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Shoprite acquisition could boost STAR’s Africa growth

SADC countries contribute 95% of earnings – Bright Khumalo, Vestact Asset Management.

NASTASSIA ARENDSE:  We spoke about Steinhoff Africa Retail [STAR] publishing their numbers today. They also came out with an announcement on Friday that they are looking to acquire 23% of Shoprite. This is my conversation with Bright Khumalo from Vestact about the numbers first and also this acquisition.

BRIGHT KHUMALO:  If you look at the results, they say revenues are up 13.2% to R6 billion. They show a marginal increase of 100 basis points, which is good – considering the current economic environment. Trading profits also increased double-digit, about 25%. But the thing is I wouldn’t get too excited too soon, because these numbers are very hard to read because they changed their reporting period from June to September. So in relation to another 12 months, if you look at these numbers properly, you would see whether they are coming off a low base or a big base, and we need to unravel all the accounting mysteries.

NASTASSIA ARENDSE:  Alright. So, from where you are sitting, things look good. What is the driver when it comes to these numbers from your perspective? What did you notice?

BRIGHT KHUMALO:  The thing that stood out for me was that the SADC countries – South Africa, Botswana, Lesotho, all those countries – still contribute 95% of the earnings of STAR, which means that we understand why they want to push more into increasing their stake in Shoprite, and most importantly their voting rights, so they can control the strategic position of the company, where it goes and where to focus in terms of the growth of Shoprite, because Shoprite really has fingerprints all over Africa, and is the biggest retailer in Africa by far. If they want to grow into Africa then a partnership between the two companies will make more sense.

NASTASSIA ARENDSE:  From an analyst’s point of view and from someone like yourself who studies these numbers all the time, are there concerning factors with regard to even an operational side?

BRIGHT KHUMALO:  There is nothing concerning here. I think you are referring to maybe something like the bigger group, Steinhoff International. When you look at IFRS, or Gaap in America, as they call it, it’s all about the interpretation of what the IFRS itself, their standards, say, and how you apply them. It differs from company to company. Some people are better than others, and if there were some things that would really alarm, to say something wrong is going on here, you would definitely notice it from the get-go. But right now I’m not worried about anything here.

NASTASSIA ARENDSE:  When it comes to Steinhoff’s Sens announcement, I now notice the share price is down. Is that a case where investors are not liking what they are reading with regard to the fact that, fine, you are going to publish the numbers, but you are not sure as to what’s going to happen with this probe and any other investigations?

BRIGHT KHUMALO:  Well, you are talking about the tax investigation in Germany. If you read the Sens announcement, it says that the 2017 consolidated financial statements will be released in unaudited form. That’s the punchline there. Though they are on schedule for December 6, the numbers will be there. But the auditor obviously is sitting on the audit because they are awaiting the outcome of the tax investigation. They don’t like to give an unqualified audit and then the tax investigation qualifies and you look like a bad auditor. So I understand why the auditors don’t want to sign these numbers. But it’s still business as usual at Steinhoff International.

NASTASSIA ARENDSE:  So, back to STAR, are you optimistic that things are going to go well, or are you going to wait for the next set of results to be able to do a fair comparison?

BRIGHT KHUMALO:  I’ll be patient and wait for next year’s numbers. But there is still a big opportunity here because they are interested in taking that Shoprite position. I think it will make sense, like I said before. If Steinhoff Africa wants to really go hard and aggressively into the rest of Africa they could use a publishing model where you find a retailer, like right next to the Shoprite that’s already there, which has already got the foot traffic and what not. It would make a lot of money for these guys if that sort of the plan is what I’m thinking about, the same as how they did with their fried chicken – I think it’s called Hungry Lion. So everywhere there is a Shoprite you find Hungry Lion and that model has worked for them. So I don’t see why the furniture model wouldn’t work.

NASTASSIA ARENDSE:  Bright, thank you so much for your time.

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