Holistic Consulting Services for Farmers and New Projects
Henk Venter obtained his MBA and decided to pursue his passion for the agricultural sector by offering a consulting service focusing on the starting of new projects in the agricultural sector and supporting CFOs with financial models and making investment appraisals on green energy projects.
CIARAN RYAN: Today’s podcast is sponsored by Draftworx, which provides automated drafting and working paper financial software to more than 8000 accounting and auditing firms and corporations. CFO Talks is a brand of the South African Institute of Business Accountants. It’s a great pleasure today to introduce Henk Venter, who is Financial Executive at a company called LVC-SA, which is a consulting firm involved in alternative energy products and the agricultural sector. We’ll find out more about that in a minute. Henk is a CA with an MBA from the University of Birmingham, where his dissertation was on the influence of capital structure on the financial performance of non-financial companies in the FTSE 250 Index. He’s got an impressive list of designations, he’s a member of the Chartered Institute of Government Finance, Audit, and Risk Officers, to name just one. He’s a member of the UK Chartered Institute of Public Finance and Accountancy. He’s also a Certified Financial Officer or CFO SA, which is the top designation offered by the South African Institute of Business Accountants. He has an extensive history in different sectors from fast-moving consumer goods to services and alternative energy and agriculture. Welcome Henk, and you’re talking to us from the Western Cape, tell us where you’re talking to us from.
HENK VENTER: Thank you for the introduction Ciaran, and for hosting me on CFO Talks, I’m in the Western Cape, talking from my office in Onrus River in the beautiful Hermanus area. I am very privileged to live in such a beautiful area. I’m glad to be on your show, thank you.
CIARAN RYAN: For people who are outside of South Africa, Hermanus or Onrus River is a little bit south of Cape Town. It’s about an hour or an hour-and-a-half south of Cape town, right?
HENK VENTER: Absolutely, it’s about an hour’s drive from the airport. So it’s not too far from the major city and then you also have the lovely Overberg area as well. So it’s a very good point to be at.
CIARAN RYAN: Tell us a little bit about LVC-SA, which is your consulting firm and what it does. I’m interested to hear what are the particular challenges for a finance executive operating in these sectors that you’re in like agriculture and alternative energy.
HENK VENTER: I started the firm in 2019 after I was working for a company in the deciduous fruit industry, which is Kromco (Pty) Ltd, and I started the firm just after completing my MBA at the University of Birmingham, which then actually prompted me to think a bit more outside of the box and start this consulting firm. LVC-SA is an accounting firm but also a consulting firm and risk management firm. We have a specific division that focuses on starting of new projects in the agricultural sector and supporting CFOs with financial models and making investment appraisals on green energy projects. So basically, our firm’s mission is to pride ourselves in understanding a client’s unique business needs and with a focus on business needs, because I believe it’s very important for CFOs of today and financial executives to understand the business, the business needs of companies, to have a much broader understanding of business during the earlier years.
CIARAN RYAN: As I mentioned at the start, you did an MBA at the University of Birmingham, was that done remotely or were you attending Birmingham University physically? How did that go?
HENK VENTER: Yes, it was mainly remotely, modular like you do at any of the other universities, but we also attended full study schools at university as well. So it was over three years that we completed the MBA, your third year being your dissertation year. A Birmingham MBA blending is also a Top 100 MBA on the Financial Times listing. I was very fortunate that the previous company selected me to do the MBA and they fully funded it, so I’m very thankful for that. It was very interesting to do an international MBA.
CIARAN RYAN: What attracted you to the University of Birmingham because there are quite good MBA programmes in South Africa, I’m sure you’d agree.
HENK VENTER: Absolutely, Ciaran, the University of Stellenbosch, UCT have wonderful MBA schools. It’s just that our CEO at that specific time gave us the opportunity to decide between the various MBAs, and we thought that we want to do something different, something that’s going to give us more exposure to international markets, international strategy to have a bigger understanding, especially if you want to start thinking more global. That was the main reason.
CIARAN RYAN: Let’s just turn now to your dissertation that you did there on the capital structure, on the financial performance of non-financial companies that are listed in the FTSE 250 Index.
