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NEPI Rockcastle – Horsing around in the Stable

Author: Published on: Published in: NEPI Rockcastle JSE:NRP

Irreconcilable international earnings, enriching management through M&A, hoodwinking investors through misleading analysis via rejection of independent investigation.

Report – Download Link

Letter to Auditor – Download Link

Romanian Subsidiary Filings – Download Link

NEPI Rockcastle (JSE:NRP) is a JSE-listed entity holding one of the largest real-estate investment portfolios in Eastern Europe. Viceroy’s investigations have uncovered numerous inconsistencies within NEPI Rockcastle’s financial reporting and major links to an established financial fraud:

  • Local filings for NEPI’s Romanian subsidiaries suggest company figures are massively overstated for at least the past 3 years. Romania is NEPI’s largest geographical income segment in which consolidated 2017 group accounts show net profit before tax of EUR 284.87m (2016: EUR 221.90m). Local income statements show these companies operate at losses of over >EUR 40m (2016: >EUR 50m) for the same period.
  • Viceroy believe corporate or tax-effective structure or transfer pricing does not adequately explain the substantial differences in Romanian earnings generation as NEPI’s reported income tax expenses in Romania also do not match local filings. Given the criminal implications of misrepresenting tax numbers to the Romanian tax office, we assume NEPI chose to instead mislead its shareholders.
  • NEPI’s recent acquisition of Rockcastle was immediately followed by a massive write-down of subsidiary loans reflecting uncollectable debt from SPVs. When taken together with the purchase premium for the business of almost 80%, it is clear that the only winners in the Rockcastle acquisition were Resilient Stable insiders.
  • NEPI’s former chairman Corneliu-Dan Pascariu was involved in Romanian real-estate venture CEEIF, funded by the Peregrine Financial fraud perpetrated by Russell Wasendorf Sr. NEPI purchased Romanian assets from CEEIF before the Peregrine Financial fraud came to light. Court filings establish that CEEIF and several subsidiary development & holding companies were utilized by Wasendorf Sr. to embezzle cash.
  • Despite having financial recourse for beneficial ownership of ~11% of CEEIF’s purported book value of >EUR 60m, Peregrine’s Receiver, Michael M. Eidelman, had no interest in pursuing these recoveries. Eidelman’s investigations alleged CEEIF was insolvent, did not discount asset values to CEEIF’s pro-rata minor stakes, hid assets and liabilities from its balance sheet, and had no audited financial statements. Given Pascariu’s involvement as a major shareholder and financier through Unicredit, at which he was chairman at the time, it would have to have been extremely neglectful to not detect this activity.
  • NEPI shareholders issued a written request on 8 August 2018 for an independent investigation into potential trading of associated companies, suspicious capital raising activity and property transactions. NEPI rejected demands for an independent investigation, instead establishing a subcommittee of its own members to investigate themselves, and their predecessors.
  • Even without considering the above points, NEPI is fundamentally overpriced when compared with peers.

Based on our analysis, we see a significant downside to NEPI’s share price driven by an unwarranted overvaluation and the likelihood of substantially lower-than-reported earnings. Were NEPI to trade in-line with peers we believe shareholders would face an 25% downside, however, given the suspected extent of financial misrepresentation, we believe the company’s shares are worth substantially less.

We believe stakeholders should reinforce their demands for an independent forensic investigation into the company’s operations and veracity of its financial consolidation and tax compliance. Until such time, Viceroy believe NEPI carries a high investment risk.

For more research into the Resilient Stable, readers should refer to the leaked internal memo by 36One Asset Management which we believe was published around the end of 2017. A Scibd link to this report is below. Viceroy have no business relationship with 36One Asset Management and have never discussed NEPI Rockcastle with them.

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