Big fish nibbling at Steinhoff’s bait
Improving prospects have already lured retail investors
● Steinhoff’s management believes restructuring the group’s debt of nearly R170bn would strengthen its investment case and possibly revive the interest of big institutional fund managers.
With retail investors already piling in, however, CEO Louis du Preez said he takes heart from improving liquidity levels, with a “good few million shares trading every day”.
The share price has strengthened, gaining more than 150% over the past 12 months. The share was trading above R50 before Steinhoff’s collapse in early December 2017, when it plunged below R1. It ended the week at R4.59.
“The volume growth is a positive sign,” Du Preez told Business Times. “It shows there are more people interested in the share and following it from an investor perspective.”
But larger asset managers, who remember the billions lost in one of SA’s biggest corporate scandals, have been understandably hesitant.
Du Preez said he hopes this will change over the next few years as the group plots a path to more manageable debt.
He said the group has had a “few nibbles” from big asset managers and hopefully more will see the investment case for Steinhoff over the next couple of years, especially now that there is more certainty about the legal claims against it.
“If we manage to restructure the debt, that will follow. The underlying businesses are really good businesses. I do think there is an investment case,” he said.
Recent positive developments include approval by the high court in Cape Town last month of a settlement of combined legal claims by former shareholders totalling more than R140bn. As a result of the settlement, claimants will receive about R30bn.
The original claims, lodged after the 2017 collapse in which then CEO Markus Jooste resigned under a cloud, comprised nearly 100 separate lawsuits, which would have crippled the company if it had to deal with them individually.
The settlement, combining cash and Pepkor shares, will reduce Steinhoff’s interest in the JSE-listed owner of Pep from about 58% to about 50%.
In addition, the group received an unqualified audit report for its annual 2021 results. These showed its underlying investments — including US-based Mattress Firm, a majority stake in Pepkor and Europebased Pepco — are delivering strong returns.
Overall, Steinhoff’s loss shrank to €850m (about R14.7bn) in 2021 from €2.3bn the previous year.
Tyrrel Murray, head of investor relations at Steinhoff, said this loss includes about €827m in expenses that are “mainly oneoff, nonrecurring costs relating to the litigation and settlement”.
He said this indicates that a return to profitability in the near future is possible and he is fielding calls from big institutions that are following developments “with interest”. In time, he said, he is confident they will give the company a relook.
FNB portfolio manager Wayne McCurrie said institutional investors have long memories. “Once bitten, twice shy. But having said that, that memory and the bad experience of losing substantial amounts of money are tied essentially to the old management. If management has been completely changed, which obviously it has in the case of Steinhoff, that pain is dulled a bit for institutional investors.”
Also, he said, “asset managers effectively just want to make a return”.
“So if a company has changed, [if] management can tell a good story and there are a couple of years of delivering on the story, you will buy back in again because all you want to do is make a return.”
Sasfin Securities chief global equities strategist David Shapiro said that even though Steinhoff’s management has worked hard to “let the phoenix rise from the ashes, it will take them time now to build up the underlying businesses”.
“Have they got rid of all the court cases? Yes, but they have a lot of debt on their balance sheet which they now have to manage down. Then afterwards you have to say what is left. They have Pepco, is it a strong enough business to compete with the other opportunities we have on the market? That is going to be up to management to show. It is going to be judged on what it produces going forward.”
Du Preez said the group is looking at a number of ways to reduce debt and interest payments over the next few years. These include divestments or selling down interests in underlying assets, extending its debt repayment terms and even allowing debt-equity swaps.
The latter, he said, Steinhoff would approach with caution and would proceed only if such swaps were “beneficial for existing shareholders, who have been very supportive, at the right ratio”.
He said there will be further asset sales “but what they are and what the percentages are has not been decided yet”.
Another possibility is for Steinhoff to refinance debt at more attractive rates through underlying assets that have low gearing.
Du Preez said these options give Steinhoff flexibility, and its goal over the next six to 18 months is to “make sure we investigate those options properly”.
Criminal investigations into former executives such as Jooste and others are under way in Germany and SA, Du Preez said, and probes by the South African Reserve Bank, the Financial Sector Conduct Authority and the JSE are at various stages. Steinhoff is assisting where it can, he said.
National Prosecuting Authority spokesperson Mthunzi Mhaga said no decision on prosecutions has been taken yet.
Du Preez said the group is still pursuing civil claims running into billions of rands against former executives, directors and entities associated with them.
“Even with those big numbers, and even if we are ultimately successful and we recover some funds, it’s still a drop in the ocean as the debt is a big issue. But the board feels strongly about this, that we owe a duty to go after these individuals and entities. We will pursue the litigation and if it takes a few years, it takes a few years.”
Judgment was reserved this week after Steinhoff was in court to oppose an application by the Financial Mail and amaBhungane for the release of a report by PwC into the scale of the fraud at Steinhoff.
Steinhoff has not released the entire report, arguing that this could affect its legal action against former directors.