It's the moment nervous shareholders have been waiting for. Rural Funds Group (ASX: RFF) has released the results of the Ernst & Young (EY) report into the allegations that 'short-seller' firm Bonitas Research stunned the market with earlier this month.
Rural Funds Group is an A-REIT (or Australian Real Estate Investment Trust) that specialises in leasing agricultural land and assets for rental income. The company is primarily focused on almonds, cattle and vineyards with some of its 'tenants' including Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV).
What happened on 6 August?
On 6 August, short-seller firm Bonitas released an explosive set of allegations against RFF – essentially accusing them of 'cooking the books' and engaging in widespread fraud.
It alleged that RFF had been 'fabricating rental income' and 'overstating the value of its assets by more than 100%, with Bonitas stating "we believe nearly 100% of RFF's reported profits since FY'17 are attributable to either fabricated rental income or non-cash gains from dubious fair value changes applied to RFF's assets."
Further, the firm accused RFF management of siphoning profits away from the company and declared that RFF shares were "ultimately worthless".
RFF halted trading in its shares and released a quick response denying all of Bonitas' allegations, but in lieu of releasing a full response, commissioned accounting firm EY to take an independent look.
What did EY find?
The report from EY was released alongside the RFF FY19 results this morning and it corroborated RFF's position almost unequivocally. Going through each allegation, EY stated time and time again that each Bonitas claim was "not substantiated" and that any potential conflicts of interest or opportunities for mismanagement had been disclosed and systematically pre-empted by RFF management. Indeed, EY pointed out many errors and factual inaccuracies in the Bonitas report.
What's next for RFF?
In its release today, RFF stated:
The independent investigation conducted by EY concludes that the assertions contained within the Document are not substantiated. Further, EY have corroborated the response provided by RFF on 7 August 2019.
It appears that this report by EY – a globally renowned and respected 'Big 4' accounting firm – has put this saga in Rural Funds' history to bed. It pays to remember that Bonitas was short on Rural Funds when its allegations were released and therefore had an interest in seeing RFF shares fall in value. Whilst the RFF share price has yet to fully recover, it appears investors are cautiously regaining confidence in the company's management – perhaps assisted by management's heavy buying of Rural Funds shares after the allegations were made.
Rural Funds has also announced it is commencing legal action against Bonitas for "misleading and deceptive conduct" as a result.
