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.

Finweek English Edition - - MARKETPLACE - By Mox­ima Gama ed­i­to­rial@fin­ Mox­ima Gama has been rated as one of the top five tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Standard Bank as part of the res

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.

Tech­ni­cal anal­y­sis:

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

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