Special Report Podcast: Rob Forsyth - Investec Asset Management
ALEC HOGG: It’s Tuesday April 24 2012 and in this Boardroom Talk special podcast, Rob Forsyth, from Investec Asset Management, joins us to talk about a stock that you hold a lot of, Rob, Steinhoff. The last time I was looking at the shareholding of Steinhoff, in fact, the biggest single shareholder is Invetsec.
ROB FORSYTH: Ja that’s correct, Alec. We’ve been shareholders off and on for a decade, so we have been fairly consistent shareholders but we did add quite substantially to our stake in the financial crisis. So ja, we are the single largest shareholder in Steinhoff International.
ALEC HOGG: And the big deal that’s been announced or the wraps taken off today is the restructuring of its interests, taking a controlling stake in JD, swopping out some of its Kap. Let’s just step back a little bit though, this offer or this transaction, it appears it can be very complicated for people who aren’t close to the deal, what exactly did shareholders, how did they vote in this?
ROB FORSYTH: Okay, let’s get back to the point of the deal, the point of the deal is really what Steinhoff wanted to do was to rationalise its interests into logical groupings and form strategic entities for the future. So in other words if you look at the way the group is divided, they’ve got a very strong 75%, 80% of their earnings coming from offshore furniture retail and then people outside if you looked at it you would have said that their South African interests were fairly…a bit of a mix mash, you would have industrial interests mixed with retail interests mixed with motor retail. So in other words they’ve tried to formalise that a little bit more into the two entities, which would be JD Group holding the South African retail interests with expansion opportunities into other formats of retail as well into, let’s say, probably the African continent. Then you’ve got Kap, which holds the manufacturing, industrial type of interests. So this was, from their side, was initiated to rationalise quite a lot of that. So in terms of the actual deal what you could do, which is quite unusual in corporate South Africa, is you could essentially elect to swop out your JD shares for Kap shares in terms of the deal.
ALEC HOGG: But why would you have wanted to do that?
ROB FORSYTH: Okay, so we were quite large shareholders in Steinhoff and we were quite large shareholders in JD Group, Investec Asset Management, on behalf of our clients and we thought it was to enable this strategic rationale to be able to do that we were quite happy to hold Kap shares, continue to hold JD shares and continue to hold Steinhoff shares.
ALEC HOGG: But what it would have presumably meant is that whatever you held in Kap would now have been expanded or would be new and why would you want that?
ROB FORSYTH: Well, Kap is an interesting vehicle, you’ve got to a stage where some of the major profit generators there being probably Hosaf, they’ve spent a lot of capital expenditure, they’re now starting to produce a lot of cash and that business has turned around quite nicely. You have got some rather smaller food interests, as well industrial interests such as Glodina and some shoe interests but that would’ve been augmented by Unitrans Logistics’ businesses. Now those businesses are very strong businesses, they’ve got a great track record, they’ve probably got the best track record in the South African market, so better than Imperial, Super Group, Barloworld Logistics. Over a 20 or 25 year period they’ve produced consistently good results, they’ve been well managed and we thought that that was an attractive asset to partake an investment view on over the long term and we were getting that at, let’s say, an 8.5 PE, which we thought was a very compelling valuation. We thought that in the Kap structure, the way it’s structured at the moment, the logistics businesses can be relatively capital intensive and what that means is basically if you get a new contract you’re often getting new fleets or new warehousing, you have to put the capital upfront and that the Kap industrial interests would be quite easy to fund that logistics expansion. So you could put a reasonable amount of debt into Kap and the business would be self-funding still.
ALEC HOGG: So it’s attractive. If you were looking at the three because it’s all about relative value, isn’t it, Steinhoff on the one part, JD on the other and Kap on the third one. If you were a conservative investor, which of the three would you be going for?
ROB FORSYTH: I think you’d probably still be going for Steinhoff from a conservatism point of view because that is where it’s the more diversified, it’s got global interests, it’s got what we would believe is a strong balance sheet, strong cash flow production is about to come through very strongly at this point in time and you’ve got a little bit of, let’s say, defensiveness in terms of diversification of interests. Whereas if you look at JD Group, I think operationally it’s probably a little bit more risky in terms of that you’ve got an asset that does need, I think, a little bit of more operational assistance, which hopefully Steinhoff will be able to bring to that asset over the next five years but it’s where, let’s say, market share for, let’s say, the traditional credit retailers they’ve been probably losing a bit of market share when it comes to credit issuance, as well as they’ve probably been losing a little bit of market share in terms of the domestic retail business in terms of furniture, which is quite a fragmented business. Then in terms of Kap, once again it’s, let’s say, a view on industrial South Africa, which let’s be frank, probably over the last ten years has not been a great place to be, the rand’s been relatively strong, our costs of production have been going up a little bit. So on a globally competitive stage you have to be pretty ruthless and lethal on your cost base to stay in the game. So I would still say that Steinhoff is probably the least risky of the three.
ALEC HOGG: We also believe that you should follow the money and the chief executive of the group has got all his interests now consolidated into Steinhoff shares. Isn’t that a tip for the rest of us?
