Stein­hoff loses dra­mat­i­cally against Shoprite

Finweek English Edition - - Techtrends -

SINCE STEIN­HOFF listed 10 years ago, its share price has fluc­tu­ated faith­fully along with Shoprite’s and the ups and downs of JSE prices. In De­cem­ber 2006 both were still trad­ing at around R25/ share. Then wealth for in­vestors in Shoprite took off. Its share price dou­bled in no time, while Stein­hoff’s halved. From be­ing equals in De­cem­ber 2006 the ra­tio changed to R55 for Shoprite and only R10 for Stein­hoff by year-end 2008.

That’s a dra­matic warn­ing to in­vestors and spec­u­la­tors about what can some­times hap­pen. There are prob­a­bly three rea­sons for it. In dif­fi­cult times, Shoprite’s busi­ness model of hor­i­zon­tal di­ver­si­fi­ca­tion is much more pop­u­lar with in­vestors than Stein­hoff’s vertical in­te­gra­tion, even though its model was re­spon­si­ble for ex­cel­lent profit growth over the pre­vi­ous decade.

But re­mem­ber that Stein­hoff also still earns a lot – as much as 50% of its in­come – in the old mon­eyed coun­tries of Europe. Shoprite is a South African and African suc­cess story. And over the past 12 months do­ing busi­ness was sim­ply bet­ter and more pop­u­lar in the emerg­ing mar­kets. Add to that the strong rand – the profit of £1 bought R11,50 at the time of writ­ing, against al­most R19 at end-2008 – and that partly ex­plains Stein­hoff’s un­pop­u­lar­ity.

And then there was the 2007 es­capade when all the ex­ec­u­tive direc­tors – even the com­pany sec­re­tary – bought large vol­umes of Stein­hoff shares in the form of sin­gle stock fu­tures (SSFs). That was a mis­take. The price fell sharply, mak­ing many in­vestors won­der whether those direc­tors re­ally knew what they were do­ing. Af­ter all, the board’s job is to man­age the com­pany to the ben­e­fit of its share­hold­ers, not to risk such large sums them­selves on spec­u­la­tive SSFs.

How­ever, the re­cov­ery in Stein­hoff’s price over the past few months to the cur­rent 1625c/share shows some in­sti­tu­tional in­vestors see value in the share. Add to that the pos­si­bil­ity of friendly cor­po­rate action and then con­sid­er­able re­cov­ery in the share price is pos­si­ble.

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