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These days it is becoming harder to find a South Africa-focused company on the Johannesburg stock exchange than a South African company that is a rand hedge. Steinhoff is among the many corporations that are increasingly global in nature. This trend was highlighted in an article by South African economist Cees Bruggemans, in which he noted that there was a corporate “brain drain”. Bruggemans’ article went viral, no doubt because few have realised that corporates are increasingly leaving our shores. But there are critics, too, who say Bruggemans has got it wrong. Steinhoff CEO Markus Jooste has said Steinhoff remains South African and will be paying taxes in South Africa, although it is on track to move its primary listing to Frankfurt. Cor van Deventer of Seed Investments sizes up Steinhoff – and the extent to which it is South African. – JC
By Cor van Deventer*
Steinhoff International Holdings Ltd is an internationally integrated retailer that manufactures, sources, and retails furniture and household goods across Europe, Africa, and Australasia. The group is positioned to benefit from the entire value chain by having stakes in the sourcing, manufacturing, logistics, and retail stages. The Group recently released its results for the financial year ended 30 June 2014, and overall the company performed admirably.
Steinhoff: Increasingly global
Bruno Steinhoff founded the company in Germany in 1964, by sourcing furniture from Eastern Europe to sell within Western Europe. In 1991 the group converted from a pure marketing and distribution company by establishing manufacturing facilities in Germany, Hungary, Poland, and the Ukraine. Steinhoff Africa was formed in 1997, when the Steinhoff family acquired a 35% interest in Gommagomma Holdings. The three Steinhoff divisions in Germany, Europe and Africa were consolidated in 1998 and listed on the JSE as Steinhoff International Holdings Ltd.
Numerous strategic investments and acquisitions followed over the next 16 years, including the Cornick Group, Unitrans Limited, Reylon Group, Sprung Slumber in the UK, PG Bison, KAP International Holdings, and JD Group. In 2011 Steinhoff acquired Conforama, the second largest home furnishings retailer in Europe with a network of 260 stores.
More recently, Steinhoff has streamlined its position as a retailer by increasing its holding in JD Group from 56% to 86% and reducing its KAP holding to 45%. In addition, JDG is in the process of selling its consumer finance division, excluding insurance operations, to an international buyer. This will enable JDG to focus on growing its retail operations.
Latest financial results
The group released its final results for the year ended 30 June 2014 last week. Improved consumer confidence across Europe resulted in increased revenue in euro terms, while the rand weakened by 20% during the reporting period and further boosted the results in rand terms. African operations suffered from the continuing pressure on consumer spending and the sustained high debt-to-income levels locally.
Revenue from continuing operations increased by 20% to R117bn, while adjusted HEPS improved by 27% to 480cps. The group was strongly cash generative, and cash generated from all operations increased by 68% to R21bn. Finally, the cash dividend has increased by 88% to 150cps.
The graphs below illustrate the revenue generated per geographical region and segment for the year:
It is clear that Steinhoff offers local investors truly global exposure, with 74% of revenue coming from outside Southern Africa. International retail activities account for 52% of the total revenue; while the Group’s strategic property holdings also contribute 2% to revenue. Fixed-yield internal rental streams are charged on group properties, protecting the Group’s cost base and increasing sustainability going forward.
International retail revenue comes mainly from developed markets, with France alone contributing 43% through Conforama.
The segmental analysis of operating profit also indicates that Steinhoff’s international operations are key to its profitability.
The group has property investments valued at R45bn, with these properties delivering an operating profit of R 2.7bn at an average return on investment of 7.1%.
Steinhoff: The investment case
Management believes that Steinhoff Europe will continue to win market share based on the Group’s competitive product range, efficient supply chain, and recognised local brands. The continued investment in retail stores should protect the cost base going forward, and the increasing asset base will help to secure financing at competitive rates. Local operations via KAP and JDG are clearly under pressure, and management hopes that streamlining JDG will ultimately increase the African operations’ contribution to total profit.
A unique combination of momentum (strong price momentum over the past year) and value (low PE compared to market) characteristics ensures that the share features strongly in the share selection process for the Seed Equity Fund. As a result, Steinhoff has been a significant holding in the Seed Equity Fund since inception, and is currently held at a 9% weight.
* Cor van Deventer graduated from the University of Stellenbosch at the end of 2009 – Actuarial Science; B.Com (Hons). He spends most of his time producing investment policy statements for institutional clients and developing software systems for research and reporting purposes. Cor also assists with research on investment opportunities for Seed’s share portfolio.
For more on Steinhoff and the corporate “brain drain”, read: