When it comes to Steinhoff, there is seldom a dull moment. Now is no exception: it is moving towards a separate listing of its African operations, with annual revenue of €5.5bn (R80bn). This will happen in the third quarter of the year.

The proposed listing, which will include the raising of an undisclosed amount of new capital, has received a mixed reception from investors. "I feel the investment community is suspicious," says Alec Abraham of Sasfin Securities.

Steinhoff’s move to list its African operations separately should not come as a surprise. It is a sequel to the retailer’s failed attempt in December to create a R170bn annual revenue giant, Retail Africa, through the merger of its African operations with those of Shoprite.

Though the proposed deal was driven hard by the largest shareholder in Steinhoff and Shoprite, Christo Wiese, it ended in failure in February when agreement could not be reached between the two companies on the share exchange ratio. Wiese has a 23.1% stake in Steinhoff and a 15.93% stake in Shoprite.

The latest move by Steinhoff suggests it could be another approach towards ultimately realising the creation of Retail Africa. In December Wiese said it was a "natural development" for the two retail giants to join forces.

Central to the proposed new listed entity — in which Steinhoff will retain a controlling, undisclosed stake — is the splitting of its Pepkor subsidiary (annual revenue of €4.93bn) into two businesses. Steinhoff acquired Pepkor from Wiese and his listed holding company, Brait, for R62.8bn (then €4.8bn) in March 2015. The deal valued Pepkor on a heady 37.4 p:e.

Following the proposed splitting of Pepkor, by far the largest new business to emerge will be the African operations, with annual revenue of €€3.1bn (R46bn), of which SA is the dominant component.

The other separate Pepkor business to emerge will make up its operations in Europe, the UK and Australasia, with a combined revenue of €€1.83bn.

In SA the latest data on Pepkor’s operations reflect it spanning 3,353 stores. Heavyweight brands are Pep, with 1,971 stores focused on low- to middle-income consumers, and Ackermans with 560 stores. Also in the SA line-up are 520 stores under the Dunns, John Craig, Shoe City and Refinery brands and the recently acquired Tekkie Town (302 stores).

In the rest of Southern Africa, Pepkor operates 294 stores under the Pep and Powersales brands. The stores generated 8% of Pepkor’s African revenue in the 12 months to June 2016.

Also to be included in the new SA-listed entity are furniture businesses JD Group and Poco SA, vehicle retailer Unitrans Automotive and building supplies unit SteinBuild, which operates under the Pennypinchers and Buco brands.

Earnings of the new listed African entity will be about R6bn before interest and tax, says Evan Walker of 36One Asset Management. Around 80% of this would be generated by Pepkor operations.

Walker has a major criticism of Steinhoff’s proposed African operations’ listing. It revolves around the capital raising.

"Investors paid a huge premium for Pepkor and are now being asked to pay for it for a second time," says Walker. "The listing should have been by way of an unbundling to Steinhoff shareholders."

Walker believes proceeds from the capital-raising exercise will be used to repay Steinhoff’s SA debt. Rand-denominated debt stood at €1.15bn (R17bn) at the end of September 2016.

Assuming the new listed entity will be debt-free, it should produce an annual net profit after tax of at least R4.5bn. The question is: how will the market rate it?

The rating is unlikely to be exceptionally high. Though Pepkor Africa has an outstanding growth record, it is now facing severe headwinds. "Apparel retail sales numbers are looking horrific," says Abraham.

Stats SA says clothing and footwear sales, in constant price terms in the three months to March, came in 6.4% down on the same period in 2016. In current price terms sales were down 1.4%. Both figures made clothing and footwear the worst-performing retail sector.

"Pepkor [Africa] faces a very tough 12-24 months," says Walker. "It will probably grow earnings by only around 10% a year."

Prospects for the other Steinhoff African businesses are also uninspiring. JD Group, rescued by Steinhoff in 2012, operates in a sector which continues its long-term decline, while SteinBuild finds itself in a sector where growth has ground to a halt. The best one can expect of Unitrans Motors is that it will hold its own in a tough sector.

Given the dominance of Pepkor Africa, it seems probable that the new listed entity’s valuation will be heavily influenced by those of other clothing retailers.

Standing out as the most likely benchmark is Mr Price, now trading on a 15 p:e.

On a similar rating it would put the market cap of Steinhoff’s proposed new listed entity at about R65bn, earning it a place in the JSE top 40 index.

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