Highly respected and newly independent asset manager Jean-Pierre Verster provides perspective on two of today’s major company news releases. The proprietor of Protea Capital Management says the fact that Steinhoff did not disclose the price of two large sales of subsidiaries today – in Australia and the UK – speaks volumes for this money manager. And he’s also not enamoured with luxury goods multinational Richemont‘s recently released interims. Even the joint venture in China with the storied AliBaba isn’t enticing him. – Alec Hogg
It’s really good to be talking to Jean-Pierre Verster who’s – since May – the owner of his own business Protea Capital Management. You’ve been involved in a number of successful asset management companies. I guess it was only a matter of time before you do your own thing.
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I guess its similar to you Alec. When someone has got an innate independence and wants to be the master of their own destiny, naturally at some point in their careers they’ll move out on their own and that time for me came earlier this year. So far I’m very happy. I work from home and my independence has been enhanced so I’m enjoying the journey. It’s not always easy building your own business, as you would know, but so far so good. Hopefully it’s a bright future and we can build Protea Capital Management.
I’ve no doubt it will be a bright future given the reputation that you have and the ability that one has nowadays to communicate from pretty much anywhere. Have you managed to pull some of your old clients in with you?
I had some friends and family that were long standing clients who effectively became the seed capital of the business. They are still with me and then a few new clients have come on in the last few months so the businesses – thank goodness – is already sustainable and profitable at our current level of assets. I have some long standing investors that we’ve made a lot of money for, in the past, that have continued to be involved.
Brilliant. That’s such a lovely story. Let’s talk bigger issues. This morning we heard from Steinoff that they’ve made two sales. Bensons for Beds in the UK and their general merchandise operations in Australia. They’re still keeping the household goods in Australia – I was surprised to see they had 10,000 employees in Australia and New Zealand – this was a very serious operation. Do you know that side of the business at all?
They are big businesses in terms of revenue and employees, but it’s not that significant in terms of profits unfortunately. And that’s probably why they also haven’t disclosed the actual price at which the transaction was done. This has been part of the Steinoff story over the years as they made multiple acquisitions. They made acquisitions of businesses with very large revenue lines, but when it came to profitability, that’s where the problems came in. So it’s understandable now that they’ve sold these two businesses and by not disclosing the purchase price, it also gives us some idea that the profitability wasn’t that high and therefore the purchase price wasn’t either.
Remember that famous story of Whitey Basson buying OK for R1. A similar thing here.
You actually take on quite a lot of liability as the purchaser – liabilities people forget about – the liability in the balance sheet. The real value of Steinoff is obviously the Pepkor business – both in South Africa as well as in Eastern Europe and a bit in the UK – and they have indicated they would look to list the Eastern European and UK Pep & Co at some point. But if that is sufficient to make a significant dent to the group’s debt situation, is still an open question. I feel that the debt that Steinoff is burdened with is an unbearable burden that ultimately, either common equity holders will be wiped out, or there’ll be a rights issue that will be so diluted that there’ll not be a lot of value left for common shareholders.
Is this a stock that you’d be going in to as a value proposition, at the current share price?
There are some significant legal claims and the prospect of a very dilutive rights issue – even if those claims are settled – there’s still not sufficient equity value in Steinoff. Then you also have the added complexity of a lot of the value trapped in South Africa – within the foreign exchange restrictive regime – and to repatriate the money to Europe where the debt sits. So because of that complexity, I still don’t see value in the current Steinoff share price.
Bensons for Beds – the UK business that was sold – is quite a well known brand and seemed to be a proposition for someone, did they get a reasonable price?
Again, they didn’t disclose the price which I think is a clue in itself. It’s a manufacturing business and we know that manufacturing businesses in general are under pressure. We know that the UK local economy is under pressure. There have been less people emigrating from Europe to the UK and there will be less going forward if Brexit does occur, so that means less people buying beds in the new flats they might be renting in London or other cities and towns in England. So because of that, one has reason to be quite bearish on the furniture market. It’s a similar case to the Australian operations where the brand might be known. There might be many stores and there might be a lot of employees, but that doesn’t necessarily mean that there’s a lot of profit being made at the end of the day.
If you were a shareholder you’d be quite happy to see these two deals today, because – although you aren’t getting anything for them – you’re getting it off your balance sheet.
I’d be indifferent to it at the moment. I think these are relatively small when it comes to contribution to the profitability to the bigger Steinhoff business. The big question – if one were a Steinoff shareholder is what is going to happen with Pep & Co? Is there any way to crystallise the value of Pepkor in South Africa? The third big uncertainty is what’s going to happen with these legal claims that the likes of Christo Wiese – which is the biggest legal claim – as well as some other prominent South African investors, including the European based shareholders consisting of South Africans that have linked up with European based shoulder activist firms? Those are the three key elements rather than the small operations that are being disposed of at the moment.
A very big operation is Richemont and the interim report came out last week. I had read through it. It made me feel like Richemont might be something to start doing my homework on again. How did you feel about the numbers?
I felt the numbers were slightly disappointing. Firstly, one must remember that in the previous year, they had a large market to market accounting entry – because they bought out the minorities – which led to a price adjustment. But if you strip that out and you look at this six month period versus a year ago it’s more or less flat and that for me is slightly disappointing. If you look at a segmental basis – we’ve seen in the last few years – the luxury watches division has been under pressure, but the jewellery business has really grown strongly – mostly the Le Cartier business. What we saw in these results was that the growth in the jewellery business has slowed down. So it means that the part of Richemont carrying the flag for growth, has been slowing down. The third devision – the online division – has continued to make losses as they continued to invest in that business, changing and adapting to the way that people are buying luxury goods. It’s not necessarily just walking into a store – whether it’s in Paris or Hong Kong – and buying a luxury watch or a very expensive piece of jewellery, but rather wanting to do it online. A collection of jewellery items is delivered to you, which you can have a look at and send back those that you don’t want. It’s a totally different way of selling goods and it’s an open question whether one can actually sustainably sell luxury goods online versus the more traditional face to face channel. So with them still not really making profits on the online, luxury watches under broad pressure – because of the advent of smart watches where people want more functionality on their wrists – and lastly the jewellery business seeing a slowdown in growth. I would characterise these interim results as slightly disappointing.
One of the things that jumped out at me was the joint venture with Alibaba, Johann Rupert in his chairman’s statement was quite excited about the possibilities and the prospects of that. You don’t get many bigger names than that in China – does that have the potential to turn that online business around?
It does have the potential, but once again it is an open question as to whether the Chinese will want to buy luxury goods over the Internet. The reason for buying luxury goods in Asia and especially China, is in broad terms a bit different to other places and cultures of the world, where it might be to a large extent for gifts. In China traditionally it had been so – up until roughly 3 or 4 years ago when there was a crackdown on gifting – but the other reason why a lot of Chinese luxury goods consumers would buy these pieces in a store is to show their social status. That is very important in the Chinese market and therefore the whole idea of going to a store – being seen outside, being welcomed into the store, being given that respect, is a large part of the whole experience of buying luxury goods – rather than just sitting alone in your home and clicking on a button and getting the luxury goods delivered to your doorstep. So because of that experiential part of buying luxury goods, which is so important in China, I would be surprised if the Alibaba joint venture would really change how they buy luxury goods, moving from face to face to online.
I reckon if you’re rich you consume conspicuously. Jean-Pierre good talking with you, thanks for your insights on two very important stocks on the Johannesburg Stock Exchange and all the best with Protea Capital Management.
