Some pep in Pep­kor’s step

Its as­so­ci­a­tion with Stein­hoff is an al­ba­tross around Pep­kor’s neck, but many of its fi­nan­cials are promis­ing

Financial Mail - - CONTENTS - Rob Rose [email protected]

Pep­kor CEO Leon Lourens isn’t prone to flashes of emo­tion.

But even he agrees that Stein­hoff’s takeover of his cloth­ing chain in 2015 was prob­a­bly the worst thing to hap­pen to Pep­kor since it opened its first store in the North­ern Cape town of De Aar in 1965. “In hind­sight, prob­a­bly yes. But Pep­kor has been in busi­ness a long time, and no­body would have liked what hap­pened to us last year,” he says.

Af­ter Stein­hoff bought Pep­kor four years ago, Markus Jooste’s com­pany shunted many of its weaker arms onto it be­fore list­ing it on the JSE in Septem­ber 2017 as Stein­hoff Africa Re­tail.

Even though Stein­hoff re­mains plagued by dark claims of fraud, it still owns 71% of the com­pany.

Though Lourens’s com­pany has tried fu­ri­ously to cut the apron strings (even chang­ing its name), the re­la­tion­ship still leaves Pep­kor cast as some­thing of an un­for­tu­nate stepchild to a se­rial killer.

But as Pep­kor’s re­sults for the year to Septem­ber il­lus­trate, if you strip away the Stein­hoff link, it’s a jug­ger­naut in its own right.

Each year, it sells more than 1-bil­lion items from its 5,236 stores in 12 coun­tries.

Chances are you have been in one of its stores, be it a Pep, Ack­er­mans, Rus­sells, Brad­lows, Tekkie Town or In­cred­i­ble Con­nec­tion.

Lit­tle won­der that for the year to Septem­ber, it re­ported rev­enue of R64bn (up 10.9% on the pre­vi­ous year) and op­er­at­ing profit of R5.9bn

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(up 1.9%). “We have tried hard to dis­en­tan­gle our­selves from Stein­hoff,” says Lourens. “I’m very pos­i­tive that we’ve put most of the is­sues be­hind us.”

The rather un­com­fort­able truth for Lourens is that un­til now, all the ques­tions over shoddy gover­nance have grav­i­tated to­wards Stein­hoff, where Jooste seems to have mas­ter­minded a se­ries of au­da­cious swin­dles.

This week, how­ever, Pep­kor re­vealed that it had it­self been fined R5m by the JSE for “in­ad­e­quate dis­clo­sures” made dur­ing the process of its list­ing last year, and in its fi­nan­cial state­ments.

But don’t be fooled by the pal­try slap-on-thewrist penalty — Pep­kor’s hid­den ex­po­sure was im­mense.

First, it didn’t tell share­hold­ers that it had “un­con­di­tion­ally and ir­re­vo­ca­bly” pro­vided a guar­an­tee to Stein­hoff to cover a R15bn cap­i­tal­rais­ing ex­er­cise. (Thank­fully, this guar­an­tee was never called on.)

Sec­ond, Pep­kor didn’t tell in­vestors it was on the hook for a R440m “guar­an­tee” it pro­vided to a murky com­pany called BVI 1499, which, it turns out, was owned by 70 Pep­kor ex­ec­u­tives.

That guar­an­tee was there to pro­tect the Pep­kor ex­ec­u­tives who’d got Stein­hoff shares af­ter Jooste’s com­pany bought Pep­kor in 2014.

But since the Stein­hoff shares have tum­bled 97% since De­cem­ber, Pep­kor’s share­hold­ers will now have to stump up the cash.

As Braam van Huys­teen, the founder of Tekkie Town and a for­mer Pep­kor di­rec­tor, said pre­vi­ously: “Share­hold­ers didn’t agree to bail out these ex­ec­u­tives — why should they?”

This is why Pep­kor was “found to be in breach” of the JSE’S rules and hit with the

R5m fine.

It’s a sanc­tion many feel is a joke.

Craig But­ters, a port­fo­lio man­ager from Pru­den­tial In­vest­ment Man­agers, says that if the JSE’S R5m fine (with R1m sus­pended) is the only sanc­tion, it would be “a sad day for the in­vestor com­mu­nity and SA as an in­vest­ment des­ti­na­tion”.

He says: “The JSE could have im­posed ad­di­tional penal­ties, but ap­pears to have elected not to do so.

“Pep­kor’s fail­ure to dis­close the R440m guar­an­tee in favour of the ex­ec­u­tive share in­cen­tive scheme is a ma­te­rial fail­ure. The nondis­clo­sure of the R15bn guar­an­tee … is even more se­ri­ous.”

But­ters says not only has Pep­kor now ex­posed it­self to po­ten­tial lit­i­ga­tion, but it is “par­tic­u­larly con­cern­ing that Pep­kor’s ex­ec­u­tives have not been sanc­tioned in any way”.

But John Burke, di­rec­tor of is­suer reg­u­la­tion at the JSE, says the fine was “sub­stan­tial. It wasn’t the big­gest fine we’ve levied, but it’s right up there.”

Dis­cussing the fine, Lourens de­picts it as quite hefty in­deed, even ar­gu­ing that it seemed the JSE “wanted to make an ex­am­ple out of us”.

As to why it wasn’t dis­closed, Lourens says the doc­u­ments were “signed off by our ad­vis­ers and au­di­tors”, though he adds: “In the end, it is our ac­count­abil­ity.”

The com­pany’s pre-list­ing state­ment shows there were 13 ad­vis­ers on the list­ing, who were paid more than R200m for their ser­vices. This in­cludes RMB, In­vestec, Citi and Mor­gan Stan­ley, as well as five sets of lawyers, in­clud­ing Bow­mans and Cliffe Dekker Hofmeyr.

So how is it that Pep­kor could fail to tell share­hold­ers that it was a co-guar­an­tor for R15bn of Stein­hoff debt? Or, in­deed, that it had a po­ten­tial li­a­bil­ity of R440m for shares granted to its own di­rec­tors?

Jean Pierre Ver­ster, a port­fo­lio man­ager at Fairtree Cap­i­tal, says luck­ily for Pep­kor, that R15bn in debt was re­paid ear­lier this year. “That makes it a bit aca­demic, but it could have turned out very badly for Stein­hoff, which would have had a knock-on im­pact on Pep­kor,” he says.

But when it comes to the R440m li­a­bil­ity for its ex­ec­u­tives, the news re­mains pretty grim.

“They didn’t dis­close the po­ten­tial li­a­bil­ity from mak­ing loans to their di­rec­tors. There is an ar­gu­ment that they didn’t fore­see a sce­nario in which the Stein­hoff share price would fall like it did, and make them li­able for it, but ac­cord­ing to ac­count­ing rules, it should have been dis­closed,” says Ver­ster.

Lourens will be hop­ing such dis­as­ters are now be­hind him and he can get back to talk­ing about the ac­tual busi­ness. On that front, Pep­kor didn’t do ter­ri­bly badly.

Still, it is clear that Pep­kor is a tale of two parts: the “orig­i­nal Pep” (in­clud­ing Ack­er­mans), and the other as­sorted com­pa­nies it in­her­ited thanks to the Stein­hoff takeover, like JD Group.

“You can see the orig­i­nal Pep busi­ness has pro­duced dou­ble-digit growth per year for more than a decade,” says Ver­ster. “But on the other side, the tra­di­tional Stein­hoff as­sets that were forced on Pep­kor didn’t do as well.”

The cloth­ing busi­ness pro­duced 93% of Pep­kor’s op­er­at­ing profit (up 8% to R6.1bn), with the build­ing ma­te­ri­als busi­ness made up of Tim­bercity and Tile­to­ria pro­duc­ing a neg­li­gi­ble R214m — just 3% of op­er­at­ing profit — and the fledg­ling fin­tech busi­ness gen­er­at­ing the other 4%.

But the splut­ter­ing fur­ni­ture arm, which was the tra­di­tional JD Group busi­ness it in­her­ited from Stein­hoff, made an em­bar­rass­ing R137m op­er­at­ing loss.

It was clear in­vestors didn’t know what to make of the re­sults. At first, Pep­kor’s stock plunged af­ter the news of the JSE fine and fi­nan­cials were pub­lished. Hours later, the stock did a U-turn, fin­ish­ing the day 7.1% higher.

Per­haps this was partly thanks to the sooth­ing words of chair Jayen­dra Naidoo, who spoke of Pep­kor’s “full au­ton­omy” from Stein­hoff, and said: “We do not in­tend to in­def­i­nitely tol­er­ate and in­vest cap­i­tal in busi­nesses which do not pro­vide ad­e­quate re­turns.”

He also spoke of how Stein­hoff, with Heather Sonn as the new board chair, was fi­nal­is­ing its re­struc­tur­ing in a way that meant it was less likely to have to sell part of its 71% stake in Pep­kor — a cloud that had de­pressed Pep­kor’s share price.

“It will be pos­i­tive news for Pep­kor share­hold­ers if these de­vel­op­ments en­able Stein­hoff to turn their fo­cus for the next few years to cre­at­ing value from their ex­ist­ing Pep­kor share­hold­ing, rather than dis­pos­ing of as­sets to ser­vice their debt,” he said. But in­vestors will re­main wary of the pos­si­bil­ity that fur­ther nasty Stein­hoff-re­lated sur­prises could arise. Even in the fine print of this week’s re­sults, there were un­for­tu­nate ref­er­ences such as the fact that “pre­vi­ously undis­closed re­lated-party” deals, in­clud­ing those with man­age­ment, have now been dis­closed, as part of its “re­state­ment”.

Naidoo is cor­rect that Pep­kor has some good as­sets — though this hardly de­scribes much that it got from Stein­hoff.

And if there’s no fur­ther fall­out, you might even de­scribe Pep­kor’s shares as good value right now. But it’s a big “if”.

In­vestors will re­main wary of the pos­si­bil­ity that fur­ther nasty Stein­hof­fre­lated sur­prises could arise

Freddy Mavunda

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