Just give us an idea of what were your key findings there?
HENK VENTER: It’s very interesting, Ciaran, I focused mainly on the FTSE 250 specifically because it’s more your local domestic firms in the UK, they are less globally linked, so there are less outside things affecting the business. The end result of the study was effectively it said that your financial leverage supports growth for the top 70 performers on the FTSE 250. In fact, the study suggests that an average financial leverage ratio of 65% is representative of an overall sample of 40% of these firms on the FTSE, So there was definitely a positive correlation on these specific firms and, as I said, the average debt-to-equity ratio of 65%, which is very interesting because at my previous firm, Kromco, one of the main questions always on board level is what should our gearing ratio be? When is it too high? When are we too conservative? When are we jeopardising growth? That’s what actually prompted me to do the specific study on debt-to-equity.
CIARAN RYAN: So just to be clear on that, companies that had a leverage, the average leverage rate was 65%?
HENK VENTER: Yes, 65%, which was, basically attributed to about 60% to the valuation of profitability for these specific firms. Obviously, when you do this study, you exclude all your financial firms because it’s all your banks and so on, which have very high gearing ratios for obvious reasons. So these are basically companies that are more vested in manufacturing, fast-moving goods and so on. The average debt-to-equity ratio was 65%, which shows a significant positive correlation in growth for those specific firms.
CIARAN RYAN: Did you find, for example, that companies that were under-leveraged, in other words, less than 65% or more than 65% didn’t grow to the same extent, was there an optimum point?
HENK VENTER: Your optimum point is obviously in the region of 65%. Anybody above that had a lower growth ratio on that. Obviously, firms with lower gearing had a negative growth figure
if you compare the debt-to-equity ratio for these specific firms. So the optimum financial leverage ratio for these firms according to the study was 65%
Bank of America forecasts growth this year and next.
CIARAN RYAN: Fascinating. So it does show that…because a lot of companies are debating this at the moment, should we take on more debt. Yes, interest rates are low, but there’s an added risk, can we absorb market shocks when they come. In fact, I was just looking yesterday at a Bank of America study, where they’re just looking at fund managers and these funds are beginning to increase their cash holdings, because maybe they’re a little bit nervous that there could be some shocks in the market after this whole Covid thing. Although at the same time, they’re very optimistic, they say that the economy is going to grow very well this year and next year.
HENK VENTER: Absolutely, Ciaran, the thing is it also depends on the sector, if you’re in the agriculture sector, you have to be very, very careful because it’s seasonal. Your retail companies tend to have much higher gearing ratios because their cash turnover is much quicker. But there’s definitely a part where you definitely jeopardise growth if you don’t increase your gearing ratio, and also the very important thing is that especially in agricultural sector is where you see that the gearing ratio is sometimes too low and they compromise liquidity, and then they have huge capital expansion, where they use cash to finance these projects. Then you get to a situation where you go through difficulties and the moment your liquidity comes under pressure, then also the bank starts to move away. So you have to have the perfect balance between your debt-to-equity ratio and your liquidity ratios, but most important is to assess the risk within a specific industry.
CIARAN RYAN: It’s obviously not a tap that you can just turn on and off. Oh, we need more liquidity, let’s go. It’s something that’s got to be planned quite well in advance, I’m sure.
HENK VENTER: Absolutely, you’ve got to look at your long long-term strategy and obviously, very important is capital projects, what is your payback on your net present value, the feasibility of the project, does it make sense to do this investment.
CIARAN RYAN: Tell us a bit about yourself, Henk, and your career journey, where you grew up, where you went to school, where you studied.
HENK VENTER: I went to Merensky High School, which is in the lowveld area, also a lovely area.
It’s an agricultural school and it’s the same school that Dale Steyn attended, our famous cricketer.
