Buffeted Steinhoff an opportunity for investors
RETAILER, manufacturer and logistics operator Steinhoff has gone from calling itself the second largest furniture and household goods retailer in Europe to the third largest “integrated household goods retailer” in the world.
Last week, I wrote about identifying the good companies on the JSE. We all know which ones they are, but the problem with these companies is that they are always quite expensive and you are always hesitant to buy them at hefty valuation levels.
But occasionally they encounter a headwind and you get the opportunity to buy.
Then you are once again hesitant because you don’t know whether it is a permanent headwind. Steinhoff embarked on an extended acquisition spree that has seen the group acquire six companies in the past 18 months, and a similar number in the 18 months prior to that.
The group has operations from South Africa to Australia, Europe and the US. Debt to equity has expanded to 39 percent, but still comfortably below 50 percent, considered a measure for a healthy company.
Last week, Steinhoff reported first half results for the six months to March and investors were disappointed. Operating profit rose by 13 percent to 903 million and revenues by 48 percent to 10.1 billion, but diluted earnings per share, which exclude specific capital items, fell 6 percent to 15.50 euro cents. Performance across the group was mixed, but the overall result was acceptable, with the elephant in the room Mattress Firm and Poundland.
Steinhoff joins the list of companies that forayed into developed markets and encountered headwinds. In anticipation of hard currency earnings and a depreciating rand, speculators chased the share price to a high of over R95 in March 2016.
Then the doubt kicked in. Was the price tag too hefty for their underperforming billion-dollar mattress business acquisition? Investor concern led to the share price dropping a staggering 30 percent the past 12 months.
The Mattress Firm, acquired in 2016 for $2.4bn, cost Steinhoff about $54m in rebranding in the six months to March 2017. Mattress Firm reported a decline in like-for-like sales of 5.9 percent and revenue of 1.5bn. Disappointing results were expected, but were underestimated.
Last week chief executive Markus Jooste said there had been a lot of “complications and store closures” in the US business, but the management team, under executive chairman Steve Stagner and president Ken Murphy, had done well to navigate the challenges.
“Mattresses and bedding has been a key product category since Steinhoff’s inception. Since the acquisition of Mattress Firm, Steinhoff has become the leading multibrand bedding retailer in the world. I believe it will follow in the footsteps of Conforama and Pepkor. It will be a game changer for Steinhoff,” said Jooste.
Steinhoff has decided to restructure and rebrand early on with Mattress Firm, instead of phasing it in over three years. Ultimately, we will only know the wisdom of it in a year. Also whether Steinhoff’s retail gamble will pay off and whether they are nimble enough to cope with changing retail dynamics in the US. The African listing seems on track and no additional funds need to be raised. The African listing will probably unlock value for shareholders.
The core of the company is very good and what is clear is Steinhoff’s commitment to the discount or value retail model, and it would appear that this model is holding its own in the current climate – whether in South Africa, Germany or the UK.
Current valuation levels present a chance to buy at a decent price. There may be more volatility, but for a long-term investor, it is a chance to buy more shares.
A Steinhoff International Holdings logo on display outside the company’s offices in Stellenbosch, South Africa.