Killer Trade: Steinhoff
Steinhoff has seen spectacular growth over the past decade but its share price shows that buyers are reluctant, the concern being that the company is struggling to extract value from its recent acquisitions.
Five years ago, Steinhoff was small fry with annual revenue of a mere €3.8bn. Now the retailer is a major international player – the world’s third-largest integrated household goods retailer by turnover – with revenue of €10.2bn in the six months to end March. With a market capitalisation of nearly €19.4bn, the group owns 50 brands and 12 000 retail stores in more than 30 countries.
Deal-making is what has driven Steinhoff’s spectacular growth over the past decade. CEO Markus Jooste has described acquiring Conforama in 2014, a furniture chain based in France, as a game-changer for Steinhoff, as it effectively doubled the group’s purchasing power. Another major deal was the acquisition of Pepkor in 2015, one of the largest acquisitions in corporate South African history.
Over the past 18 months, Steinhoff has continued its aggressive expansion plans, with acquisitions including Mattress Firm in the US, Poundland in the UK, Fantastic Furniture in Australia and Tekkie Town in South Africa. The acquisitions helped boost revenue by 48% to €10.2bn, while operating profit increased 13% to €903m in the six months to end March. Excluding acquisitions, revenue grew 9% to €7.2bn, while operating profit of the retail businesses grew 15% to €534m, Steinhoff said earlier this month.
However, not all its acquisitions have been successful. A proposed tie-up of Steinhoff’s African assets with Shoprite to create an African retail giant failed to materialise, with a number of market commentators expressing scepticism that the proposed merger would realise significant cost savings and other value-accretive benefits. Unperturbed, Steinhoff is now moving towards a separate listing of its African operations, with annual revenue of €5.5bn (R80bn) – potentially happening in the third quarter of this year. The proposed listing, which would include raising an undisclosed amount of new capital, has received mixed reaction from investors. This may well be a sequel to the retailer’s failed attempt in December last year to create an African retail giant, as a separate listing would value those assets independently before another attempt to tie up with Shoprite is made.
Steinhoff reported a 25% increase in revenue to €1.4bn from its African operations, thanks to “momentum in Pepkor’s discount and value retail concepts” despite weaker consumer markets. “This underscores the resilience of Pepkor’s defensive business model as double-digit sales and operating profit growth were achieved for the 18th consecutive year,” the company said.
After encountering major resistance at 9 700c/share, Steinhoff entered bearish territory when it breached key support at 7 750c/share in September 2016. Even after recovering towards 7 750c/share a few times, buyers seem reluctant. Steinhoff is currently range bound – a signal of mixed investor sentiment. Sceptics are concerned that Steinhoff has trouble bedding down and extracting value from its recent acquisition spree.
How to trade it:
Go short: Downside through 6 215c/share would negatively end current short-term consolidation and depress the share price further to 4 610c/share. We recommend an aggressive short below 6 215c/ share with a fair trailing stop-loss. Go long: Support retained at 6 215c/share would prolong current consolidation. However, Steinhoff would have to trade above 7 750c/share to positively escape its sideways trend. A neutral long could be initiated above that level, as gains towards the 9 700c/share all-time high could then follow.
Markus Jooste CEO of Steinhoff International