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Solid and predictable is an investor’s best friend

Steinhoff Africa ticks that box.
The company is comprised of Pep and Ackermans and a collective of smaller brands including Tekkie Town, Shoe City, Buco (the old Pennypinchers), Incredible Connection, Bradlows and Poco, the discount furniture store that originated in Germany. Picture: Moneyweb

Steinhoff Africa Retail (Star) has gained almost 20% since listing in September. In comparison, Steinhoff, its Frankfurt and Johannesburg dual-listed parent has lost 22% in the year to date as the company grapples with tax investigations, soured joint ventures and auditors who won’t sign off on its accounts.

Read: Steinhoff slides amid forgery allegations

Investors do not like complexity and in comparison Star’s results were boringly predictable and solid. The company is comprised of Pep and Ackermans and a collective of smaller brands including Tekkie Town, Shoe City, Buco (the old Pennypinchers), Incredible Connection, Bradlows and Poco, the discount furniture store that originated in Germany.

For ease of comparison, Star has provided 12-month pro-forma results because the company moved its year-end from June to September in 2016, creating a 15-month year.

For the 12 months to September 2017, pro forma revenue increased by 13.2% to R58.6 billion, the operating margin increased by 100 basis points to 10.4% and pro forma operating profit was up 25.2% to R6.1 billion. Of this, R44.1 billion was generated from the discount division, Pep and Ackermans in particular. These businesses grew like-for-like revenue by 6.5%, ahead of inflation.

The speciality division, enlarged by the Tekkie Town footwear business, contributed about 25% to group revenue, supported by a strong performance from the clothing, footwear and home retail brands (like John Craig, Refinery and Dunns) as well as improved profitability in the do-it-yourself (DIY) business.  

Star expanded its retail presence by opening 272 stores on a net basis. The acquisition of Tekkie Town added 308 stores to the group’s footprint and as of September, Star traded from 4 953 retail locations. It plans to open another 350 stores in the next financial year.

Good news is the fact that the furniture and appliance business has reached break-even following the closure of about 300 stores and extensive restructuring.

Other Africa operations (ex South Africa, Botswana, Lesotho, Namibia and Swaziland), contributed about 5% of Star group revenue, all of them constrained by slower economic growth.

“This is a solid performance from a solid and uncomplicated company,” says retail analyst Syd Vianello.

“Investors know what they are investing in and they are reassured by the predictability of performance. They know the company continues to take market share and they know it prints cash.”

As part of the listing process, the balance sheet was restructured and the net debt on September 30 2017 amounted to R12.0 billion, resulting in a net debt/Ebitda ratio of 1.8 times. Shareholders are reminded that the debt was only introduced as part of the listing process and is expected to reduce in future.

The share is a little expensive, Vianello adds, “but as you see with Clicks and Dis-Chem, investors are prepared to pay up for predicable, good performance.”

As Star was only listed for 11 days during the 2017 financial year, no dividend will be declared for the full year.

The company has also confirmed that it has exercised call options to acquire a 23.1% stake and 50.6%  voting control in Shoprite, as previously communicated and effective immediately.

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Boringly predictable on 5 December. Then came 6 December.

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