Pepco’s results for the six months to end-March were a reminder of just why so many South Africans were entranced by Steinhoff’s investment potential. It was also confirmation of that group’s status as one of the biggest profit contributors to Steinhoff.
Pepco, which is Steinhoff’s European discount operator, reported an impressive 16.8% increase in earnings before interest, tax, depreciation and amortisation despite the grim Covid-lockdown conditions it had to endure.
No doubt it helped that in some regions its stores were regarded as essential and allowed to trade through lockdowns. It also helped that the UK government provided support in the form of business rates relief for its Poundland operation in the UK and that management was able to use the tougher trading conditions to negotiate significantly lower store rents.
Certainly a group that is able to increase gross margins by over 100 basis points – to 42.4% from 41.1% – and is willing to add around 15% to its store base during a global pandemic does represent an entrancing investment opportunity.
If only …
Tens of thousands of Steinhoff investors must be feeling desperately sorry that former CEO Markus Jooste and a handful of colleagues couldn’t just focus on the business at hand instead of getting drawn into increasingly imaginative and ultimately destructive transactions.
And Christo Wiese, who made the fateful decision to sell Pepkor to Steinhoff in 2015, must rue the day and feel even more determined to reclaim something of substance from the Steinhoff carcass.
It’s difficult not to imagine Steinhoff will dip into this attractive cash source again in the months ahead, particularly as the Pepco business appears to be strongly cash-generative.
Ahead of the listing there had been speculation that Steinhoff was in talks to sell all of Pepco to a private equity consortium. Presumably the Covid pandemic put paid to those plans.
In the just-released interim results management says the gross margins benefitted from “strategic space initiatives and reduced markdowns”.
Process and systems enhancement in Pepco have enabled a significantly more focused, targeted and tailored approach to the discounting of poor-performing ranges, says management adding that discounting is now undertaken on a country-by-country basis rather than by applying the same discount to the product across all territories.
Credit where it’s due …
At around the time of the Warsaw listing in May, Pepco refinanced its external debt facilities, which comprised a €475 million term loan, €130 million revolving credit facility and a shareholder intragroup loan of €247 million.
Unlike its parent Steinhoff, Pepco was evidently negotiating from a position of strength.
According to management: “The group’s objectives were to ensure sufficient liquidity over a longer time period with new term loans backed up by a new RCF [revolving credit facility] with a five-year maturity, to decrease the interest cost paid on the existing debt and to incorporate the existing lenders and treasury operation banks into an appropriate relationship bank group.”
Pepco’s new, “more appropriate relationship” includes a five-year RCF at an initial interest rate of below 1.5%, which means the group is paying a significantly reduced interest bill.
An interest rate below 1.5% compares starkly with the 10% per annum that Steinhoff has had to offer the parties behind the €9 billion of debt that it refinanced in 2019.
News of the results, which had been flagged at the time of the May listing, saw the Pepco share price surge 13% on Thursday.
And the good news for long-suffering Steinhoff shareholders is that Pepco CEO Andy Bond is upbeat about its prospects.
Unsurprisingly Bond – who, as former CEO of Walmart-owned Asda, led the acquisition of Massmart back in 2010 – expects the environment to remain “changeable and challenging” in the short term.
“However, as these results show, we have a clear and winning customer offering, a long-term growth strategy of delivering stores in existing and exciting new markets, as well as a number of key initiatives to drive our sales and margin,” says Bond.
“As such, we remain confident about our prospects for continued profitable growth in the balance of the financial year and beyond.”