Buf­feted Stein­hoff an op­por­tu­nity for in­vestors

The Star Early Edition - - OPINION & ANALYSIS - Amelia Mor­gen­rood is a stock­bro­ker from PSG Wealth. Amelia Mor­gen­rood

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.

Prospects

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.

PHOTO: BLOOMBERG

A Stein­hoff In­ter­na­tional Hold­ings logo on dis­play out­side the com­pany’s of­fices in Stel­len­bosch, South Africa.

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