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Steinhoff bargain-hunters lose out today

EOH similarly gives off bad vibes – David Shapiro on Thursday.

NASTASSIA ARENDSE:  Good evening and welcome to the SAfm Market Update with Moneyweb with me, Nastassia Arendse.

I’m joined by David Shapiro from Sasfin. David, thanks so much for your time. Were things a little calmer today compared to today?

DAVID SHAPIRO:  No. We ended up but I still think most of the attention on the market is being directed at Steinhoff and all the other companies. Steinhoff was up at about R17 or R18 overnight – and a lot of people came in yesterday believing that they were picking up bargains. Well, unfortunately those bargains are 30 or 40% down today. In fact, the share price is down over 43% at R10. So I don’t think we’ve seen the end of the troubles there.

But associated companies are now also beginning to feel the heat. No one is quite sure where this is all going to unwind, and what it’s going to mean. You’ve got to undo a lot of transactions, which is going to take a long time, particularly because of the size of it and where they operate. This is going to continue for some time.

NASTASSIA ARENDSE:  At what point would the JSE suspend the share? What would have to happen?

DAVID SHAPIRO:  Their primary listing is in Frankfurt, so that’s where it will be dictated. I’m a practitioner, I’m not a trader, not at all, I don’t trade at all. But I do watch markets on a daily basis and I look for hints. The signs were there that things weren’t happy at Steinhoff for a along time. The share price has been going down, as we’ve been seeing at EOH – very similar.

When the rest of the market is tracking sideways or doing nothing, and you start to see this volatility, it alerts you that something is wrong, that inside information is leaking out, because you can’t keep information [quiet]. There are so many parties that are involved in transactions, looking through accounts, dealing with the business. This is your currency and this gives you an alert – when you see these kind of plunges – that you need to do something. My view is that the regulators also have a duty to help people who are invested and warn them.

EOH is a similar one. EOH was down. It plunged today. It’s also a share that was at R170 a year ago. Their July accounts, their latest set of accounts, were very good. They were up 20% in profits and we saw nothing wrong with the business. And yet the share price keeps going down. So that’s another warning sign. They came out with a statement today that doesn’t say much. They do admit that they have reached an agreement with former shareholders of three companies to unwind a transactions. That’s it.

And then right at the end they say, ah, “EOH remains committed to its purpose of being an ethical and relevant force for good society, ensuring that all our business is conducted with integrity, transparency and a higher moral standard. EOH would therefore like to reassure the market that the business remains strong, with great leadership and strong fundamentals.” Well, the market doesn’t think so. The market is telling you something completely different. It’s telling you, hold on a sec, we are getting out of the share – and the share price was knocked 30, 40%. You don’t see that, Tash, in markets. Companies with great leadership and strong fundamentals don’t plunge 40%.

NASTASSIA ARENDSE:  Anything else on the market to cheer me up a little bit? I am very glad that I don’t own EOH or Steinhoff.

DAVID SHAPIRO:  These are stories that unfortunately do shake sentiment on the market. In other words, they are not good because you start to lose faith, number one, in corporate SA and the people that are running businesses, and you begin to ask questions.

Other than that, its wasn’t a bad day because resources staged a bit of recovery and the rand was under a bit of pressure because of the dollar. The dollar picked up on fundamentals there and also on Congress working towards finalising their tax bill. So the US market was strong. We’ve seen a recovery in tech.

Naspers was up today and generally it wasn’t bad outside of the scandalous companies.

NASTASSIA ARENDSE:  Do you see Steinhoff going to R5 anytime soon?

DAVID SHAPIRO:  You can see it going to zero. Well, we don’t know. We don’t have enough information on which to base it. But what the market is telling you – and I’m reflecting on what the market says, not what I know about the company – is that the troubles are deep. The problem is we don’t know how it’s going to affect everybody associated with it, and what these troubles are.

NASTASSIA ARENDSE:  There is a word in play on Twitter. They are comparing it to Enron and calling it “Steinron”.

NASTASSIA ARENDSE:  We come back to debt. The view is that they hid debt off balance sheet, which is what Enron did through special vehicles. It’s a bit complicated to explain it on radio, but in other words debt wasn’t on the balance sheet but rather housed in subsidiary companies which were investments. Also, those companies could be used to massage numbers. That’s the worry, that’s what Enron did, and this is way around massaging your balance sheet, as I said yesterday, for bankers and bondholders rather than for shareholders.

NASTASSIA ARENDSE:  Thanks, David, for your time this evening


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