The Rural Funds Group Limited (ASX: RFF) share price tanked 42% to $1.36 this morning on the back of a string of outrageous allegations made publicly against the agricultural real estate investment trust by activist short seller Bonitas Research.
Please note these are only allegations made by a 'short seller' for now and should not be relied upon as fact or to draw an investment conclusion.
By way of background Rural Funds Management (RFM) as a privately held business is responsible for managing the ASX-listed RFF investment trust, but Bonitas Research is alleging that privately held RFM has been used to siphon off funds via different transactions from the trust to the private management company.
Bonitas alleged: "In total, we calculate that through these two transactions plus various ongoing cash expenses and fees since FY'14, RFF Management had siphoned A$ 86+ million into RFM at the ultimate expense of RFF minority shareholders," .
These are some serious allegations, but only the tip of the iceberg according to Bonitas.
It also alleges, among other things, that RFF fabricated rental income by around $28 million and overstated net assets (the aggregate value of all its agricultural businesses, farms, cattle herds, etc) by more than 100%.
This is notable as if the allegation is correct or if RFF has even been inflating assets to a lesser extent, it could be in breach of debt covenants relating to the minimum value of net assets. Debt can be a killer for any business.
In conclusion, according to Bonitas, RFF has raised a total of $475 million via equity raisings and borrowings since FY 2014 on the back of its allegedly misleading reporting and activities.
"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," Bonitas concluded.
Bonitas rates the equity as worthless and of course is financially incentivised to paint as worse a picture of RFF as possible.
The stock has been suspended while RFF's management team prepares its response to the shock allegations. As such it's important to note that management should be given the chance to explain themselves or rebut the allegations.
