Rural Funds Group (ASX: RFF) has commenced legal proceedings against Bonitas Research LLC, the source of a recent short report that saw the RFF share price fall more than 40% in a day.
About Rural Funds
Rural Funds Group is a real estate investment trust (REIT) that owns farms and leases them to tenants. Started in 1997, Rural Funds Management now manages $1.2 billion in agricultural assets across New South Wales, Queensland, South Australia and Victoria.
The Short Report
Bonitas Research made several allegations against Rural Funds on August 6th, including that it had fabricated $28 million of rental income paid by its two largest third-party lessees and that it had overstated its net assets by 100%.
Bonitas alleged that Rural Funds’ actual net assets figure was only $268 million, putting the company in breach of a $400 million net asset loan covenant.
Another allegation was that: “RFF’s largest nefarious transaction appeared as an undisclosed dividend recapitalisation of RFM’s newly acquired cattle asset, J&F, which included a A$30 million special cash dividend paid to RFM financed by borrowings backstopped by RFF’s A$75 million financial guarantee to J&F”.
This short report saw the Rural Funds share price plummet more than 40% on the day.
Rural Funds responded the next day, and three weeks after the initial short report, Rural Funds released findings from an Ernst & Young report which found that the Bonitas allegations were not substantiated. The Rural Funds share price is up 10% in the last month, but it hasn’t fully recovered.
Rural Funds announced this morning that it has issued legal proceedings against Bonitas in the Supreme Court of New South Wales, alleging that the company suffered loss and damage as a result of the allegations.
What Does This Mean For Rural Funds?
Most people would say Rural Funds has responded well to the short report, quickly issuing a response and engaging a leading accounting firm to investigate the allegations. Starting legal proceedings should bring back a lot of confidence, and a win in court could hopefully help the share price to return to the level it was at before the short report.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.