South Africa’s Steinhoff faces cherry-picking of its best businesses
Steinhoff investors have continued to clutch at straws.
The publication of a brief summary of PwC’s investigation into accounting irregularities was enough to prompt a short-term rally in March, which was based more on hope than on logic.
The sale of the Steinhoff’s more attractive businesses has continued apace.
- In March, Steinhoff agreed to sell a 75% stake in its auto showroom and truck dealership network Unitrans to France’s CFAO.
- It also offloaded its 26% stake in KAP, a chemicals and logistics firm.
- Bloomberg reported in March that Steinhoff is seeking to sell properties in Europe worth about €400m to raise cash
The situation provides opportunities, with the sales of South African financial services provider PSG in January 2018 and KAP being heavily subscribed by institutional investors. The valuations of both businesses suffered from the overhang of the Steinhoff shareholding, Mark Lawrence, investment analyst for frontier markets at T. Rowe Price in London, says. In the case of KAP, he points out, all the treasury operations that Steinhoff conducted for them ended last year, so the last remaining linkage was the stake and board representation.
Steinhoff, Lawrence says, has been highly acquisitive, and so it’s future is “very dependent on its ability to drive shareholder returns from acquisitions.” An exhaustive breakdown of the assets held by Steinhoff was produced by academics at Stellenbosch Business School in Cape Town in June 2018. Value-generating integration, of course, is highly management intensive. The case for Steinhoff’s current management remains unproven.
The company has said that 2017 and 2018 results will be released at the end of May. Until those results are available, there is still no way that Steinhoff investors can know what they are getting in return for their cash.
Debating Steinhoff’s value
In an article for Seeking Alpha in January, Sarel Oberholster, executive director of PurePlay Holdings in South Africa and a Steinhoff shareholder, argued that the events the previous two years are “history” and that the company had “navigated the storm”. Oberholster wrote that the core businesses are performing better than expected, with debt servicing and repayment supported by trading performance. “Steinhoff is already on the comeback trail. The tough choices and decisions have already been made.”
- The shares have lost more than 90% of their value since the resignation of former CEO Markus Jooste in December 2017. The company, which used to be known as the “IKEA of Africa” clearly still has businesses that are strong enough to attract institutional interest.
- Could deep value be lurking?
Some value funds have tried to catch the falling knife. The Discovery Equity fund and Discovery Dynamic Equity funds increased their shareholdings in Steinhoff in the second half of December 2018, with fund manager Grant Irvine-Smith saying the price had already fallen more than the possible value of the alleged fraud, and that it therefore offered good value.
Yet the full impact of the irregular transactions is still not known. Lawrence says now that the outlook for Steinhoff “does not look good”. The write-down in shareholder equity from €16.6bn in March 2017 to €3.8bn in March 2018 is compounded by continuing net income losses, he says.
None of which is to say that strong businesses that deserve to be valued separately are not lurking in there. Low-cost retailer Pepkor, for example, changed its name from Steinhoff Africa Retail in 2018. Analysts have argued that despite the fact that its own results have been solid, the toxic associations of Steinhoff as shareholder makes it hard for the market to value the company.
Bottom Line: The Steinhoff name is too tainted to make its holdings a reasonable value proposition. The mess conceals a range of well-run businesses – but those businesses could find that their future lies under a new umbrella.