From there I was very fortunate to be able to get into PwC directly after school. In those days you still had the five-year plan, you don’t get them these days anymore at the bigger firms. So that’s where my career started, where I did my studies through Unisa and I completed my training contract and got fully qualified. After that I went to Midrand in Johannesburg where I worked for an international company, an IT company called Aquero Africa, their head office is in Amsterdam, I was the group accountant for Aquero for a couple of years. From there I moved to Cape Town, where I started in the agricultural sector, where I worked for Kromco (Pty) Ltd, which is one of the largest deciduous fruit packhouses in South Africa. I was on the board of directors there for about ten years. So that’s mainly where I got all my agricultural experience from, working in the deciduous fruit industry, but also coming from Tzaneen and going to an agricultural school, I always had a passion for agriculture and that’s why I decided after my MBA to mainly focus on the agricultural sector, especially new projects, BEE projects, so that’s my passion now.
CIARAN RYAN: So all the way from Limpopo, Gauteng, down to the Western Cape, and I guess that’s where you’re going to stay now?
HENK VENTER: Absolutely.
‘Over the last five years that the price of solar has dropped significantly.’
CIARAN RYAN: And LVC-SA, that was obviously a decision you took, you decided you’re going to focus on these specific sectors, alternative energy. Are there quite a few alternative energy projects in the Western Cape area where you are?
HENK VENTER: Yes, I think specifically in the fruit packhouses because you have enough roof space to accommodate solar. I think most of the companies are at this stage running a hybrid solution. It’s always a challenge to get approval from the National Energy Regulator of South Africa (NERSA) if it’s a project above one megawatt. I think the Western Cape is definitely almost a leader if you look at solar. I think over the next five years we will probably see an increase in these kinds of projects. I also believe over the last five years that the price of solar has dropped significantly and I think it’s definitely something that will continue.
CIARAN RYAN: That’s always a debate about solar, isn’t it? It’s your return on investment, at what point do you pay off your capital expenditure on that. How is that now, you say the prices have dropped? I remember reading years ago that it was often an eight to ten-year payback period, has that shortened down now?
HENK VENTER: I think significantly, Ciaran, I think we’re probably now looking at a four to five-year planning horizon, which makes more sense. Obviously, the bigger increase we get in Eskom prices, the better the payback, so that then makes more sense. But I think if you now look at a one megawatt plant, five to seven years ago it would have cost you in the region of R25 million, and you’re probably now looking at R12.5 million for exactly the same solar panels, and obviously all the taxation benefits you can get. But each project you have to appraise in isolation, depending on what they pay for electricity, that can have a significant impact. Wind plants are also an option, the only problem in the Western Cape is that in specific areas you don’t get consistent wind and you can’t have a plant where you have gale force winds. We have some windfarms in the Caledon area, where there is consistent wind and that’s more suitable for wind electricity.
CIARAN RYAN: Give us an idea of what drew you to the world of accounting in the first place because you went to an agricultural school, did you make a decision somewhere along the way that you wanted to get into the accounting area, and why was that?
HENK VENTER: In my early school days and high school days I always enjoyed accounting,
and it was always one of my better marks at school. But I can’t say I had a specific interest in…
when you’re 16, 17 years old, you think you have interests but you’re still deciding about it. But I think when I started my training at PwC, I think that is initially where my interest in accounting really started, I had a bigger interest. But I was never somebody who was that interested in the technical side of accounting, I always had a more specific interest in the business side of things in accounting. I think it’s probably one of the reasons that I’m no longer specifically in the auditing sector. I prefer to be part of the consulting basis, where you look at the future, not only compliance. We can be more involved in a value-added service, which I think is very, very important. That’s actually what intrigues me about accounting is more looking into the future, not about the history, which is also important, we have to look at compliance. But that’s mainly where my interest lies in accounting.
‘The CFO designation was available, and I specifically decided to go that route.’
CIARAN RYAN: Listeners might be keen to hear about your CFO SA designation and what motivated you to go that route because you have got a CA, you’ve got an MBA, so you obviously decided you’re going to round out your skillset, your toolkit, and what motivated you to go for the CFO SA designation?
