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Steinhoff results: The good, bad and ugly

Engineering this ‘level of fraud’ must have involved more than one person.

 

NASTASSIA ARENDSE: Steinhoff, as we mentioned, published their interim results for the six months to end March 31st on Friday afternoon – and was the first look into its financial position since Markus Jooste resigned as CEO in December of last year. And I also indicated that management made it clear that because of the PwC forensic investigation into the financial irregularities is still ongoing, there are uncertainties that remain. And, to talk to us a little bit more about the results – the good, the bad, the ugly, is Graeme Kerner of Kerner Perspective. Graeme, thanks so much for you time.

As expected, it was going to be a bleak, bleak figures all across the board. What did you make of what you saw on Friday?

Read: The scale of the Steinhoff deception

GRAEME KERNER: Well, good morning Nastassia. I think when you say the good, the bad and the ugly, there wasn’t a lot of good. Although, maybe let’s start with that. I think Australasia, interestingly, although they obviously impaired it, that looked a lot better. But Pepkor in Europe did really, really nicely. More recently maybe conditions have tightened a little bit, Ebitda was up 40% there and even Star (Steinhoff Africa Retail) – of course, you must remember Nastassia, not only is there a whole lot of complexity and noise and lack of audited financials for September last year, but there’s lots in terms of currency moves. And also, the operating environment.

Quite a few of the operating companies who relied on funding from head office had that funding effectively [and] had those funding taps closed. So, it’s very difficult to sort of almost find the real story. But I think, the gist of it for me, is we’ve always said there were, or still are, very good businesses inside there. If you look at some of the Star assets like Pepkor eastern Europe for example. That, I think, was the good.

In terms of the bad, Conforama was very disappointing. But, of course, Mattress Firm, which isn’t itself in the process of restructuring, it’s got I think 1 300 stores and it’s busy repositioning themselves. Mattress Firm acquired a business shortly before Steinhoff bought them, so a lot of capital and funding needed to sort of reposition those businesses. That caused a lot of pain, so that operational results were very, very disappointing. Yeah, and just generally, I think the really ugly part is the extent of the value destruction for equity shareholders, which we kind of expected but when you see your net asset value, or your equity holders’ value decline from €5.2 billion to €2.4 billion, it sort of tells the real story.

NASTASSIA ARENDSE:  One of the Moneyweb journalists, Patrick Cairns, has written an article where he used the time over the weekend to plough through the numbers more in depth, because I think on Friday afternoon, we were all just rushing to get through at least the basics to get a bit of a quick analysis. But, here’s something that he found. So, if you looked at the interim numbers from last year, the six months to March 31 last year, and you read the comment that at the time Markus Jooste said, when he hailed the group’s performance, and I’m going to quote it to you.

He says: “This solid revenue and margin performance underscores the resilient model of the group. This has been further underpinned by both our product and geographical diversification in what remains a resilient discount market.  The strong leadership and execution from our operationally focused management teams also continues to deliver good growth.” 

When I read this, I found it quite funny, because they basically overstated their operating profit for the period by R16.1 billion and when you look back at what has been happening and what we’ve discovered thus far, and there’s probably even more to discover, if the PwC report is released at the end of the year. It’s just remarkable, what he’s described last year and what’s currently happened.

GRAEME KERNER:  Yeah, it’s almost like he was writing a novel and the rest of us thought we were reading a factual book. That’s really the key thing here, Nastassia. When you look at it on paper, there’s €0.58 of NAV here. The reality though is that we don’t have audited financials for last year. It’s going to take us, let’s say another six months before PwC can actually produce anything coherent.

They are, which is quite encouraging, going to be investigating laying charges and trying to recover, you know where they feel the group overpaid for assets, but if the fair value of Mattress Firm was, I don’t know, $500 million or a $1 billion, and you paid $3.8 billion, you know what, good luck in trying to recover that I think. I think for me the big issue is exactly what you’re talking about.

Just why one has to take that €0.58 of NAV with a pinch of salt is because, in this half year, before the restatement of last year, there’s a loss of €600 million. If that were repeated for the next six months, and I think it remains a challenging environment and let’s assume that’s right, suddenly that €2.4 billion, which is €58, and it goes to further impairments. Let’s say on a mattress firm, where the carrying goodwill is still €1 billion, you can see a little bit of this NAV that is there evaporate. But, exactly to your point, I mean, I did the calculation shortly after the results came out on Friday and between what was reported and what has now been restated is about €1 billion of operating performance. 

It’s just so amazing that somebody could engineer this level of fraud – and when I say somebody, there must have been more than one person involved. But how this was allowed to happen is really, it’s a mystery and as Paul said, it’s going to go down as a case study of how to prevent a corporate disaster. But, I still say, and I’m not only pointing fingers at the auditors, or the audit committee, the ratings agency – how did we all allow this to happen? This didn’t happen overnight.

A lot of people would say: “I should’ve known better”. And that is right, but at the same time, when we pick up a set of financials, we assume them to be reasonably accurate. We always say that financial statements are slightly wrong, because of timing differences and a few technicalities.  But, not to the tune of restated €362 million loss, versus a significant profit. And, of course, these asset write-downs are amazing. 

I think the key question for us now, Nastassia, is that of solvency. If you look at that very thin equity layer that remains, remembering that these businesses have to continue operating. And I think that’s the key thing, and I think Heather Sonn and her team are doing the very best they can to try and negotiate with creditors and shareholders to try and keep the taps open so that businesses like Mattress Firm can be sort of massaged, or nursed, to a position where some semblance of fair value is extracted. I think when we have to be honest, the days of easy sales – selling PSG, selling a block of Star – those things are gone. Selling the Gulfstream Jet, which $6 million was lost on, by the way. 

Those things have happened, now it becomes a lot more difficult in trying to negotiate with big buyers for effectively, let’s call them trade buyers or private equity buyers, has now got to write out checks for $1 billion or €1 billion for a business being Mattress Firm, which is actually losing money.

Unfortunately, the script is not ending well and even if we did have a massage solution, which saw the group in a much-diminished form, but still solvent and liquid – my guess is, we’re going to need a massive capital raise. You’re going to be so diluted that that €0.58, even if it theoretically was there, it’s going to be so diluted, as will be the earnings, that it’s just so sad.  I just cannot express how disappointing this whole thing was, because the whole system unfortunately failed us.

NASTASSIA ARENDSE: Alright, that’s Graeme Kerner, from Kerner Perspective, talking to us about Steinhoff’s numbers.

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Analysts don’t even look at financial statements, the valuations are based on relative measures, PE, BV etc and CEO’s platitudes. That’s why you hear them time and again going….such and such CEO and the team are running a tight ship, instead of looking at CEOs with skepticism they have an incredible admiration for them.

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