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Transnet revaluations requires scrutiny


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Transnet revaluations requires scrutiny

Image of African Rail Industry Association CEO Mesela Nhlapo
African Rail Industry Association CEO Mesela Nhlapo

3rd April 2023

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As Transnet heads towards its financial year-end, industry body, African Rail Industry Association (ARIA) has called for caution in the asset revaluations as errors could be catastrophic for the rail industry.

ARIA CEO Mesela Nhlapo said given the fact that Transnet’s material revaluations have increased significantly despite a drop in cash flow, operational performance and maintenance spend, caution is needed.

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Nhlapo pointed out that:

In March 2022 Duetsche Bahn Thelo performed a revaluation of the rail infrastructure. This 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%.

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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 and it increased by a further R7.6 billion. Together with the revaluations of March 2022, it means that Transnet have revalued the rail infrastructure by R16.7 billion or 41% in just 18 months.

The gearing ratio decreased to 43.7% from 45.5% (the covenant is breached at 50%) at the mid-year despite Transnet formally breaching their cash interest cover ratio recording a result of 2.1 times (threshold 2.5 times). 

“The reason for our concern around the revaluations is that Transnet Freight Rail reported a R8.95 billion drop in operating cashflow 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 10 years (according to ARIA’s internal analysis) and their operational performance has decreased significantly over the past five years – down from 226 million tonnes in 2018 to 173 in March 2022. 

“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,” she said.

“The Copex (Capitalised Opex) accounting policy of Transnet also bears mention. This can be applied in line with IFRS (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 that asset values are not overstated as maintenance is capitalised instead of being expensed. This inflates both earnings and asset values,” she said, “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”.

Note to editors:

Transnet’s auction for private third-party rail freight access, launched last year, resulted in only one successful application bid. Transnet Freight Rail (TFR) said only two companies had participated in the auction of slots. Transnet initially announced that 16 slots were available to private operators. These slots were to be sold on a two-year basis; Transnet would retain grandfather rights on the lines; slots were made available on a “voetstoots” basis and a phased implementation of the private slots to only limited sections of the network would be implemented. The only bid made for the Cape Corridor's Kroonstad to East London slot was successful and went to private freight operator Traxtion.

 

Issued by The African Rail Industry Association (ARIA) 

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