PREMIUM: Peter Armitage: Steinhoff’s “bolt from the blue” – why we’re selling our shares

LONDON — Investment shocks rarely come bigger than this morning's 60% collapse in the share price of what was the JSE's 5th biggest company, Steinhoff. A R100bn-plus evaporation of value comes on news that long-time CEO Markus Jooste has resigned with immediate effect, and this morning's release of annual financial results has been postponed until further notice. Reason is the mergence of new "accounting irregularities" - and the resulting appointment of auditing firm PwC to check the work of fellow Big Four firm Deloitte, Steinhoff's long-time auditor. Having known Jooste for a couple decades and even served on two directorates together, I've watched the expansion of his vertically integrated furniture with sufficient admiration to include it in the Biznews SA Champions portfolio. Another in the army of Steinhoff supporters was Anchor Capital whose CEO Peter Armitage who is equally astonished at this morning's events. In this interview Armitage, a top rated investment analyst, explains why the share price has tanked and tells us what he'll be doing about his substantial holdings. - Alec Hogg A warm welcome to Peter Armitage, who joins us from Johannesburg. A shock on the JSE today, with the collapse in the Steinhoff share price. Now, I know you’ve sent out a note to your clients to tell them your views on exactly what’s happening but maybe you could share them with the rest of us. Yes, Alec. I think last night’s announcement was a bolt out of the blue. To put it into context, Steinhoff I think was about the fifth biggest company on the JSE, as of their close yesterday so, there’s widespread exposure to Steinhoff, certainly amongst SA equity managers and we do hold shares for clients. I think it was known that there were some issues in the company. Number one, it related to a German tax investigation, which is something that was known and declared a long time. The second issue is that there’s a previous joint venture partner who was having a fight with them, which has been at it for the last three years. What came as a big surprise is the indication that there’s new irregularities in the company, and that the CEO resigned. New irregularities? pwcYes, and the fact that PwC are coming in to do an investigation on Deloitte, their auditors, so it just looks like a mess. It creates complete uncertainty and you’ve seen it with the share price today that the market really has no idea how to assess it or value it because we don’t know exactly what the implications are. Just to unpack them one at a time. PwC coming in as the auditors or coming in to do an investigation. Deloitte are already the existing auditors so, neither of these firms have been tagged in the same way as KPMG is being tagged. You’re a chartered accountant what does one, as an outsider, read from that? Deloitte have signed off on the account so, presumably they’re happy with all accounting treatments and we really have got no idea of what the new issue is so it might relate to something that has recently been discovered but I think they want another independent view of what’s going on. That appears to be the case. A bit of a vote of no confidence in Deloitte from the board, to bring in somebody else. Well, without knowing the circumstances it’s difficult to reach any kind of conclusion and as I say, it might relate to something which Deloitte were never aware of. Peter, you know Markus Jooste. I’ve been a friend of his for many years. He’s always been a straight arrow from all my dealings with him. Could there be something in this that we aren’t contemplating at the moment? Everyone seems to be screaming fraud and malfeasance. I think it’s premature to point fingers and accuse people of unethical or fraudulent dealings. We certainly wouldn’t be doing that with the information that we’ve got at hand but that really is another issue. You don’t really know how to interpret what’s been said and we probably won’t know for quite some time.
Long-time Steinhoff CEO Markus Jooste
Explain what would happen from here, when you say, we wouldn’t know for quite some time. Again, just a traditional, within the accounting field and within a corporate like this. I think the timing sensitivity as the results are due by the end of December so, presumably they’ll have to put out some sort of statement by the end of December. They were scheduled to put unaudited results out today and they said they would follow up with auditor results by the end of January. So, once you’ve crossed the December threshold, you then have to start liaising and getting permission from the JSE but I guess, it must a very difficult situation as a company where there’s clearly some issues that need to be investigated and I’m not sure if they can say too much, until the enquiry is finished. I would imagine there’s a lot of PwC folk in their offices, trying to work out what’s going on. So the two big things that worry you and other investors, and hence the share price collapsed today, is the resignation, with immediate effect, of Markus Jooste and the new irregularities that have emerged. Yes so, we’ve gone through our numbers, there’s about, as of yesterday, R21 a share of investments, which is STAR, PSG, and Kap. We think there’s property value of about R15 a share. So, there’s some underlying assets. We really don’t know how to value intrinsic core business as it stands but there is about R160bn debt, which is around R25 a share of debt. So, the value of the business ultimately, is those assets plus the core business – less the debt. A further concern is R160bn is a big quantum of debt and I would imagine a big anxiety is the banks who have lent money to Steinhoff. It’s a bit of a horror show. We’ve never seen, or I’ve certainly never seen anything like this in 35 years. Have you? No, certainly not with a company this size. As I said, the market cap was, I think about R220bn yesterday. I think it was around the fifth biggest company in the JSE. We have seen issues in smaller businesses but the board of Steinhoff is a very high-quality board. People with great track-records and a lot of integrity and all of that makes it even more surprising.
