Steinhoff valuation – The good, the bad and the ugly – analysis
By Justin Rowe-Roberts*
Nearly four years later and the bean counters at Steinhoff can once again sleep easy. The 2021 annual report obtained an unqualified audit opinion, the first clean audit since accounting irregularities came to light at the back end of 2017. The audit, coupled with recent court approval on the R24bn global settlement agreement, paves the way for Steinhoff to become a viable investment. Before this information, Steinhoff was merely a speculative asset, underpinned by choppy share price action throughout the last four years. With a clean audit and more clarity and transparency on the path forward, institutional shareholders are likely to start showing interest in the business, given an attractive valuation and investment opportunity.
When delving into the valuation of Steinhoff, it can be separated into three distinct parts: the good, the bad and the ugly. This isn't usually the valuation methodology used to value a retailer but considering Steinhoff's lopsided capital structure (very little shareholders equity, lots of debt), it's appropriate. In short, given the distressed situation of Steinhoff, this is the best way to get an idea of whether there is any value left in the business.
Let's start with the ugly. Steinhoff's debt is still €9.8bn (R170bn), unchanged from that of a year earlier. This is despite raising €1bn (R17.5bn) from listing the group's crown jewel, discount retailer Pepco, on the Warsaw Stock Exchange in May last year. Steinhoff sold off around 20% of the business and still owns approximately 79%, which is valued at around €4bn (R70bn). Steinhoff owns 50.1% of Pepkor after selling off more than R7bn late last year. Its shareholding in the business is worth roughly R42bn, at current market values. These are the two best businesses within the group – great retailers in their own right – however, despite disposals (R17.5bn in Pepco, R7.3bn in Pepkor), debt remained the same as was reported in the previous annual financial statements. This is because, among other things, Steinhoff pays 10% interest given its financial position. The interest rate on its huge debt burden is unsustainable and if not renegotiated, would make the investment case much less appealing.
Onto the bad. As noted above, Steinhoff has some really solid retail businesses within its stable. On top of Pepco and Pepkor, the firm has controlling interests in American and Australian retailers Mattress Firm and Fantastic Furniture. Despite the troubles Mattress firm has experienced since Steinhoff acquired the business for a whopping $3.8bn in 2016, the speciality retailer plans to go public in New York to raise $100m. Chump change when it comes to the money Steinhoff owes. Fantastic Furniture, its retail interests in Australia, is also set to go public and raise cash when volatility and calm return to global markets, according to management. Steinhoff paid R1bn in legal fees last year, the same as the previous year; 10% of the entire value of the business when added together. The listing and advisory fees associated with all this corporate action is another concern for shareholders.
The best for last: the good. The underlying businesses are performing solidly. Despite making losses, the losses have been reduced by multiples of what was incurred in 2020 and retail as an industry generally performs well within the current economic environment. Management has indicated that negotiations with the bankers, on the 10% interest rate, are on the move as a result of the stronger financial condition the business finds itself in. The global settlement process is finalised and there is clarity on the financials, the auditors have given investors the thumbs up.
It is going to be interesting how management plays its cards. This is integral to the value the business will have in the years to come. While it is forced to sell off assets, what they sell and when they do so will ultimately determine the company's future. At the current share price, it is hard to justify being overly bullish or bearish. While less speculative than it was a few months ago, in light of the new information, it should still be regarded as a very risky investment. Treat it as such, and if you are optimistic about its prospects, be prudent and position accordingly.
*The author does not own any Steinhoff shares.
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