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Steinhoff: ‘We didn’t believe the numbers’

The market is making inevitable comparisons with African Bank and Enron.
For years many people have been noting two glaring issues with the furniture retailer; that it was acquiring underperforming assets and that there was no cash flow from the business, Adrian Saville, the CEO of Cannon Asset Managers says. Picture: Waldo Swiegers/Bloomberg

Over the last few years there have been few stocks on the JSE that have divided opinion quite as much as Steinhoff. While there must always be buyers and sellers to make any market, attitudes towards the furniture retailer have been far more polarised than most.

There have always been those who argued that the business was simply too complex to properly understand, and what they did understand they didn’t like. On the other end of the spectrum were people who believed strongly in Markus Jooste’s deal-making abilities and that Steinhoff was a great company run by an outstanding management team.

It’s a story not unlike what the market experienced with African Bank (Abil) only a few years ago. There were those who were convinced that the Abil business model was fatally flawed, and others who believed that Leon Kirkinis was a brilliant CEO who had the unsecured lending market at his feet.

The cash just isn’t there’

Adrian Saville, the CEO of Cannon Asset Managers, has been, in both instances, in the former camp. He points out that the forensic tools that they use in their investment process had been raising flags over Steinhoff’s numbers for some time. This, he says, is a clear parallel with African Bank, as in both cases it appears that “accounting trumped cash flows”.

“There are two elements of Steinhoff that have stood out for a long time, and I don’t think this is being expert after the fact,” Saville says. “Each time they made an acquisition it tended to get bigger and bigger, which often is the nature of a type of sheltering where in order to hide historically rearranged financial furniture, you have to buy bigger and bigger rooms of furniture.”

These big acquisitions, he argues camouflaged the shortcomings in the earlier transactions.

“But as the transactions got bigger, the return on invested capital fell increasingly below the cost of capital,” Saville explains. “This meant that they were either borrowing money or issuing equity, and inevitably they’ve been a furious equity issuer to fund transactions that were not particularly good transactions.”

This is where the second issue becomes apparent.

“If you can get past the fairly anaemic return on invested capital and satisfy yourself that the accounting number is what it is, it really becomes a glaring anomaly when you go look for the cash flow,” says Saville. “The cash just isn’t there.”

He points out that this is not a new or even particularly uncommon view. Many people have been noting for years that there are these two problems with Steinhoff – that it is acquiring underperforming assets and that there is no cash flow from the business.

“It’s not necessarily the case that if you are making bad acquisitions it’s fraud, but it is often the case that once you have started to chase your tail the activity becomes increasingly furious,” Saville argues. “And the activity they have undertaken has been absolutely frenetic. We had no exposure to Steinhoff in our active mandates for the simple reason that we didn’t believe the numbers. And we weren’t alone in that observation.”

South Africa’s Enron

Steinhoff is, however, far bigger than African Bank ever was. Until this week it was one of the top 10 shares in the FTSE/JSE All Share SWIX Index.

This has caused some commentators to compare it to Enron, the US energy company that collapsed into bankruptcy at the start of this century. At it’s peak, its stock traded at over $90 per share, and it was a Wall Street darling.

At this point, it might be premature to predict that Steinhoff’s current troubles must doom the company to total collapse, but there are striking similarities with what happened at Enron. In both cases the issue is questionable accounting involving off-balance sheet transactions and inflated revenues that made the business appear far more attractive to the market than it actually was.

Where to now?

Steinhoff won’t necessarily go the same way as Enron, but if it is to survive things are going to have to change radically.

“I think it’s clear that this is a business in deep distress,” says Saville. “There are at least three or four issues that have to be worked through.”

The first is getting clarity on the real earnings in the business, which has both income statement and balance sheet implications.

“For the income statement, whatever you’ve been looking at for the last few years is simply the stuff of financial manufacturing,” says Saville. “It’s going to have to be restated. That will transfer into the balance sheet. They also have to bring the off balance sheet stuff onto the balance sheet.”

He adds that there is now no chance of recapitalising the business at its historical multiples. Any recapitalisation will almost certainly require new investors and therefore necessitate a change of ownership.

“The other element is that there are clearly criminal and civil legal actions that could be brought,” Saville concludes. “Steinhoff has issued a whole lot of equity on the back of numbers that are manufactured. The board would have been aware of these structures and they were issuing equity and raising debt on the back of numbers that were simply not true. And that’s criminal.”

