The Steinhoff blindside

CLARITY ON SHAREHOLDINGS A slew of once-popular stocks have become fallen angels in the last year. Part 1 of a series of articles...

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.