Steinhoff: More to come
Steinhoff (R35.9) has been a frustrating share for many investors over the years – it has almost a l ways been cheap, but it s detractors will point to historically poor levels of disclosure, a debt-fuelled acquisition strategy and consequently, a balance sheet comprising substantial goodwill as reasons not to own it. There is evidence that this view has been fairly widely held – while Steinhoff ’s share price has actually performed similarly to the broader market over the past 10 years (figure 1), there have been protracted periods of sharp underperformance.
Perhaps a more telling indication of investors’ impressions of this business is the stock’s P/E ratio relative to similarly sized businesses and the market as a whole – this business has traded at a deep discount for years.
We have been bulls on Steinhoff for some time, not because we think it’s the best business in the world, but simply because it was far too cheap. When it was back in the mid-R20s earlier this year, we took the stance that the share price was not pricing in our expectations of a significantly better second-half financial performance, driven by 1) improved Conforama (their French furniture retailer) margins as a result of cost-cutting measures and better procurement, and 2) a significantly weaker rand in the second half (75% of Steinhoff ’s earnings are denominated in currencies other than the rand, principally the euro).
This view has subsequently been vindicated, with the group reporting 25% HEPS growth for year to June 2013 (1H13: +5%) and the share price rising by 53% since its recent lows in May. Despite this performance, we think there is more to come – f irst, given current exchange rates, the group commences FY14 with a further ~15% tailwind to its rand reported earnings, and we think its underlying European operations should deliver further improved margins and earnings in euros. A reasonable earnings figure for the 2014 financial year is R4.50/share, placing the stock at a sub-8 times P/E less than a year out. Second, Steinhoff ’s management has for some time spoken about its intention to separately list the group’s European furniture operations (possibly on the LSE) – we think the timing is becoming about right to do this (investors’ appetite for European assets is probably improving, albeit off a low base) and we think this could well happen over a time horizon of six to 12 months, provided global equity market conditions remain fairly benign.
In our view, a separate listing for the ‘ developed market’ assets will provide investors with focused vehicles providing exposure to European retail on the one hand, and the group’s South African assets on the other, and could unlock value via an improved overall rating.
What would be the correct P/E multiple to place on the European assets? Given the shortage of l isted peers ( Ikea, the largest European furniture retailer, is privately-owned) we’re not entirely sure, but we think the current 7-8 times is too low. We believe one could justify P/E multiples of 10-13 times for these assets, and it should be noted that 20% of the group’s current earnings base comprises rental income on retail properties it owns in Europe – we think these assets could be valued conservatively at a 7% gross yield, while the current 8 times P/ E on Steinhoff implies at least a 12.5% after
tax yield being placed on this income. On this basis and taking the group’s listed SA assets ( JD Group, KAP and PSG) at face value, Steinhoff could be worth at least R44/share and possibly north of R50/share. The basic message – don’t base investment decisions on where the share has come from; we think substantial upside potential remains.