Christo Wiese, billionaire and chairman of Steinhoff Holdings NV. Photographer: Waldo Swiegers/Bloomberg
Just going into the board, a little more. You have Christo Wiese, an entrepreneur who has been acknowledged as one of the best to come out of SA, who injected all of his assets through Pepkor, and swapped them for Steinhoff shares. Now, I’m scratching my head. He’s the chairman. He would have surely done his own homework and due diligence before putting his assets in there, which suddenly today, are worth 60% less. Alec, he also bought another, I think about R120m on the CFD account, which was disclosed a few weeks ago. So, one thing we can be certain of is there are things that have come to light that he wasn’t aware of. Yes so, what do we do from here? What are you advising to your clients, given that you’ve given them an evaluation, what would your move be from here? I think with the level of uncertainty our inclination is to exit the position but I guess, like all investments, it’s all about valuation and price so, I think it’s important to look at it unemotionally in a time like this. We’ve been a seller of some shares but we will go forward looking at information that’s released and our assessment of the valuation. It’s not an African Bank, where you don’t need too much equity to fall off, for the thing to go to naught. But I think we’ve got very little clarity of where the share price can go from here. With the statement that came out today it was the normal cautionary. Shareholders were advised by the board to exercise caution in the dealing in their shares. In other words, don’t do anything until you know something so, from your perspective, you’re not really exercising caution. What you’re saying is, ‘hang on, there’s a problem here – we can’t trust the company anymore.’ Is that the way I’m reading it? Well, the cautionary is something that’s required by the JSE rules so, it’s a pretty bland statement, which goes out under defined circumstances. So I think our position is to, first and foremost, reduce our exposure to it. Our job is to try and make people money so, we’ll constantly assess where the share price is and where the value sits. There’s one or two roads here, and it’s once the numbers come out that asset managers can have a proper assessment of the underlying value but there’s huge businesses across 40 countries in this business. If you look at the cashflow statements they have been generating massive cash and the cashflow statement doesn’t look largely out of sync with the income statement and ultimately the truth always comes out in cash. So yes, I think the prudent thing to do is to firstly reduce your position but as you can imagine, we’ve got all of our bean counters and Excel experts working away today on making final decisions, to act in our clients’ interests. https://twitter.com/davidshapiro61/status/938395985650339841 In essence, as you’ve shared with us, there’s R21 a share that’s sitting in listed equities, PSG, STAR, etc., then another R15 on top of that, with properties, is that correct? Then minus R25 in debt, and that excludes all of their other assets like Mattress Firm that they recently bought, Poundland, and those kinds of investments, which have got to be worth something. Yes, they’re the second biggest furniture retailer in Europe. That’s why you’ve got to look at the facts but the biggest point is the uncertainty. You have no idea of what the impact of whatever they’ve uncovered has on the income statement of the business. My gut feel at this stage, is it’s getting down to a price where if the outcome isn’t terrific with value, but the uncertainty means that you can’t make that statement with absolute certainty. That’s what investors need. You don’t like playing in the dark, I guess? Absolutely, our philosophy is based on the fundamental valuation of the company so it’s from information that’s publicly available. Currently, I guess our confidence level in arriving at the value of the company changed with last night’s events. Peter, just one final point. For small investors, small shareholders, who’ve seen the R60, or R70, or even R80 evaporate all the way down to R20 or below. What would your advice to them be? I think it’s all in the context of your whole portfolio and obviously your shares. Portfolios are widely diversified so if your portfolio isn’t diversified or if it’s a reasonable portion of an investor’s portfolio I would probably reduce it, and watch where the price goes. If you get massive exposure or geared exposure this is a very risky proposition right now, and I’d probably move out of it. https://twitter.com/Richards_Karin/status/938337263846649856 Just to close off with. Again, your history, you’ve been doing this for a long time. What’s your gut feel right now, on how this is all going to work out? The CEO left with immediate effect. New issues, new auditors brought in, the new shareholder. My gut feel is probably events that will result in the balance sheet and income statement being restated, and possibly going back, historically. The big thing that nobody knows and we’ve got to get a handle on is how the debt holders will view this and if any covenants have been broken. If it isn’t completely horrific, there’s probably value in the share but it’s certainly not something we’d take a new bet on right now. Yes, I guess it is very difficult to predict a course of certainty. Just explain that, covenants broken – people who don’t understand how the debt markets work. What I’m saying is there might be conditions. First of all, when you borrow money from somebody you’ve got to have assets and income against it so the extent to which those assets and income are not what we think they are. Secondly, if there are terms in the debt relating to the kind of events that have happened. And then what happens if that is the case? It would depend on the contract with the person who’s lent you money. They might have certain rights to recall debt or the like. I’m not suggesting that that’s the case but we’d have to know the actual specifics. Debt is very broadly spread across countries and companies. I think their offshore bonds, the last I’ve heard, are trading at 60-cents to the Rand offshore, which is quite a negative view from the debt market. Wow, Peter Armitage, thanks for that insight. There are a lot of worried people today but at least you’ve given us some insight into where Steinhoff might be going. Much appreciated. Thank you, cheers Alec.