Steinhoff in a state of (re)flux
The market seems concerned about possible indigestion after the company’s two-year buying spree
That Steinhoff is now the world’s largest bedding retailer appears to have left the market entirely unmoved. The release last week of its interim results to the end of March showed that revenue grew 7% but diluted sustainable EPS dropped 3% to €15.5c.
Steinhoff’s shares are trading about 25% weaker since August 8 2016, when the company sprang its US$2.4bn offer for US group Mattress Firm. It has argued that the acquisition will be a game changer in the vein of its two biggest purchases of the past decade: furniture chain Conforama and retail giant Pepkor.
The weakness is explained partly by a 15% increase in shares under issue to fund the acquisitions of Mattress Firm and the UK’s Poundland. But the market is clearly worried about impending indigestion after a two-year buying spree that, besides these two companies, included listed building materials outfit Iliad Africa and Austrian furniture group kika-Leiner in 2015, Australian budget chain Fantastic Furniture in 2016, and SA’s Tekkie Town this year.
"As we know, retail is all about scale," says Lentus Asset Management’s Nic Norman-Smith. "It gives you buying power to provide attractive pricing and becomes a virtuous circle — like Walmart in its dominating phase and Amazon at the moment.
"So now that it’s clear Steinhoff is driving that agenda forward, the strategy is on track and it’s a question of whether the company is getting it right. If you look at [its] history, it has managed to walk the talk and deliver on what it was going to do."
N-e-FG portfolio manager Gerbrand Smit, who sold a big chunk of Steinhoff shares at their R90 high, says Steinhoff has managed to "get away" with its frantic deal making of the past two years, but "hopefully it does not do any big deals in the next year, and gets it right in what it has bought".
In the case of Mattress Firm, Steinhoff had expected to make sales of $3.8bn at margins of 6.5% a year after it completed the deal in September. But margins there came to 4.5% for the period under review and Steinhoff is now eyeing 2018 as a target, having spent €48m in the period restructuring the company, including converting its Sleepy’s and Sleep Train stores to a single Mattress Firm brand.
Bloomberg Intelligence says: "Steinhoff’s restructuring of Mattress Firm seems more disruptive than expected" — no thanks to a bust-up with Tempur Sealy earlier this year that left "holes" on its shop floors.
Steinhoff has since struck up a partnership with Serta Simmons, the largest mattress maker in the US, and taken a majority stake in US manufacturer Sherwood Bedding, which supplies private-label goods to Mattress Firm.
Serta Simmons is also funding a $100m, 18-month advertising campaign that Steinhoff plans to kick off shortly.
Losing one supplier may be small dice compared with the disruption posed by the "bed-in-a-box" phenomenon challenging the entire mattress sector. These mattresses are compressed and vacuum-sealed into a box that is a fraction of the size of a traditional mattress and designed especially for shipping. It’s no surprise that they’re favoured by online-happy millennials. However, Steinhoff, headed by Markus Jooste, appears awake to the threat and has teamed up with online mattress retailer Purple. It is also pushing into e-tailing in Europe, taking a 17% stake in European digital retailer Showroomprivé for almost €160m.
The market’s obsession with Steinhoff’s US business is somewhat curious, given that Europe and the UK account for 53% of its sales, followed by Africa at 26%, the US at 15% and Australasia at 6%.
Smit says it could be that Conforama was bought at a good price, whereas Mattress Firm came in at an eye-watering 115% premium.
Smit likes European cyclical sectors, and says Steinhoff is now "a nice way for South Africans to play a European uplift".
Household goods account for roughly two-thirds of Steinhoff’s business, and its US business is a fifth of that. General merchandise, through Pepkor, Poundland and Tekkie Town, among others, accounts for 31% of sales, and automotive, through Unitrans and Hertz, makes up 7%.
Pepkor pulled off a stunning performance for the period under review, posting a 25% increase in revenue if you strip out the rand’s 14% rally against the euro. That helped a 27% rise in operating profit in its African businesses, which may explain why Steinhoff isn’t keen on a full unbundling of its retail assets.
While some analysts have questioned the logic of a separate listing in which Steinhoff maintains control, the company says it wants to "participate in the upside that we believe these assets will bring".
Says Norman-Smith: "Just having a separate listing might change the shareholder base — sometimes the market doesn’t appreciate the value that is [in these investment holding companies]. If they are to do more acquisitions in future, a strong share price is very beneficial."
Steinhoff is likely to issue a listing prospectus around June 19 and has previously said it was hopeful the listing would be completed by the third quarter.