HENK VENTER: It’s funny, many years ago when I decided to join SAIBA, when I saw that it’s the South African Institute of Business Accountants, what intrigued me about that designation is specifically business accountants, and the fact that I believe accountants should be more business focused. The CFO designation was available, and I specifically decided to go that route. I think it is a very specialised area and one thing that should be far more promoted between accountants and members. I believe that in essence every accountant or financial manager is a CFO and that’s how we should look at it. I think it’s very important to network and to understand from different businesses, you learn so much while being part of this network and there’s so much value added to be part of this designation.
CIARAN RYAN: There’s been quite a lot of academic study about the role of the CFO and how that’s evolved over the years. In actual fact, if you go back to some of these studies that happened in the 1920s and the 1930s, and we were talking a hundred years ago, very similar kind of debates happening, what is the CFO’s job? Of course, it’s, as you just mentioned, it’s more than compliance and the technical issues of preparing financial statements, it’s communication and team leadership and strategy, human resources, and it’s really looking after and being the right-hand man to the CEO very often, that’s the critical thing, the person who is the sounding board for some of these wild and crazy ideas that CEOs have.
HENK VENTER: Absolutely and I think that one of the things that CFOs needs to do more is to be more involved in absolute robust analysis. I think in the earlier years of CFO, absolutely, they were more focused on compliance and also they didn’t have the technology to be that productive, so you have to do everything manually. Today we have the technology to enable us to be more focused on business strategy, technology and operations, and understand the whole value chain of the company. Businesses is forever changing, and you have to align your strategy and your financial strategy all the time in a competitive environment. I think that’s probably what’s different these days, it’s more competitive and you still have all the compliance issues, but we do have technology to support us to do both.
CIARAN RYAN: There are some things that you can only learn through experience and hard knocks, things that are not taught in the accounting schools. You went and did the MBA for a reason, you felt that there was maybe some business knowledge there that was lacking. Maybe just elaborate on that a bit.
HENK VENTER: If I can go back to compliance again, these days is that if you have trainee accountants, and I think that was my shortfall to really understand the business. So many times you will have an audit firm that comes to a business, and after that they still don’t understand the business. I really believe that if you are an auditor or accountant, you should make an absolute effort to understand the business operations. For me, always the devil is in the detail, there needs to be more detail. One thing I’ve learned over the last couple of years is that executives tend to present more things that they want the board to hear and not the things that they want the board to hear. Not that I’m saying they’re hiding something, but it’s added benefit for everybody if you can provide more detail and understand the business. You can add more value as a company CFO if you really make the effort to understand the business and not just focusing on compliance, understanding what do the ratios tell us, how’s it going to affect our long-term strategy. I never thought about it before I did my MBA, and now you’re making time to really think about the financials that you present to your clients. That’s the main thing.
CIARAN RYAN: Do you think there’s a little bit of an unconscious bias that enters into the auditor-client relationship, where, if you are an auditor, let’s say not necessarily a senior auditor, but a junior auditor at a firm, and that firm is collecting R60 million in fees from that client, you’re not really going to be wanting to be the guy that’s got the bad news, right? So there might be a bit of an unconscious bias that can creep in there, and you’re going to keep some of that bad news away. Is there that kind of thing happening?
HENK VENTER: That’s quite a big question but I think it’s absolutely true and sad, to be honest. It must be a bit of bias when you get to that. I think it’s maybe a good thing where we have the new rules of audit, where we have to rotate or you need a different partner to review the file. I think we need to have audit committees have a bigger impact on this specific checking the auditors. Then train the CFOs to understand the risk in auditing and to be more involved in the process. I think there’s a big risk, and also not only from the auditor side, I think one thing I’ve found in big firms is that where there’s certain bonus structures and things like that, it’s important for auditors to understand those bonus structures. That’s normally where CFOs are under pressure to have good results. It’s definitely a fine line, I think it’s a very fine line, and I think audit committees itself should be less focused on going through the motions, but rather be more focused on checking on the auditors and the auditors’ responsibility.
