Rural Funds claims Bucephalus "slavishly repeated" Bonitas allegations

The company that manages agricultural landholder Rural Funds Group (ASX: RFF) is doubling down on its dismissal of allegations raised by Hong Kong-based Bucephalus Research, which last week described the business as a "Ponzi scheme".

In a rebuttal released to the ASX this morning, Rural Funds Management (RFM) reiterated its opinion Bucephalus' criticisms were "substantially similar to those made in the recent documents selectively released by short seller Bonitas".

RFM noted short sellers like Bonitas and those associated with them make substantial profit from a declining RFF securities price. However, Bucephalus has emphasised it is not a short seller and has no association with Bonitas.

"Bucephalus and Bonitas have each released documents that are false, misleading and speculative without any inquiry being made of RFM before their release," RFM said.

"Their documents are entirely without substantiation and are made out of the jurisdiction in their false view that they are beyond regulatory scrutiny in Australia.

"RFM has commenced proceedings in the Supreme Court of New South Wales to demonstrate the false and misleading character of the Bonitas allegations, which allegations have been slavishly repeated by Bucephalus."

"RFM again encourages its investors to consider carefully the full rebuttal of these claims by RFM management which has been corroborated by EY and the fulsome audit reports of the group by its auditors, PwC over the past six years."

In its own rebuttal, Bucephalus described RFM's comment on its work as "disingenuous", claiming it failed to address the questions we posed.

"We have no relationship with Bonitas. Our conclusions may be similar, but our reasoning was different. Our opinions are based on the facts as we see them and are supported by extracts from the original documentation," the research firm said.

"We are a Hong Kong regulated, subscription based, independent research company working with institutional investors. We have no incentive to be malicious or to be misleading. There is always the chance that we may draw the wrong conclusion, but we do not think that that is the case here."

RFM has taken issue with the "Ponzi scheme" allegation, claiming it to be "false and misleading" as RFF has raised capital to acquire new income generating assets.

"Investor distributions are funded by cash, which is generated by leasing assets, not from capital raised from investors," RFM said.

"RFF's FY19 adjusted funds from operations payout ratio was 78%, which means distributions are sufficiently covered by operating cash flows with surplus cash flow to reinvest or reduce debt."

One of Bucephalus' main claims surrounded the issuance of RFF funds to raise $149 million for a transaction with Brazil's JBS Group, which it alleged allowed RFM to "to use RFF money to take a 100% equity stake in J&F at no cost", giving RFM any upside and "leaving RFF exposed to the downside".

RFM has responded claiming the statement is false and misleading.

"RFM does not and cannot receive any benefit other than the 1.05% management fee," the company says.

"The transaction is as described in the Retail Offer Booklet and Explanatory Memorandum issued in July 2018 and was confirmed in the independent investigation report prepared by Ernst & Young (EY Report), released on 27 August 2019."

Another concern raised by Bucephalus surrounded the calculation of RFF's asset values, alleging "RFF looks to be booking assets expenses as asset improvements". The investor research service company also questioned the calculation of asset lives, alleging depreciation costs were cut and profits were inflated.

RFM also claimed both these statements were false and misleading, stating accounting standards meant costs may only be capitalised in the event that they result in future economic benefits to the asset.

"RFF capitalises costs relating to capital improvements on the properties. These capitalised costs attract additional lease revenue and have been audited by PricewaterhouseCoopers (PwC), RFF's auditor," the group said.

"The depreciation rates adopted reflect the expected useful lives of the assets. The useful lives are based on assumptions that depend on various factors relating to the assets," RFM said.

"The assumptions adopted are based on RFM's experience in the various sectors and are in line with the views of industry experts.

RFM noted RFF recognises its property assets at fair value in total adjusted assets, based on independent valuations which have been audited by PwC and addressed in the EY Report.

Bucephalus alleges whilst RFM states its work is false and misleading, it ignores a few issues raised.

"If capitalised costs improve asset quality, why are revenues not rising as fast as assets?" the research firm asked.

"Asset lives are estimates, but the estimates they are using are longer than other experts would suggest, why?

"Both the profit and funds from operations number depend on whether costs are capitalised or expensed. If expensed, profit and funds from operations would not be able to cover distributions."