Investment lessons from Steinhoff
Craig Butters was an analyst at Brait back in December 2009 when he met Christo Wiese at the One&Only hotel in Cape Town and warned him to steer clear of Steinhoff.
In a 40-page presentation to Wiese, Butters flagged issues including Steinhoff’s unusually low tax rate, its “opaque businesses”, “poor disclosure” and “significant transactions with unknown private entities”. Butters calculated that
41% of Steinhoff’s earnings between 2005 and 2009 hadn’t come from real sales, but from accounting tricks such as “revaluing” the value of its forests upwards by nearly R1bn in that time.
Had Wiese listened, rather than swapping his stake in Pepkor into Steinhoff in 2014, he might never have lost R59bn when the stock crashed.
Today, Butters tells the FM there are plenty of investment lessons to be learnt from Steinhoff, which may help investors avoid another disaster.
Uncovering accounting irregularities is not easy. If there were a single obvious issue, then everyone would spot this.
The cash flow statement can be manipulated, especially the allocation between operating, investing and financing cash flows. Analyse cash inflows vs outflows (in the form of cash dividends). The gap between Steinhoff’s disclosed operating cash flow and dividends paid was simply too big.
It’s always excessive debt that kills a company, and when this debt is funding intangible assets, make sure these are converted into tangible assets in subsequent years. Steinhoff’s ballooning debt and consistent negative tangible NAV should have raised eyebrows.
If you don’t understand how a company is making its money, beware. The opaque nature of Steinhoff’s manufacturing and sourcing division, and reliance on “treasury” and “brand management” profits, were irregular. Sometimes it’s the less obvious items that hold the key. In Steinhoff’s case, “investments and loans” were an anomaly that required further scrutiny.
Pay attention to companies with an overconfident, dominant CEO and an adulating chair.
Do not ignore the nature and timing of transactions. Steinhoff accounted for several transactions on the last day of its reporting period and often structured these transactions in very unusual ways.
Avoid excessive reliance on the reputation of board members. When the shocking news on Steinhoff broke, many of these individuals headed for the hills. There’s usually a good reason for a company to delay the publication of its results. Even if investors ignored other red flags, there was ample opportunity to exit Steinhoff when these delays became apparent.