Stay for the Steinhoff ride?

Countless companies have run into trouble in the 132 years since the founding of the Johannesburg Stock Exchange on a dusty street corner in Johannesburg in 1887. Many a fortune has been lost.

Some companies recovered and shareholders were able to recoup their losses, with brave investors making fortunes when share prices surged after some of the recoveries.

A few recent examples include the wild revival of several SA mining companies and their share prices. Anglo American shareholders saw the share price fall by nearly 90% from a high of R550 in 2008 to a low of R55 at the beginning of 2016, then recovering to R400 just 18 months later.

Dimension Data, which was bought by Japan’s NTT a few years back, also fell from a great height. Once the darling of the JSE, the share fell more than 90% in the first few years of the new millennium. Back then it had grand ambitions. Instead, it nearly took Nedbank down with it.

Will it or won’t it?

Steinhoff shareholders are in the same difficult situation now. Will the share recover to make the current price look like a gift a few years on – or will it fail?

Since its fall from grace, Steinhoff’s share seemed to have settled around the R1.20 level. Most investors probably see the share as little more than an option on the possibility of recovery at Steinhoff. Risking R12 000 to buy a thousand shares could yield R120 000 if the share price runs to R12, which is still a far cry from the inflated levels of R95 in 2016.

It seems shareholders got a bit of hope from an investor presentation hosted by Steinhoff in Cape Town on Tuesday morning. It was well attended, and CEO Louis du Preez mentioned in his opening remarks that another 300 people were listening to the proceedings via a webcast.

Signs of support

The share price increased a few cents to R1.32 yesterday as investors focused on what Steinhoff management has achieved in the 20 months since the problems first surfaced.

Du Preez again stressed that trying to fix Steinhoff is a highly complex and very demanding process. The group has businesses around the globe, and untangling the web of interrelated transactions and capital structuring took months to complete.

Read: Steinhoff’s window-dressing reveals the devil is in the details

The good news is that Steinhoff believes it has reached the point where it can say it has achieved financial stability, following the completion of a voluntary arrangement with its creditors. The arrangement covers debt amounting to €8.8 billion (R149 billion) and will provide stability for the next few years to give the operating businesses time to recover.

A characteristic of the restructuring is that all the old debt was reissued and moved away from Steinhoff itself to the underlying businesses.

This will structure the listed Steinhoff as an investment holding company rather than a huge sprawling operating empire.

The process is largely complete and is aimed at giving the new Steinhoff more flexibility and options as it tackles the future. The first signs of this new flexibility include the sale of some assets or shares in the underlying companies, such as the reduction in the Pepkor shareholding from 77% at the time of Pepkor’s listing to 71%.

Disinvestments

The shareholding in the US Mattress Firm has been reduced to below 50%, and sales of a lot of the smaller companies in the group were finalised during the last few months. More disinvestments will follow to enable the group to focus on its core companies.

The debt burden remains the biggest problem, with management admitting that it is one of the biggest factors in determining whether Steinhoff is indeed a going concern. Two other challenges that could kill Steinhoff as a going concern are ongoing litigation and uncertainties about its tax liability in different countries.

Litigation against Steinhoff includes possible class actions for damages suffered by groups of investors in Germany, the Netherlands and SA, as well as two big legal cases challenging the validity of acquisitions. This includes the well-reported legal case by the previous owners of Tekkie Town against Pepkor, in which an adverse finding against Pepkor will have a big effect.

However, Du Preez creates the impression that these challenges are the last that must be resolved and that all write-downs and adjustments to Steinhoff’s figures have been done. “We do not anticipate any further impact on financial statements,” says Du Preez.

Another negative is that Steinhoff has spent an enormous amount on legal fees, consultants and investigations, and that these expenses – which totalled €82 million in the last six months – will continue.

Read: The winners in the Steinhoff mess

Du Preez’s job as CEO requires that he remain optimistic, and he says some businesses in the group are still performing well. “Turnover remains strong overall, but profitability is a challenge. It will take a few years to achieve satisfactory profitability.”

Management remains focused on implementing its strategy to protect and maximise value for all stakeholders by fully implementing its recovery (and survival) plan.

It will be a long road, as can be seen from the latest interim results for the six months to March. Steinhoff posted a loss of €450 million in the first half of the current financial year, despite a credible increase of 3% in turnover to €6.86 billion.

Read: Scandal-hit Steinhoff reports R5.5bn loss in first half

Management believes Steinhoff can recover as it remains a geographically well-diversified global retail group delivering products with strong stable brands. It says some of the businesses are doing well and that others are improving.

Investors must decide if they want to stay on board for the long journey, or look for another recovery stock. There is a long list of shares that have fallen from grace during the last two years, each with its own problems and opportunities.

Source: Moneyweb

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