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The man in the street could see that Steinhoffs growth was too good to be true. The man in the street could see that African Bank were like pigs at the feeding trough, soliciting un-required loans to people who we all knew could never afford to repay. Yet the auditors,financial advisors, investment houses, all the integrated internal and external checks and balances, act shocked and surprised when the crash occurs. Jooste has got probably hundreds of millions of rands invested in race horses, and it costs him millions a month to stable and care for them, which is an extravagant loss making indulgence to satisfy his vanity.I and many other men in the street are not surprised in the least. Amazing how ill gotton gains are so much easier to flaunt than hard earned income.

An arrest and fast tracking through the justice system in a fraud case would be of comfort to some but that system does not have a place in South Africa where the wrong doers have more rights then the honest people in the country have.

If a spade was truly a spade, it would have been reported that Jooste is being investigated for accounting and tax fraud, theft and corruption where investors and tax authorities are alleged to have been swindled out of more than R13.5 billion.

Can someone help me, what happen to the share price of Reinet?

not much. Don’t worry, you won’t have to change your name…unless you owned Steinhoff….

Many times their accountants advise farmers to buy implements in a effort to lighten the tax bill. By doing this they eventually paint themselves into a corner. Initially they spend capital on something they do not need, in order to pay less tax. Then, eventually they do not have the cash to pay the taxes, so they are forced to buy stuff they don’t need. My accountant told me, if you use this strategy to minimize the tax bill, you will eventually have to buy a whole train.

Some farmers go bankrupt because of the spending to minimize the tax bill after good years. not after the losses of bad years. That is why we say the most dangerous thing that can happen to a young farmer is a year of record profits.

An old successful farmer once told me “the more taxes I pay, the more successful I become”.
Steinhoff did not have the cash flow, so thy were forced to keep on spending capital.
One positive thing you can say about Marcus Jooste, he did not pay “unnecessary” taxes.

spot on. 100% correct and I speak from experience with my immediate family “farming”. My BIL bought an irrigation system (spilpunt) to minimize his tax load only to find out 6 months later he did not have enough water to service it. There is a standing joke in the professional fraternity too: if its tax deductible, I”l take two.

“if its tax deductible, I”l take two” – loving it!

brilliant comment. Yes don’t try and out smart the tax man…..and don’t do corrupt things in the dark. Now I understand why some of my colleagues are being told to by new cars to pay less tax. Is this the input/output vat your’e referring to?

Markus Jooste used the same tax-avoidance strategies used by some farmers. Maybe he learned these strategies in his hunting trips.
It has fancy academic descriptions like “round-tripping” and shifting funds between “off balance sheet entities” or doing business with “special purpose vehicles”. We can simplify these actions for those who are not financial experts.

When a farmer at the end of the tax year, buys cattle from his neighbour, whose tax year ends at a different period, to sell it back to him in the new tax year in order to have a tax-deductible expense now, this is known as round-tripping. When you set out on this round-tripping journey, you need to buy ever-increasing amounts of cattle to hide your profits. The only thing that can save you now is a drought or a loss-making year. When you are in business and you wish for a loss-making year to come to your rescue, you know it is time to fire your accountant.

When you buy tractors and harvesters you don’t need, to have a the tax-deductible expense, and you start paying more in interest on loans than what you would have paid in taxes, you should fire your accountant.

When you don’t have the cash-flow to pay the VAT when it’s due, it implies that your wife is living beyond your means. When you claim VAT on false expenses, you are plain stupid and should go to jail.

You see, if you don’t want your business to end up like Steinhoff, you should fire your accountant and discipline your wife.

This is all about normal tax and travelling allowances.



Ja you sheeple !

Keep handing over your hard earned money as you continually get extorted by those thugs in power

Blindly believing you are doing the ‘right thing’ by paying your tax

As those inefficient idiots in power continue to ADD NEW TAXES on what is now a weekly basis [ ‘Waste Tax’ just introduced… God…….what next, toilet tax !!!!???? ], to make up for their complete and utter mismanagement and incompetence, and you idiots continue to grind every day working your a@@ off to give away your income to these criminals

Eish….this has been going on since the Roman Empire days, and the elite continue to extort the masses


Indeed, spending R100 to get R20 back in tax does not make sense, but so many people don’t understand this.

BTW; my wifes grandfather (who was a real cheapskate!) years ago went driving with his heavily pregnant wife up and down a bad dirt road hoping that it would make the baby come before the end of the tax year so he could deduct another dependant from his income tax. (It didnt work – her aunt was born just after the start of the next tax year)

@ Sensei

What a load of cr*p your observation is……!!…and so ignorant of whats really at stake.

