Following media reports overnight, Steinhoff has released a SENS statement today indicating that it has found new information relating to accounting irregularities, prompting it to cancel its results release today and delay the audited results release until further notice. The CEO, Markus Jooste, has stepped down with immediate effect. Christo Wiese is taking over as executive chairman. We hold Steinhoff shares on behalf of our client base. To place this in context, this company is widely owned by institutional investors in South Africa and as of yesterday was a top 10 company in the JSE SWIX All Share index.
At this stage, there are clearly more unknowns than known information pertaining to the group’s real financial position and operations. It is clear that fraud remains a distinct possibility given the above information.
What we do know is the following:
- The group has approximately R21 per share of value in the listed stakes that it owns (STAR, PSG and KAP International), per closing prices of these shares on 5th December. It is likely there is some contagion in these assets, and indeed these shares are experiencing selling pressure today.
- There is net debt on Steinhoff’s balance sheet of ~R100bn, or R23 per share.
- Aside from its operational household goods retail and manufacturing assets, the group is a significant investor in retail properties in Europe. While we should be suspicious of its reported segmental accounting, it disclosed €243m of operating income from properties in FY16. This could yield a value of €4bn, or R15 per share, and could be regarded as a source of liquidity should the group be broken up into its component parts.
- This leaves the core operating assets, of which we can be highly uncertain of the value given likely fraud. The key concern investors will have now is that, short of a fire sale of the group’s non-controlled assets to reduce debt, the confidence of debt funders will have all but evaporated and this is likely to place pressure on the group’s ability to fund itself in the normal course of business. A negative operational impact is a certainty.
At the time of writing, the share price is R23.00 this morning and is likely to be highly volatile. We have taken an in-principle decision to exit our holdings given the above developments, but given the share price response this morning we will do this in a manner that maximises value for our clients. It is likely that fundamental value is above current levels – even in a break-up of the business scenario – but the company has clearly lost the trust of institutional investors (ourselves included) and this could weigh on listed values for some time.
Opportunities are made up easier than losses.