The Steinhoff blindside
WAIT: CLARITY ON SHAREHOLDINGS
A slew of once-popular stocks have become fallen angels in the last year. Part 1 of a series of articles...
Asset managers have to be better at spotting the loser before it takes the next leg down. I’ll be detailing each culprit’s (Steinhoff, Aspen, EOH, Resilient, Grindrod Shipping and General Electric) failures in a series of articles, starting with this one.
Steinhoff
Before the accounting scandal, Steinhoff had over 12 000 stores in 30 countries on five continents, employing 130 000 people. It made it on to Bloomberg Intelligence’s annual list of global Top 50 companies.
How much was lost?
Steinhoff’s share price tumbled 98% over six months, from an intra-day high of R55.70 on December 4 2017 to R1.07 on June 4. Today it trades at little over R2. The collapse saw over R230 billion wiped off Steinhoff’s market value – the largest loss by a company in SA history.
Large institutions accounted for about 20% of the total shareholding. The Public Investment Corporation (PIC) owned over 8.4%.
What happened?
The collapse was caused by accounting irregularities exacerbated by the board’s “boys club” corporate culture, which allowed the fraud to escape scrutiny and avoid detection until it was too late.
The fallout began two years before, when there were murmurs of fraud – and a German tax official investigation.
The irregularities were publicised in Viceroy Research’s report: it said Steinhoff was obscuring losses in off-balancesheet entities and inflating earnings. This was how Steinhoff managed to acquire struggling companies whose performance miraculously improved after acquisition.
Benguela Global Fund Managers also questioned how a company operating in a 28% tax jurisdiction could maintain a 15% tax rate annually, without capital expenditure (which would allow tax deductions) to lower its tax rate.
There were investigations into senior executives for tax evasion, document forgery and fraud, rampant and dilutive equity raising – and allegations that cash flow trends didn’t correspond with operating profit. Where do investors currently stand? PwC has been investigating Steinhoff’s financials and is to release a highly anticipated report in December.
A class action by Dutch Investors’ Association VEB against the retailer was suspended until April. The action is the most advanced of three class actions facing Steinhoff.
The suspension is to allow time for Steinhoff to avoid damaging insolvency in the interim. This will give management time to restructure the business and make further progress in its investigations and preparation of its financial statements.
A recent court case found SA shareholders can’t sue for the share price fall. Steinhoff shareholders will have to wait for the PwC report and the first class action.
Lee Kern is an assistant portfolio manager at Cratos Capital. The views and opinions in this article belong to the author and don’t necessarily mirror Moneyweb’s views and opinions.