CIARAN RYAN: That very question that you just raised, the issue that you raised about bonuses and, of course, that can skew the whole business operations. We saw that in Tongaat Hulett, where executive remuneration was tied to certain targets such as revenue, and so you get these transgressions against IFRS 17 and revenue recognition. That kind of thing can and, of course, IFRS, all the financial standards were set there to try and provide some guidelines, but there’s a lot of interpretation and judgment that enters into that, as we have seen, right?
SA agriculture having a bumper year.
HENK VENTER: Absolutely and it gets to a stage where it becomes a 50/50 call between management, the CFO and the CEO. For me personally, I’ve seen it in the industry, where you can see when it’s a 50/50 call in terms of figures, that management tends to make the wrong decisions when it comes to where they’d benefit from bonuses and so on. As I said before, I think the audit and risk committees need to be far more involved in these kinds of decisions. Also, because it is so difficult for management as well, being involved in the day-to-day operations, and for the auditor that gets a R60 million fee every year, it somehow can be affected. I think it needs to be a combined effort to make sure that everybody complies with the risk involved in making the right decisions.
CIARAN RYAN: One thing that I do observe is that the areas that you are in, alternative energy and agriculture, they’re two very, very strong sectors at the moment. South African agriculture, based on the stats that are coming through, having a bumper year and certainly last year, and will have again this year, I think, and alternative energy as well is flying. So you’ve really positioned yourself in the fast lane there.
HENK VENTER: I believe so, I’ve also got a partner who’s a technical horticulturist, so we provide holistic consulting services to farmers and new projects. That’s something that I learnt through life, you have to surround yourself with people who know specific industries. I totally agree with you, I think solar is going to boom going forward, it also depends on the rand exchange rate. I think the agricultural sector at this stage is significantly benefiting from the exchange rate. I definitely foresee a couple of good years in these sectors.
CIARAN RYAN: Just give us a sense of some of the peculiarities of agriculture. One or two that come to mind is valuing stock, which is plants in the ground. We saw that, again just referring to Tongaat Hulett, where that was one of the issues that was raised as being incorrectly reported. But I’m sure there are others, just run through one or two of the peculiarities of the sector.
HENK VENTER: Probably the first thing is water that’s the main challenge. But if we specifically look at deciduous fruit industry, if you look at your payback, especially with new projects. I think the reason we see so many new projects not being sustainable is from a cashflow point of view, is that people don’t understand that there’s a significant amount of capital you need to invest before you start getting a return on your capital. You get funding for these projects and you’re able to do put all of this capital and plants in place, but then they run out of cash flow. So. It’s absolutely imperative to make sure that you get the right people on board to make sure that you get the right technical advice from a farmer side, you need to get a right horticulturist involved, get the right CFO involved to help you with the financial modelling and cost management as well. Definitely in terms of innovation, if you get the right people involved, I truly and honestly believe that South Africa is well positioned to do very well in agriculture, but you need to get the right skills involved. People specifically in the deciduous industry are not getting the right volumes on trees and not necessarily because they’re not good farmers, they just didn’t get the right advice. That is where you need to get a consulting firm, get a specialist involved to show you where you can improve on your outputs on fruit and provide a better quality, make sure you plant the right varieties and going to the right strain because that can have a significant impact on your profitability going forward. Planting the wrong apple trees and finding out six years later that you don’t have a good price for those specific apples, that can cost you a lot of money. So get the right people on board.
‘If you think you’re going to buy a farm tomorrow, because you heard somebody’s making money, think again.’
CIARAN RYAN: You could make some dreadful errors, I’m sure, which you only find out, as you say, six years later. What you just mentioned is that you have a partner who is an agriculturalist, so you’ve got that expertise, which you then can marry with the financial expertise, and the very unique capital flows and capital requirements in agriculture. This is not something that you can learn from your grandpa.
HENK VENTER: Absolutely not, if you think you’re going to buy a farm tomorrow, because you heard somebody’s making money, think again. It’s an absolute specialist industry and there are such fine margins, specifically in how you plant an apple tree, how close are your lines, which direction do you plant it, and what is the chill factor involved. So that can make a significant impact on your return and the difference between being successful and not being successful. That’s why we’ve made sure that we’ve got the right people on board, and so should every company, get the right people on board.
