.7 million in 2020 to just M8.2 million in 2021, an astonishing 84 percent decline.

This disconnect between reported profits and actual cash in the bank is a classic warning sign that the quality of earnings may be poor or unsustainable.

While revenue remained relatively flat, expenses went nuclear. Administrative expenses more than doubled from M272,820 to M640,042, while other expenses skyrocketed by over 400 percent from M2.9 million to a staggering M14.7 million.

Included in this M14.7 million black hole are directors’ fees of just over M1 million, electricity and water expenses exceeding M1.1 million, employee benefits of M415,613, consulting fees of M227,644, insurance of M373,956, and most alarmingly, a M10 million impairment charge.

THE M10 MILLION QUESTION: What happened to Afri Expo?

Buried deep in the notes to the financial statements lies a bombshell: the consortium completely wrote off its entire M10 million investment in Afri Expo Textiles. The investment, which represented a 30 percent stake in the textile company, has been valued at zero.

Afri Expo’s own financials paint a picture of devastation, with equity attributable to owners standing at negative M840,645, a loss from operations of M1.2 million, and interest expenses of M432,391.

The company, according to the statements, is technically insolvent, with liabilities far exceeding assets.

However, the consortium’s directors provided no explanation to shareholders about what went wrong at Afri Expo or why this M10 million investment, a significant portion of the consortium’s portfolio, has been completely destroyed.

Afri-Expo Textiles, according to information on its website, is a privately held, 100 percent Basotho owned textile manufacturing company registered under the laws of Lesotho.

“The company is under the directorship of Three Directors (Indigenous Basotho experienced in different fields). Afri-Expo Textiles (Pty) Ltd was registered in Lesotho in 2011, with the aim of increasing local entrepreneur participation in the manufacturing sector.”

TECHNICAL INSOLVENCY: The Company cannot pay its bills

Perhaps the most alarming revelation in the financial statements is the consortium’s catastrophic liquidity position. The company had M142.5 million in debts due within one year, but only M29.2 million in assets that could be quickly converted to cash.

This means that for every M1 of debt due in the next 12 months, the consortium had only 20 lisente available. The company’s ratio stood at an extremely dangerous 0.20, and by any conventional measure, the company was technically insolvent.

The only thing that prevented immediate collapse was that the largest liability, a staggering M136.7 million intercompany payable, was likely owed to related entities that did not demand immediate repayment.

But this created a precarious house of cards. If any of those related parties called in their debts, Sekhametsi Investment Consortium would be unable to pay.

ACCOUNTING SCANDAL: Material errors force restatement

The company was forced to restate its entire 2020 financial statements due to what auditors described as a material misstatement.

The error involved expenses paid by a subsidiary, Sekhametsi Enterprises, on behalf of the parent company being incorrectly recorded in the subsidiary’s books, even though they related to the parent’s activities.

This was not a minor bookkeeping error. The restatement affected multiple line items across the financial statements, including intercompany payables adjusted by M5.2 million, retained earnings adjusted by nearly M16 million, and employee costs, electricity, insurance, legal expenses, and rent all requiring correction.

For a company of this size, with professional directors and auditors, such a fundamental accounting failure raises serious questions about the competence of the finance department, the effectiveness of internal controls, the reliability of all previously issued financial statements, and the oversight provided by the board of directors.

WHO’S WATCHING THE STORE? Board changes and governance concerns

The company’s board saw significant changes during the year 2021, with Malitšitso-Moteane-Thahane and Ntee Bereng resigning, while Palo Kotelo, Naledi Maphathe, Lerotholi Seeiso, Limpho Maema, and Relebohile Sefako joined.

While board turnover is not inherently problematic, the timing coinciding with a year of massive accounting errors, an M10 million write-off, and an operating loss merits scrutiny.

Directors were paid a total of just over M1 million in fees during the year, with Chairman Leboela Lebete receiving M192,325, Matjato Neo Moteane (now minister of public works and transport) receiving M172,575, Dr Lebohang Khomari receiving M143,460, Palo Kotelo receiving M127,700, Lintle Thamae receiving M77,760, Lerotholi Seeiso receiving M77,760, Naledi Maphathe receiving M72,000, Limpho Maema receiving M72,000, and Relebohile Sefako receiving M72,000.

THE STANLIB LIFELINE: One investment holds the key

Without its 25 percent stake in Stanlib Lesotho, Sekhametsi Investment Consortium would be in ruins.

Stanlib remained the crown jewel of the portfolio, with non-current assets of M5.5 million, current assets of M37.2 million, revenue of M37.1 million, profit from operations of M16.6 million, and cash and cash equivalents of M32.5 million.

The consortium’s investment in Stanlib was valued at M16.5 million at year-end, and the dividends and profit-sharing from this single investment were the only things keeping the consortium afloat.

MYSTERY ASSET

Buried in the Statement of Financial Position is a puzzling line item, Sekhametsi Development Trust valued at M37,590.

The financial statements provide no explanation of what this trust is, who controls it, why it is considered an asset of the company, or what its purpose is.

MEMBERSHIP BOOMS WHILE DIVIDENDS SHRINK

The company added 148 new members during the year 2021, growing its shareholder base from 320 to 468 members with total share capital of M2,858,098.

However, despite this growth and the reported M62.7 million profit, dividends paid actually decreased from M35.2 million in 2020 to just M27.9 million in 2021.

For the 148 new members who joined, hoping to share in the consortium’s success, the reduced dividend payout, coupled with the revelations of operating losses and accounting errors, must be deeply disappointing.

DIRECTORS INSIST: “We are a going concern”

Despite the alarming financial indicators, directors insisted the company remains viable. In their report, they stated that they had given due consideration to the potential impact of the COVID-19 pandemic on the company’s ability to continue as a going concern.

They believed that the pandemic would have a temporary impact on the business activities and that notwithstanding these short-term challenges, the company had sufficient resources to continue as a going concern.

They attributed the company’s challenges to COVID-19, though many of the structural problems, the operating losses, the dependency on investment income, and the liquidity crisis predated the pandemic.

Auditors, New Dawn Chartered Accountants, issued an unqualified audit opinion, stating that the financial statements presented fairly, in all material respects, the financial position of the company.

However, an unqualified opinion does not mean the company is healthy, only that the financial statements accurately reflect its position.

Staff Reporter

Authored by our expert team of writers and editors, with thorough research.