In­vestors seem to be in­creas­ingly scep­tic about its busi­ness model, but the rat­ing may just be too low

Keep an eye on it

Finweek English Edition - - INSIGHT - VIC DE KLERK vicd@fin­week.co.za

STEIN­HOFF’S SHARE PRICE has per­formed badly against those of other listed re­tail­ers on the JSE over the past eight or nine months. Per­haps it’s in fact that un­fair com­par­i­son that’s putting its share price un­der pres­sure. Stein­hoff is pos­si­bly more of a man­u­fac­turer than a re­tailer. The greater por­tion of its turnover and in­come is in Ger­many. Its busi­ness model – one of ver­ti­cal in­te­gra­tion, in which lit­er­ally the whole chain from forestry right down to the sell­ing of fur­ni­ture is con­trolled – may also be one in­vestors aren’t too sure about.

How­ever, Stein­hoff is still a big com­pany with ex­cel­lent per­for­mances over the past 10 years. How­ever, it looks as if Stein­hoff’s busi­ness and in­vestors’ de­sire to in­vest have cur­rently cooled off some­what. The ta­ble show­ing the mar­ket cap­i­tal­i­sa­tion of the listed re­tail com­pa­nies on the JSE tells its own story. Sho­prite, with a mar­ket value of R50bn, is the biggest in the coun­try. Pick n Pay, with a mar­ket cap­i­tal­i­sa­tion of only R22bn, comes af­ter Stein­hoff, which is solidly in sec­ond spot with a mar­ket value of R27,8bn.

Stein­hoff and Sho­prite are clearly not go­ing to merge, as Fin­week spec­u­lated last year. But in­vestors may still be won­der­ing about the sig­nif­i­cant dif­fer­ence in the rat­ings of the two shares. An­a­lysts spec­u­late Sho­prite achieved a profit of 443c/share for the year to 30 June 2010. The shares are cur­rently trad­ing at R90, or more than 20 times the profit per share. Over the same pe­riod, Stein­hoff prob­a­bly earned 240c/share – but its price is a very mod­est 1900c/share, an earn­ings mul­ti­ple of only 7,8.

Stein­hoff’s profit had al­ready bogged down some­what for the six months to De­cem­ber 2009 while ev­ery­thing is still go­ing well with Sho­prite. But the an­a­lysts

In­vestors may still be won­der­ing about the sig­nif­i­cant dif­fer­ence in the rat­ings of the two shares

ex­pect that over the next two years Stein­hoff will achieve bet­ter profit growth than Sho­prite. A mod­est in­crease of only 26% is pre­dicted for Sho­prite’s profit, while Stein­hoff’s could climb by 42% over the next two years, an­a­lysts say. Sho­prite is No 1 and – with Africa on the boil – things will only keep get­ting bet­ter for the group. But a P:E of 20 is solid, even ex­pen­sive or too ex­pen­sive, some prospec­tive in­vestors may say.

At the same time, Stein­hoff’s in­vest­ment rat­ing – a his­tor­i­cal P:E of be­low 8, fall­ing to be­low 6 if the ex­pected profit for two years for­ward is used – is low: per­haps too low. Keep an eye on this share. If it looks over the next six weeks as if its price is again mov­ing closer to 2000c/share that could just be an in­di­ca­tion its fi­nan­cial per­for­mances for the six months to June 2010 have re­cov­ered re­cently. You need have no qualms about buy­ing this one, be­cause the ex­pected fi­nal div­i­dend of 60c/share that will be paid by De­cem­ber will at least be a con­so­la­tion prize if its price bogs down.

GLOBAL LIFE­STYLE SUP­PLIER Stein­hoff is a com­pany with ex­cel­lent per­for­mances over the past 10 years

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