Investing in Steinhoff

International discount retailer Steinhoff has made it onto the Bloomberg list of stocks to watch in 2017. Stefan du Toit, stockbroker at PSG Wealth Durbanville, noted that the list contains some of the largest and most followed globally listed companies.

“This is a distinguished list and would further enhance the profile of Steinhoff as a global player. As commented on the Bloomberg list, where Steinhoff is rated 41, it will be important going forward to control costs and unlock efficiencies after the recent acquisition spree and resulting increase in debts,” said du Toit.

Steinhoff has a primary listing on the Frankfurt stock exchange, with a secondary listing on the Johannesburg Stock Exchange (JSE). This guide looks at the performance of Steinhoff on the JSE and what it has to offer as an investment.

Steinhoff’s performance

For the 12 months ended 30 June 2016, Steinhoff reported a 33% increase in revenue. Over that time, headline earnings per share dropped by three percent to 29.5 cents, while operating profit increased by 13%.

Du Toit stated that the company’s share price underperformed ‘severely’ with a one year return of negative 12% and a year to date return of negative two percent. “This was in part as a result of currency movements as Steinhoff generates approximately 70% of revenue outside South Africa.”

Following the release of its full year financial results, Steinhoff revealed that it will remain focused on expanding volumes, reducing costs and unlocking efficiencies through additional acquisitions. Du Toit pointed out that Steinhoff has implemented an accelerated book-build to raise additional capital to fund the aggressive acquisition strategy.

Steinhoff and its competition

While the company does not face any direct competition on the JSE, du Toit pointed out that internationally, there is competition from the likes of Ikea, which is a privately held company. As such, the performance of Steinhoff on the JSE cannot be compared to other companies in the market.

“Steinhoff is an integrated retailer focusing on the discount retail market in Europe, Africa and Australasia. The company manufactures, distributes and sells general merchandise and furniture. Scale is important for a company in this space and this is exactly what Steinhoff has been building aggressively through acquisitions. The vertical integration of Steinhoff also provides some safety against the backdrop of lower margin businesses,” said du Toit.

The company’s most recent acquisitions include:

• In July, Steinhoff announced the acquisition British variety store chain, Poundland Group, in an all cash offer.
• In August, the company announced its intention to acquire Mattress Firm, expanding Steinhoff’s reach in the United States.
• At the end of August Steinhoff revealed its intention of purchasing South African based Tekkie Town for an undisclosed amount.

“Steinhoff is well diversified among different geographies and as such provides South African investors with Rand hedge characteristics,” noted du Toit.

Investing in Steinhoff

According to du Toit, Steinhoff is a quality company with good management that has gained significant market share in most of the markets in which it operates. Through its acquisitions, together with the recently announced intention to purchase Australian based furniture manufacturer and retailer Fantastic Holdings, the company has been building scale.

“Management has distinguished itself in the past as good capital allocators and with South African businessman Christo Wiese as the largest shareholder, Steinhoff is definitely a company to watch for the future. Steinhoff also holds approximately 24% of PSG Group, which has some exciting underlying companies in the likes of Capitec and Curro,” said du Toit.

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