Coronation price drop offers a great opportunity

FNB Wealth & Investments’ Wayne McCurrie says Coronation is a great company and that the recent price drop offers a buying opportunity.

Coronation’s share price plummeted over 10% after it told investors it is likely to suspend interim dividends after an adverse Supreme Court of Appeal (SCA) ruling.

The dispute between the South African Revenue Service (SARS) and Coronation relates to tax payable in South Africa for its international operations.

The court ruled on whether Coronation Global Fund Managers (CGFM), an Ireland-based subsidiary of Coronation Investment Management South Africa (CIMSA), was liable for tax in South Africa.

The SCA found that the primary operations of CGFM were not conducted in Ireland, and a tax exemption could, therefore, not be granted.

Coronation maintains that it has always been tax-compliant and was therefore “naturally disappointed” in the SCA judgment.

The company told shareholders that it is considering appealing the decision through the Constitutional Court.

Coronation said it is “in the process of quantifying the exact financial impact of the ruling and will update shareholders in due course”.

“Given the material impact on earnings and cash flows, we do not anticipate declaring an interim dividend,” it said.

Sasfin Securities’ David Shapiro said although Coronation did not disclose its liability, it is expected to be in the region of R250 million to R500 million.

Another question is what impact the ruling will have on the company’s future tax obligations related to offshore earnings.

Many investors hold Coronation for its strong dividend yield, and news of a halt on its interim dividend caused the share price to tank.

Buying opportunity

McCurrie said Coronation is an extremely good company with strong revenue which conducts business ethically.

He highlighted that the first court found in favour of Coronation, after which SARS took the matter to the SCA.

“They have not granted SARS the right to levy any penalties on the outstanding tax. They can only charge interest on it,” he said.

There are clearly two sides to this dispute, with experts on both sides and two different courts interpreting the laws differently.

“However it plays out, Coronation is a fantastic company, and I have full faith that they operate very ethically,” McCurrie said.

He added that South Africa is in a bull market which is extremely good for asset management companies like Coronation.

“The tax dispute is a once-off hit to the income statement, and the share price is down,” he said. “To me, that is an opportunity you get every now and then in the market to buy shares,” he said.

Reporting with Bianke Neethling and William Brederode