The issue here is not trying to avoid tax, but tax itself !

The whole reason ppl are trying to minimize tax,or more importantly, have an issue with it, quite simply, is because tax is legalized theft

Nothing more, nothing less

Anyone who still believes in the whole premise that your tax is used to build schools, maintain roads, provide health care and security, electricity etc etc continues to live in la la land

Anyway, one only has to look at this list of ‘services’ our govt is meant to provide here in SA, and know that they fail miserably on each one.

Instead, the looting and pillaging of hard earned wages of our citizens continues unabated…….all the while as the govt and its thugs continue to add to the tax burden as they get ever more desperate to plug the gaps caused by their corruption and maladministration [ and to upgrade their mansion/ expensive cars/wives etc ]

And its ppl like you Sensei, who are in effect furthering the corrupt politicians cause, while you foolishly blunder on while believing you are ‘doing the right thing’

And you continue to support this god awful plunder of our beautiful country, and in effect are an accomplice to this crime by funding these criminals and handing over money to keep them operating

Shame on you, and wake up from your coma !

That methamphetamine trip you are on is really pushing you over the edge brother….

Christo Wiese once related a story: “if a man knows how much he is worth, he isn’t worth very much”. Bruce Whitfield asked Wiese how much he is worth, and Wiese said it is hard to know. Bruce said we know how much the market cap of his shares are, and the debt is easy to know. Wiese went quiet.

The Steinhoff top management, auditors from Deloitte, the FM, the deputy FM and the Vice President are all silent to protect the WMC lobby

Where were the auditors in all of this?? Yes they didn’t want to sign off this year’s finacials, but at the same time said that prior year AFS may need to be restated. Don’t tell me (1) everything went wrong in only one year (2) only Markus Jooste was responsible for it.

(3) Wiese was ignorant to all of this

Ha ha ha

This just goes to show that white man in the corporate landscape play by a different set of rules compared to the rest of us. These set of rules are constructed through a white supremacist lens to ensure that white executives are protected from being demonised or painted as corrupt.

Money is colour blind and people are people long before they are white, black, green or pink. Get that into your head.

What are the guptabots doing on moneyweb?

Emma welcome. Read a few more books and lose that victim mentality, and you might make welcome contributions to the financial community one day. You are vocal, that’s a positive. Now keep going forward on that journey and find something worthwhile to be vocal about.

Regardless of race or whatever orientation, arrogance makes you blind

@ Emma

Ah, the old race card rears its head again

Emma, plse get one thing into your head – at least these ‘white’ people played with money CREATED AND generated by their own companies

Big difference to the ppl in govt who are only good at one thing:


Much like how the likes of Cyril Ramaphosa etc are now critical of corruption, I find it rather ironic how all of a sudden every fund manager and their dog saw this coming, had an inkling this would happen, had a dream/epiphany about this etc blah blah blah…
Next time, please care to share with the average layman on the street prior to such events unfolding, I’m pretty certain Moneyweb would happily oblige to giving you the platform.

Like I commented on Tuesday, once there’s a scandal around a company, the markets assume it is guilty till proven innocent, as is the case right now, whereby markets are expecting the worst till proven otherwise, and are pricing it accordingly, so, in other words, once the German authorities flagged accounting irregularities a while back, that was, for the average investor, your cue to jump ship, because it was only gonna be downhill from there,

Should we be “jumping the Naspers ship”…. en masse?

I understand this reaction, but I don’t think it’s fair. Should asset managers be obliged to state publicly every time they find a stock they don’t like? Every asset manager has dozens of stocks in this category. Should they spend their time writing and talking about them, or managing their client’s money?

Because, to be fair, anyone who takes the time can find dozens of articles over the last seven years or more that are critical of Steinhoff. This is not being clever after the fact.

Well just think of the Capital gains credit you’ll receive on your Steinhoff sale to counteract the Capital Gain on the Naspers that you will be selling shortly….. lol! And seriously guys…do you honestly think that thenew CEO And chairman of Steinhoff is someone in whom you can place your trust.? Does no one remember the airport arrest for money laundering in 2009? All the signs have been there for all of us to see, we’ve just chosen not to see them. But then, I suppose if your President can use smoke and mirrors to cover his corrupt behaviour, why can’t Captains of Industry and Business do the same?

