PICK OF THE MONTH

Steinhoff International

Combining bold acquisitions and aggressive organic expansion, Steinhoff has grown into a mega-company in just five years under the astute leadership of CEO Markus Jooste. It is a growth story that is still unfolding.

“There is an exciting year ahead for us,” says Jooste, fresh from masterminding the R62,8bn acquisition of apparel retailer Pepkor in a deal closed on March 31.

Pepkor adds another dimension to Steinhoff, which, in 2011, was thrust into the position of Europe’s second-largest furniture retailer through the €1,2bn acquisition of France-based Conforama.

Pepkor comes with a retail footprint of more than 4 000 stores on three continents: Europe (seven countries), Africa (10 countries) and Australia. Some 2 300 of the stores are outside SA.

In Europe, Pepkor boosts Steinhoff from fifth to third largest player in the continent’s fastest-growing retail sector: discount retailing. It comes at a time when consumer confidence in Europe has rebounded to its highest level in eight years.

“We saw our first top-line growth in Europe last year,” says Jooste of the group’s year to June. Pepkor’s turnover, which grew a hefty 18% in the year to June to R45bn, boosts Steinhoff to a group with annual turnover approaching R170bn, a far cry from the R36bn turnover of five years ago. It makes Steinhoff a group with huge scale, a key factor for success in an era of constrained economic growth.

“Our supply chain is a scale game,” says Jooste. “As our volumes grow, margins improve.”

The benefit of margin uplift on profits can’t be underestimated. Reflecting this, a rise in Steinhoff’s continental European furniture and household goods operations’ margin — from 6% to 6,6% in the year to June — levered a 7% turnover rise to €7,6bn into a 15% rise in operating profit.

Steinhoff is also pursuing organic growth through an aggressive increase in store numbers. Among big recent jumps, its European retail management division added eight stores in the year to June. Of these big-format stores, averaging some 8 300 m² each, six were in the fast-growing, high-margin German market. “Expanding in Germany is a priority for us,” says Jooste.

Pepkor is also expanding aggressively, adding 318 new stores over the past financial year. Also added were new markets: Romania, Hungary and the UK, where 50 Pepco branded stores were rolled out in seven weeks.

In the Steinhoff tradition, bolt-on acquisitions continue at a steady pace. In France, the 13-store Macdan has been added to Pepkor’s line-up. In Australia, mattress manufacturer Select-O-Pedic was acquired in June.

Steinhoff’s growth formula is delivering results, with headline earnings in the year to June rising 36% (38% in euros) to R12,42bn. It followed a 39,5% rise the previous year.

However, headline EPS (HEPS) in its latest year came in 2% down. At work was the dilution impact of an R18,2bn rights issue in July 2014, conversion of some €740m bonds into ordinary shares and shares issued to fund the Pepkor deal. In total, weighted shares in issue increased 38%.

For Steinhoff the next big leap comes on December 7 when its primary listing moves from the JSE to the Frankfurt Stock Exchange. It lists on the German bourse with its balance sheet in fine shape, net gearing having been cut from 34% at its June 2014 year end to 14%.

Cash flow is also robust, coming in at R20,3bn net of tax and dividends in the latest financial year.

Steinhoff appears set to again deliver strong double-digit profit growth in its year to June 2016. However, HEPS face further dilution when the full impact of shares issued to fund the Pepkor deal kick in. The number of shares on which HEPS is calculated will rise by a third.

Dilution is likely to be muted by share buy-backs, for which Steinhoff has prepared itself through a €1,1bn bond issue in August. The convertible bond was issued at a minimal yield of 1,25%.

In line to be bought are Steinhoff shares acquired by Brait, when it exchanged its 37% stake in Pepkor for a 6,1% stake in Steinhoff. Brait has indicated that it is a seller of its stake — now worth about R18,5bn, roughly the same value as the €1,1bn bond issue.

Indicating that the market is looking through earnings dilution, Steinhoff’s share price has bucked an overall weak market and risen to a new high on strong buying volume. It is a bull trend that appears to still have long legs.

Dilution is likely to be muted by share buy-backs, for which Steinhoff has prepared itself through a €1,1bn bond issue in August