Fury over Pepkor’s slap on the wrist
Its association with Steinhoff is an albatross around Pepkor’s neck, but many of its financials are promising
Pepkor CEO Leon Lourens isn’t prone to flashes of emotion.
But even he agrees that Steinhoff’s takeover of his clothing chain in 2015 was probably the worst thing to happen to Pepkor since it opened its first store in the Northern Cape town of De Aar in 1965. "In hindsight, probably yes. But Pepkor has been in business a long time, and nobody would have liked what happened to us last year," he says.
After Steinhoff bought Pepkor four years ago, Markus Jooste’s company shunted many of its weaker arms onto it before listing it on the JSE in September 2017 as Steinhoff Africa Retail.
Even though Steinhoff remains plagued by dark claims of fraud, it still owns 71% of the company.
Though Lourens’s company has tried furiously to cut the apron strings (even changing its name), the relationship still leaves Pepkor cast as something of an unfortunate stepchild to a serial killer.
But as Pepkor’s results for the year to September illustrate, if you strip away the Steinhoff link, it’s a juggernaut in its own right.
Each year, it sells more than 1-billion items from its 5,236 stores in 12 countries.
Chances are you have been in one of its stores, be it a Pep, Ackermans, Russells, Bradlows, Tekkie Town or Incredible Connection.
Little wonder that for the year to September, it reported revenue of R64bn (up 10.9% on the previous year) and operating profit of R5.9bn (up 1.9%). "We have tried hard to disentangle ourselves from Steinhoff," says Lourens. "I’m very positive that we’ve put most of the issues behind us."
The rather uncomfortable truth for Lourens is that until now, all the questions over shoddy governance have gravitated towards Steinhoff, where Jooste seems to have masterminded a series of audacious swindles.
This week, however, Pepkor revealed that it had itself been fined R5m by the JSE for "inadequate disclosures" made during the process of its listing last year, and in its financial statements.
But don’t be fooled by the paltry slap-on-the-wrist penalty — Pepkor’s hidden exposure was immense.
First, it didn’t tell shareholders that it had "unconditionally and irrevocably" provided a guarantee to Steinhoff to cover a R15bn capital-raising exercise. (Thankfully, this guarantee was never called on.)
Second, Pepkor didn’t tell investors it was on the hook for a R440m "guarantee" it provided to a murky company called BVI 1499, which, it turns out, was owned by 70 Pepkor executives.
That guarantee was there to protect the Pepkor executives who’d got Steinhoff shares after Jooste’s company bought Pepkor in 2014.
But since the Steinhoff shares have tumbled 97% since December, Pepkor’s shareholders will now have to stump up the cash.
As Braam van Huysteen, the founder of Tekkie Town and a former Pepkor director, said previously: "Shareholders didn’t agree to bail out these executives — why should they?"
This is why Pepkor was "found to be in breach" of the JSE’s rules and hit with the R5m fine.
It’s a sanction many feel is a joke.
Craig Butters, a portfolio manager from Prudential Investment Managers, says that if the JSE’s R5m fine (with R1m suspended) is the only sanction, it would be "a sad day for the investor community and SA as an investment destination".
He says: "The JSE could have imposed additional penalties, but appears to have elected not to do so.
"Pepkor’s failure to disclose the R440m guarantee in favour of the executive share incentive scheme is a material failure. The nondisclosure of the R15bn guarantee … is even more serious."
Butters says not only has Pepkor now exposed itself to potential litigation, but it is "particularly concerning that Pepkor’s executives have not been sanctioned in any way".
But John Burke, director of issuer regulation at the JSE, says the fine was "substantial. It wasn’t the biggest fine we’ve levied, but it’s right up there."
Discussing the fine, Lourens depicts it as quite hefty indeed, even arguing that it seemed the JSE "wanted to make an example out of us".
As to why it wasn’t disclosed, Lourens says the documents were "signed off by our advisers and auditors", though he adds: "In the end, it is our accountability."
The company’s pre-listing statement shows there were 13 advisers on the listing, who were paid more than R200m for their services. This includes RMB, Investec, Citi and Morgan Stanley, as well as five sets of lawyers, including Bowmans and Cliffe Dekker Hofmeyr.
So how is it that Pepkor could fail to tell shareholders that it was a co-guarantor for R15bn of Steinhoff debt? Or, indeed, that it had a potential liability of R440m for shares granted to its own directors?
Jean Pierre Verster, a portfolio manager at Fairtree Capital, says luckily for Pepkor, that R15bn in debt was repaid earlier this year. "That makes it a bit academic, but it could have turned out very badly for Steinhoff, which would have had a knock-on impact on Pepkor," he says.
But when it comes to the R440m liability for its executives, the news remains pretty grim.
"They didn’t disclose the potential liability from making loans to their directors. There is an argument that they didn’t foresee a scenario in which the Steinhoff share price would fall like it did, and make them liable for it, but according to accounting rules, it should have been disclosed," says Verster.
Lourens will be hoping such disasters are now behind him and he can get back to talking about the actual business. On that front, Pepkor didn’t do terribly badly.
Still, it is clear that Pepkor is a tale of two parts: the "original Pep" (including Ackermans), and the other assorted companies it inherited thanks to the Steinhoff takeover, like JD Group.
"You can see the original Pep business has produced double-digit growth per year for more than a decade," says Verster. "But on the other side, the traditional Steinhoff assets that were forced on Pepkor didn’t do as well."
The clothing business produced 93% of Pepkor’s operating profit (up 8% to R6.1bn), with the building materials business made up of Timbercity and Tiletoria producing a negligible R214m — just 3% of operating profit — and the fledgling fintech business generating the other 4%.
But the spluttering furniture arm, which was the traditional JD Group business it inherited from Steinhoff, made an embarrassing R137m operating loss.
It was clear investors didn’t know what to make of the results. At first, Pepkor’s stock plunged after the news of the JSE fine and financials were published. Hours later, the stock did a U-turn, finishing the day 7.1% higher.
Perhaps this was partly thanks to the soothing words of chair Jayendra Naidoo, who spoke of Pepkor’s "full autonomy" from Steinhoff, and said: "We do not intend to indefinitely tolerate and invest capital in businesses which do not provide adequate returns."
He also spoke of how Steinhoff, with Heather Sonn as the new board chair, was finalising its restructuring in a way that meant it was less likely to have to sell part of its 71% stake in Pepkor — a cloud that had depressed Pepkor’s share price.
"It will be positive news for Pepkor shareholders if these developments enable Steinhoff to turn their focus for the next few years to creating value from their existing Pepkor shareholding, rather than disposing of assets to service their debt," he said.
But investors will remain wary of the possibility that further nasty Steinhoff-related surprises could arise. Even in the fine print of this week’s results, there were unfortunate references such as the fact that "previously undisclosed related-party" deals, including those with management, have now been disclosed, as part of its "restatement".
Naidoo is correct that Pepkor has some good assets — though this hardly describes much that it got from Steinhoff.
And if there’s no further fallout, you might even describe Pepkor’s shares as good value right now. But it’s a big "if".