Just earlier this week, the CEO of the Black Business Council, Danisa Baloyi was reported to have been suspended pending an investigation into fraud and theft allegations over a missing R5 million donation. Many headlines explicitly stated that she was fired for fraud and theft. Year in and year out, whenever a black person is involved in shady activities in leadership positions they are labelled as fraudsters and thieves while their white counterparts are protected with kid glove reporting tactics

Whatever clandestine spin management company you work for, on behalf of the Guptas, should keep out moneyweb comments, people are calling the old Steinhoff CEO worse things than a fraudster and thief, but that doesn’t gel with your fake news angle ob WMC, now does it?

Yes Emma, it’s that “white supremacist lens” you mentioned in your earlier post….. You haven’t mentioned “white monopoly capital” yet, but keep going….,

What would you call the monopolist in control of the South-African economy, Graham?
Why do you think pointing out their skin color is bad in this country with it’s history?

The idea that the Gupta’s are the major criminals in South-Africa is almost on par with who was blame for German’s problems in the 1930’s. Suffice to say when minorities are blamed who were never in control of the economy you can be sure there are minorities or majorities somewhere trying to deflect blame from themselves.

The Parliament must show resolve and unity of purpose in pursuing the Steinhoff scandal to its legitimate conclusion through inquiry. DA and EFF that make so much noise on corruption should come forward in this matter as well instead of maintaining silence.

Got to love all the commentary – nobody has a clue including myself – but the share price is down 90% therefore it must be bankrupt !!
This could be a buying opportunity – from the reports I have read there were only 4 people involved – and judging by the size of those 3 companies – I doubt the hole is bigger than 1-2bn Euro.
Wiese is probably buying the Preference shares by the truckload
Enjoy the roller coaster

Yep – sounds like a bargain for Amazon… does Jeff Bezos know?

You could be right and i wouldn’t ever put anything beyond these fraudsters. The time to buy shares is, allegedly, when there is blood in the streets.

And has ONE asset manager brought an application to declare the directors delinquent-no-rather hide in the grass and do nothing like the reptiles that you are!

Foord, Investec, Alan Gray etc….your research belongs with you…in a May 2018 Cape Town toilet.

Please bring us 2 steaks with chips merged with mash potatoes, we would then like to sell the steak back to you, share mash potatoes with your cousin and order the fish, but only if it is still swimming around in tbe atlantic ocean which we will take a call option on, but only after your manager allows a credit transaction to be paid next year whilst letting him smell our chips. You owe us R345 and 23 cents , thank you and we will rent this table from you in the mean time provided you give us a tax invoice also to be paid in by offering you shares in the fish and chips we just ordered. Thank you again

Bitcoin ….. ?

Bitcoin? Even worse! Here is an empty plate, but imagine there is steak and chips on it, and that steak and chips is worth $14 000, which it is because others are currently paying that for it. The best thing is the price will go up and up on it, it’s the future of food after all. Farms and shops just don’t like it that you can imagine your own food, so the investment experts will say it’s a bubble, don’t listen to them, emancipate yourself from the grocery system, and get rich with imagine food.

Someone below asked what happened to the Reinet price which jumped 30% one week before Steinhoff lost 60%….Call me paranoid but is it just possible that these two trades are connected by someone in the know protecting themselves? We just have to find out who that was for justice to be served!

Reniet had a 1 for 10 ‘split’ Some 2 weeks back.
Share effectively down some 3% since then .
Reniet was trading @R29now R290 per share after split.
Nothing sinister I believe.

Steinhoff’s growth was quite pedestrian – nothing special. It was however a very much hyped company with grandiose plans and they made sure that they were very much in the public’s eye. The share price performed as follows;

price @ 30 Dec 2013 2717c
price @ 30 Mar 2016 9685c Annualised return from 30 Dec 2013 73.53%
price @ 29 Nov 2016 6508c Annualised return from 30 Dec 2013 24.93%
price @ 29 Nov 2017 5626c Annualised return from 30 Dec 2013 19.96%

Note that the share price has been on a downward slide since 30 March 2016 – those capable of reading a balance sheet could see some interesting trends in the frenetic acquisitions trail – average companies being bought at unjustified premiums – no rocket science required to smell a a rat. The asset managers who got holding it deserve the hiding they got for not having the conviction to get rid of it. The pain would have been lessened if they had taken a principled stand – even the mighty opportunistic Magda of Sygnia had some SNH in her passive portfolios.

End of comments.





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