Steinhoff loses dramatically against Shoprite
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.