Since lows in June 2013, the share price of JSE-listed Steinhoff International has rallied more than 120%, after being significantly undervalued by investors for a prolonged period of time. The company has outperformed its retail sector peers significantly in the midst of what is considered a fragile global economic recovery. What makes Steinhoff stand out among its retail counterparts is the vertical integration of the company, which witnesses involvements throughout the life cycle of the products that it sells and presents opportunity through its global supply chain. The three core businesses are manufacturing and sourcing as well as retail and logistic services. Steinhoff ’s investment in separately listed, emerging market and diversified industrial company Kap, provides supply chain infrastructure into Africa through logistics and warehousing as well as timber forest activities, which feed its manufacturing plants.
Steinhoff ’s investment in JD Group provides retail and consumer finance into Africa, catering to mass market customers in predominantly the lower LSM range.
Internationally, Steinhoff ’s European integrated household goods business incor- porates all its retail businesses in Europe and the Pacific Rim, supported by manufacturing, sourcing and logistics that service its own and external retail customers throughout Europe. The integration of Steinhoff ’s global supply chain provides the opportunity for cost control and in turn improved margins. Over the sixmonth reporting period ending December 2013, operating margin improved to 9.4% from 8.7% in the 2012 comparative. The latest revenue split, as revealed by the company’s interim results, shows that the major contributors thereof remain: Continental Europe (55%) and Southern Africa (37%) while the United Kingdom and Pacific Rim regions currently contribute 6% and 2% respectively.
Revenue growth was realised in all regions, although most noticeably in the UK and Continental Europe. Both these regions witnessed an increase of around 30% when compared to the f irst-half results of the previous reporting period. In Africa, the manufacturing, sourcing and logistic businesses, through Steinhoff ’s holding in Kap, is growing across all major divisions with operating profit from continuing operations increasing by 9.2%. However, the retail activities in the furniture division of JD Group struggled amid a pressured consumer environment. This has resulted in the consumer finance business realising a 15% impairment of its loan book.
More than 80% of Steinhoff ’s company profits are being realised from its international operations as it grows in developed markets. International earnings are also providing a currency hedge against the rand, which has been deteriorating along with its emerging market peers. The African footprint provides opportunity for long-term growth, which is being achieved through diversified industrial operations (Kap) and should improve in the retail department as credit conditions improve. Despite the strong run in share price, Steinhoff still trades on a relatively conservative P/E ratio of 11. Relative to the industrial sector, the company appears as a value proposition. Interim results have showed that the company is well on track in the first half of the year, with headline earnings per share increasing by 41% over the period, highlighting the company as a growth proposition. Investors may caution on the high levels of debt, which amounts to 46% of equity, however the figure is improved from the 2013 full-year results and remains below the 35%-50% targeted threshold.
Steinhoff ’s vertical integration and global supply chains provide a competitive edge in cost control through purchasing power, which, along with currency diversity, is benefitting the company as it performs well in a challenging environment.
Timbercity, part of JD Group’s retail division