Steinhoff's Subsequent Slump in Share Prices
The recent news on Steinhoff and subsequent slump in share price, that some asset managers own in their unit trust funds and we own in our direct equity portfolios, are likely to cross your screens or feature in dinner conversations in the coming weeks, and we thought it prudent to communicate with you proactively in this regard as some of our clients have exposure to Steinhoff in their share portfolios.
Below is a brief overview by PSGH of our managed share portfolios:
- Steinhoff has been involved in a court case in the Netherlands regarding non-disclosure of reportable transactions. There were various updates and press releases in recent months about the matter which we followed with due care and diligence.
- Steinhoff had a media, announcing Markus Jooste´s (CEO of Steinhoff) immediate resignation, as well as an internal investigation into accounting irregularities.
- Christo Wiese (Chairman of Steinhoff), with the help of Pieter Erasmus who worked closely with Christo Wiese for many years, is taking over in short term, with the Supervisory Board overseeing management of the company in the medium term.
- Steinhoff also postponed their unaudited results announcement for the year ending September 2017, until further notice.
- On 22 December 2017 the Dutch court will rule over whether Steinhoff did in-fact contravene some accounting policies (dealing with whether a transaction was reportable or not), but it looks like this is not the only claim that Steinhoff may face.
- Final audited financial statements are due mid January 2018, which now look likely to be postponed.
What gives us comfort
- Our clients´ portfolios are well diversified, with the average exposure in Steinhoff prior to price movements at about 5% per client. So even if Steinhoff goes to zero, it would mean that just 5% of the portfolio is at risk. Some unit trusts hold less than 1%.
- Steinhoff´s investments in publicly traded companies like STAR, PSG and KAP accounts for approximately R20 of the Steinhoff share price. All other assets, cash and investments make up the balance. As such, it could be argued, that Steinhoff is trading well below its Net Asset Value, even if unlisted investments are completely written off (which is highly irrational).
- Steinhoff had turnover of EUR14bn for the 9 months ending Jun 2017. As such, it could be argued that Steinhoff has sound underlying businesses, selling goods and products to customers around the globe.
- Steinhoff generated free cash flow of R14.4bn for the 12 months ending September 2016. As such, it could be argued that Steinhoff has a good cash generation ability, and that regardless of what happens on balance sheet and income statements as a result of potential restatement, the core business is cash generative.
What we don´t know
- Whether there will be a fine issued by the Dutch court, and the extent of the fine.
- Whether there will be subsequent fines after the investigation, and the extent of those fines.
- What the impact will be on Steinhoff´s financial statements for the current year (accounting for any fines, as well as fixing the irregularities in the statements).
- Whether prior years financial statements will have to be restated, and what the impact on those financial statements would be.
- Whether there will be and what the extent of any of the above would be on the ability of Steinhoff to generate cash.
- What the effect would be on Steinhoff´s ability would be to repay it´s debt, and the subsequent impact on cash flow.
- Whether Steinhoff will have to do a capital raise by rights issue, or sell assets to cover debt to support the cash position of the business.
As always, our own money is invested in the same portfolios as those of our clients. We (as individual investors) also feel the pain and if we could have done anything to pre-empt the fall in share price, you can be assured that we would have.
This is not the time for rash decisions. It calls for cool heads and clear process, which we assure you we have in adequate measure. It is clear from the facts above that selling Steinhoff at these levels will be tantamount to value destruction on a grand scale, and we draw your attention to the well diversified nature of our portfolios and the fact that we ride the wave with you every step of the way.
Courtesy of Danie Olivier from PSG Hermanus Portfolio and Stockbroking