ROB FORSYTH: Look, I would think not much has changed really. Yes, obviously through the PSG transaction Mr Jooste has upped his stake, which I think is obviously a very strong endorsement of how he feels in terms of the positioning of Steinhoff at this point in time. But actually if you look at it you look at, say, Top 40 JSE companies, Steinhoff has been one of the companies that over the years has had one of the highest absolute holdings in rand value by the directors and management in the company consistently over a ten year period and also in percentage terms. It’s probably getting close to being…I think when I last looked it was second or third maybe behind the founders of RMBH and maybe Patrice Motsepe at African Rainbow Minerals. So in terms of that they have been long term committed management to their holdings in Steinhoff and they have not really sold over the years. So they’ve already got a strong endorsement on what they think they can do with the company and they’ve even increased that a little bit, as you’ve mentioned.
ALEC HOGG: That’s interesting. The offer itself, in the swopping of JD Group shares for Kap shares, 16.6m accepted, which wasn’t enough for the 38m that was required and then there was a 21.7 excess amount that was asked for. Just take us through those numbers, first of all why do you think that such a relatively small percentage of shareholders actually accepted it?
ROB FORSYTH: Well, ja, I think it’s partly because it is slightly unusual in terms of the fact that you have got…you’re swopping an unrelated asset almost for another asset. So most people would have felt that JD Group would…we’re giving up our upside on JD Group for maybe a slightly lowly asset in Kap but we’re giving up our upside for when new shares can potentially unlock some value in JD Group. So they thought, well, let’s just rather have a look at the new shareholding in JD Group and let’s not go into something that we don’t know quite as much and that is not quite as liquid.
ALEC HOGG: And a number of the directors of JD Group stuck with those shares rather than switching them into Kap as well.
ROB FORSYTH: I actually haven’t looked at that. The directors of JD Group don’t hold that many shares in total of the company but you’d expect that because they would be still incentivised in terms of the operations of JD Group, so they wouldn’t really want to work at JD Group and hold Kap shares, it would be a bit strange.
ALEC HOGG: So now the excess applications of 21.7m; where does that come from?
ROB FORSYTH: Okay, so that comes from…essentially the way the deal was structured you could have tendered 26.2% of your shares to get Steinhoff to the 38.2m shares and then you could tender excess if you wanted to. So in other words you could apply for any more than the 26.2%, which a lot of funds did.
ALEC HOGG: So there were funds that wanted to get out of JD and put their investment now in Kap in the future?
ROB FORSYTH: Ja, it’s a little bit complicated by the fact that, let’s say, Investec Asset Management on behalf of its clients was a major contributor of the excess applications.
ALEC HOGG: And you’ve explained that because you think there’s some good upside coming in Kap.
ROB FORSYTH: Well, good upside in Kap and since the deal was actually announced we were reasonably active on behalf of clients in the JD Group market. So in other words our net position in JD Group has actually not been diluted that much.
ALEC HOGG: Was your arm twisted a little bit in this respect to try and make this transaction successful?
ROB FORSYTH: No, it was a standalone transaction that was proposed to the shareholders and we decided to go along. As I said, the merits of it we thought were strong in all cases, we thought it has merits for making Kap, let’s say, a better entity with a large entity with more sustainable cash flows and a better growth profile. It gives JD Group shareholders a very strong international shareholder that can in a competitive market that can bring substantive international experience on international retailing, discounting, procurement, that has some interesting views on financial services globally. As well as the fact for Steinhoff it puts the right strategic assets in the right place for the long-term platform and the growth of Steinhoff International Holdings.
ALEC HOGG: So you took a holistic view, if I’m reading you correctly…
ROB FORSYTH: Ja.
ALEC HOGG: …of this is going to good for Steinhoff, good for JD and good for Kap, so let’s support the transaction.
ROB FORSYTH: Absolutely.
ALEC HOGG: Rob, the strategy from here onwards, do you have any insight into what Steinhoff’s likely to do differently at both Kap and JD?
ROB FORSYTH: Well, I think in terms of if you had to look at JD I think it’s fair to say that the share price prior to this had lagged obviously the rest of the retail sector quite a lot. I think that the group has potentially…it’s done a lot over the last couple of years to try and catch up where it was a little bit behind and they’ve separated the retail business and the financial services business. But I think that that will be further sharpened up in terms of the retail formats, I think that that will be a little bit more focused in terms of, let’s say, brand proliferation and where you want to put your money behind which brands and [UNCLEAR 5:32] and let’s say the handwriting of each brand in terms of meaning different people to different people. So I think the marketing will be sharpened. I think that then if you look at financial services today in the consumer credit space I think that the JD Group and a lot of the other retailers lack scale, so there’s probably going to be a five to ten year story of relative consolidation in consumer finance credit in the marketplace, which JD and Steinhoff will participate in. From the Steinhoff perspective, I think that now that they’ve got the bulk of their South African assets organised into a logical framework and they’ve got platforms from which to expand, I think the focus will mainly be on the international potential listing of their furniture operations and how they go about that to unlock value. But there’s no particular rush on that, they’re going to continue to grow those organically albeit in a tough, fragmented marketplace but I think they’ll manage to do a very good job of that and that portion of the business should be able to rerate over a period of time. Then in Kap I don’t think we should particularly kid ourselves looking for particular focus. That will be a broad based manufacturing group of South African industrial assets that will be relatively entrepreneurial over the future and look to bolt on more businesses over time.
ALEC HOGG: Rob Forsyth is with Investec Asset Management.