Finweek English Edition - - INVESTMENT -

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

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