Steinhoff: We didn’t believe the numbers
For years it was seen to be acquiring underperforming assets with no cashflow.
Many people noted two problems for years: it’s acquiring underperforming assets and there’s no cash flow – Adrian Saville. Moneyweb
Over the last few years there’ve been few JSE stocks that have divided opinion quite as much as Steinhoff. There were those who argued the business was too complex to properly understand and what they did understand they didn’t like. Others believed in former CEO Markus Jooste’s deal-making abilities and that Steinhoff was a great company run by an outstanding management team.
It’s a story not unlike what the market experienced with African Bank (Abil) a few years ago.
‘The cash just isn’t there’
In both instances, Cannon Asset Managers CEO Adrian Saville has been in the former camp. He says the forensic tools they use in their investment process had been raising flags over Steinhoff’s numbers for some time.
This, he says, is a clear parallel with Abil, as in both cases it appears that “accounting trumped cash flows”.
“There are two elements of Steinhoff that have stood out for a long time ... Each time they made an acquisition it tended to get bigger and bigger, which often is the nature of a type of sheltering where in order to hide historically rearranged financial furniture, you have to buy bigger and bigger rooms of furniture.”
These big acquisitions, he argues, camouflaged the shortcomings in the earlier transactions.
“But as the transactions got bigger, the return on invested capital fell increasingly below the cost of capital. This meant that they were either borrowing money or issuing equity, and inevitably they’ve been a furious equity issuer to fund transactions that were not particularly good transactions.”
Here, the second issue becomes apparent. “It really becomes a glaring anomaly when you go look for the cash flow. The cash just isn’t there.”
He says many people have noted these two problems with Steinhoff for years – that it’s acquiring underperforming assets and there’s no cash flow from the business.
“It’s not necessarily the case that if you are making bad acquisitions it’s fraud, but it is often the case that once you have started to chase your tail the activity becomes increasingly furious. And the activity they have undertaken has been absolutely frenetic. We had no exposure to Steinhoff in our active mandates for the simple reason that we didn’t believe the numbers. And we weren’t alone in that observation.”
SA’s Enron
Until this week, Steinhoff was one of the top 10 shares in the FTSE/JSE All Share SWIX Index.
As such some commentators have compared it to Enron, the US energy company that collapsed into bankruptcy at the start of this century.
At its peak, its stock traded at over $90 per share, and it was a Wall Street darling.
It might be premature to predict that Steinhoff’s current troubles must doom it to total collapse, but there are striking similarities with what happened at Enron.