CIARAN RYAN: Just turning to alternative energy, you said there are a lot of hybrids down there. I presume that’s like wind because the Western Cape is quite well known for its wind and solar.
But my question is really around these packhouses, is there a big move by packhouses and agricultural companies to put in these alternative energy sources and somehow remove themselves from the Eskom grid, which is very unstable at the moment.
HENK VENTER: I think most of the companies have already gone the route of solar. To get off the grid completely is a bit of a challenge. As I said in the beginning, you need to get specific approval from NERSA to go anything above one megawatt. So currently the companies will run a hybrid between solar and generators. Packhouses also have large cold storage, so what you’ll try to do with the solar system is can you at least run 60% to 70% of your plant on solar because you have cold storage. In some cases, the cold storage will be able to continue for a while at the correct levels. So there’s definitely a move but to get off the grid completely, I don’t think it’s possible at the moment.
CIARAN RYAN: A couple of quick questions here, what do you do in your downtime?
HENK VENTER: I like to play golf if I get time. There’s a lovely golf course in Hermanus, probably one of the best I have played. As you know, Cape Town, we’ve got the Garden Route, I like to play a different course every month. So I like to go down the Garden Route and play a round of golf if I get time. I like running, I used to do the Comrades, but these days I don’t run that kind of distance. I’m a very active person.
CIARAN RYAN: Okay, a lot of sports there. Are you a family man?
HENK VENTER: Absolutely, I think it’s very important to have a balance in life with family. It’s always a challenge, people say you must have a balance, I don’t think you always get it right. But I am definitely trying to be more balanced focused.
CIARAN RYAN: How many kids have you got?
HENK VENTER: I’ve got no kids.
CIARAN RYAN: Are there any books that you’d recommend, something that really inspired you, changed your mind about something, led you in a different direction?
HENK VENTER: In my earlier younger years there was one specific book, and everybody will know the book, it’s The 7 Habits of Highly Effective People by Stephen Covey. It’s a book that I got from my dad just after school, during my young career, and that meant a lot to me, to try and invest some of those principles in my life. Another book is Too Big to Fail by Andrew Ross Sorkin, which is about the 2008 economic downturn in the United States. For me, every CFO should read that book. I always feel that people don’t go broke, they grow broke. It’s a very important book to understand how important it is for CFOs to be involved and to be transparent and be very robust in analysis. As I said earlier, I always feel that the devil is in the detail. That is definitely what was lacking if you read the book Too Big to Fail, definitely not enough detail.
CIARAN RYAN: So that was a book exploring the financial collapse. I read quite a few of those books, but I haven’t read that one. I think that what a lot of people are suggesting is that what happened in 2008, there was a bit of a rescue, we got through by the skin of our teeth. But what you see now, just last week with the US government, President Joe Biden, $1.9 trillion, these figures are so big. I can’t even tell you how many zeros there are on the end of it, but it’s a big figure and that surely has consequences.
HENK VENTER: Absolutely, that specific book meant a lot to me. There’s such big pressure on CFOs to make sure that everything is absolutely transparent.
CIARAN RYAN: Henk Venter thank you so much for coming on and sharing your story and your insights as well. I must say, I’m highly impressed by the amount of work that you’ve put into your career and the, the interesting turn that it’s taken. I like the fact that you’ve got the CFO SA designation and your reasons for doing that, for the network and that being one of the great learning experiences that you get at a senior level. If you’re a finance executive, it’s really just being able to communicate and share ideas with people at the same level, and that is not something you’re going to learn in accounting schools. I’m sure you would agree with that. Maybe I’m putting words in your mouth, but I don’t know.
HENK VENTER: Absolutely, I agree with you. That’s so true, Ciaran, thank you.
CIARAN RYAN: Please stay in touch, I’m so keen to hear how the agricultural sector does this year and also alternative energy. These are two of the biggest stories in the economy at the moment. So let’s get you back in a short while and have a catch up.
HENK VENTER: Thank you for having me on CFO Talks, it was nice chatting to you and I really enjoyed it. I would love to give you some feedback in a couple of months’ time.