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Steinhoff may have potential as a deep-value play

By David Whitehouse
Posted on Friday, 21 June 2019 09:22

Steinhoff shares are now worth less than the bargain goods in its Poundland stores. REUTERS/Stefan Wermuth

Terrible news flow creates its own opportunities. Steinhoff shares are not for the faint-hearted, but the scandal-hit South African company has a core of assets that could not be bought elsewhere for its current market valuation.

Steinhoff has been through a perfect storm in terms of corporate governance. Yet viable businesses within the group have survived the buffeting. The shares fell again on 19 June after the company finally reported a loss of €1.2bn ($1.4bn; R19.3bn) for the year to September 2018, versus a loss of €4bn euros a year earlier. The shares have lost about 97% of their value since accounting irregularities came to light.

The company’s stock has fallen off the radar of most of the analysts who confidently recommended it before the resignation of former CEO Markus Jooste in December 2017. But there is a price for everything: deep-value plays usually require such a perfect storm before they can emerge.

Sarel Oberholster, executive director at PurePlay Holdings in Johannesburg, argues on Seeking Alpha on 19 June that the company has a sum of the parts valuation of about €11bn and debt of about €7.4bn. That, Oberholster calculates, means an indicative net asset value per share of about 83.5 euro cents a share, which remains to be confirmed by the 2019 half year report.

  • The emerging core subsidiary businesses are Pepkor South Africa and Pepkor Europe, as well as operations in the UK and Australia, Oberholster says.
  • Steinhoff currently trades at around 8 euro cents a share in Frankfurt.

Weak trading outlook

The company says that it lost control of Mattress Firm in the US in 2018 and that it will lose control of French furniture retailer Conforama in the current year. They will be treated as equity-accounted investments and Oberholster expects a positive impact from the fact that those struggling businesses will no longer be consolidated.

The economic backdrop is unlikely to give Steinhoff much of a tailwind.

  • The company says that 2019 reporting-period sales will be reduced by a weaker global economy and stronger competition in its markets.
  • Operating expenses will remain high due to legal and restructuring costs and capital expenditure will be restricted to protect free cash flow.

Oberholster sees the company’s half-year report, due on 12 July, and an analyst day which the company’s website says will also happen in July, as potential triggers for a narrowing of the discount. The analyst discussions are likely to be key, he says, though legal challenges “will continue to have a depressing effect on the share price as a counterweight”. Steinhoff faces a mass lawsuit from investors in Germany who lost money as the shares collapsed.

Piet Naudé, director of the University of  Stellenbosch Business School in Cape Town, argues that the legal challenges mean it is unlikely that any “reasonable residual value will be realised in the short to medium term. I suspect the group will break up and separate entities might become profitable again,” he says.

It’s up to management to convince the market that the company can become investable again. But even if they can’t, retail industry buyers are unlikely to leave discounted assets on the table indefinitely, creating the prospect of some shareholder value being realised.

Bottom line:

Margin of safety is the core principle of value investing. It’s a margin that buyers of Steinhoff will need given the ongoing legal disputes and serious reputational damage – but it’s a margin that does exist.

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