Steinhoff's share price over the past five trading days. (Fin24)
  • Steinhoff's share price saw a massive 50% rally on Tuesday morning.
  • The share price has been strengthening since it reported its long-awaited (and terrifying) financial results on Friday.
  • The company had to write off almost R200 billion due to dubious accounting and suspect deals.
  • But speculators may be taking a position.

Steinhoff’s share price has gained a massive 50% in a morning's trading on Tuesday. The share, now trading above 200c, has been running hard since the release of its interim results on Friday.

On the face of it, the numbers were truly terrifying: as much as R200 billion had to be written off due to dubious accounting and suspect deals. Also, it suffered an operating loss of R2.4 billion in the six months to end-March and its revenues declined by 6%. 

The company has been struggling to stay afloat after accounting irregularities emerged in December, which saw its CEO Markus Jooste resign. Police are now investigating fraud at Steinhoff, which has lost 97% of its value in seven months.

Its share price is now up almost 65% in the past five days, and it now has almost doubled since its weakest point this year. 

While its results were shocking, it has brought a degree of certainty to the market, analysts say. 

"We finally saw the results, so we now know how much the write-downs were and seemingly, how bad the damage is. So, for the first time it’s almost as though it [the damage] has been quantified. We now know what we are dealing with," says Herenya Capital's founder and trader Petri Redelinghuys.

FNB Wealth and Investments head of research Chantal Marx agrees. "The market likes certainty and the fact that we now have a balance sheet to work with helps."

Uphill battle

Still the obstacles seem enormous: Steinhoff still doesn't have final agreement from its creditors about the restructuring of its massive debts. It also faces large lawsuits, including from companies in Christo Wiese’s Titan Group, which are suing Steinhoff for R59bn. Coronation, which was a major shareholder, also said it planned to sue Steinhoff.  European law firms are working on various investor class action lawsuits.

Then there are also concerns about its potential tax liabilities, says research analyst and portfolio manager at Gryphon Asset Management, Casparus Treurnicht.

Steinhoff's share price performance over recent days does suggest that speculators have started buying.  

Stuart Theobald, chairman of the research house Intellidex, told Bruce Whitfield on The Money Show last night that "this kind of disaster" could attract large private equity firms - usually from the US - who may see an opportunity in Steinhoff.

The German trading platform FinanzTrends said in its analysis that "there is still a lot of life in the [Steinhoff] group"

"Although the [results] were not altogether pleasing, they showed in detail that Steinhoff's core business is still profitable." 

The company reported a sustainable operating profit - which excludes the massive lawyer and auditor fees, calculated at R5.4 million a day, that Steinhoff is currently paying to sort out its financial mess. The number also excludes loan impairments and forex losses. Its sustainable operating profit is €143 million (R2.3 billion) – a third lower than in 2017, but at least not a loss. 

Tenuous goodwill

"Investing in the stock continues to be extremely speculative. The opportunities are enormous, but the outcome remains uncertain," editor of FinanzTrends Robert Sasse wrote.

Steinhoff is still worth something – on paper. It reported a positive net asset value of €0.58 (933c) on Friday. This means that its assets are still worth more than its liabilities (its debts). Its NAV is far higher than its current share price of 134c. Theoretically, this implies that there may be some upside in its share price. 

The NAV number provided by management is materially higher than the value the market is currently attaching to the company, says Marx. But she cautions that the NAV number is dependent on goodwill and other intangibles, mainly associated with Steinhoff Africa Retail (STAR), which owns Pep and Ackermans, as well as the US giant Mattress Firm.

Goodwill is an accounting term that measures assets that can’t be seen – like the value of a brand name, reputation, and customer loyalty. 

The goodwill in Mattress Firm – more than €1 billion – is key to the Steinhoff NAV, says Graeme Körner, director of the multi-asset fund manager Körner Perspective's director.  This amount may prove tenuous - Mattress Firm's total operating loss was  €133 million in the past six months - 66% more than in the same period in the previous year. 

Also, a positive NAV means nothing if there's a liquidity crisis —  which is Steinhoff’s problem at the moment, says Capicraft Investment Partners' CEO, Drikus Combrinck. The company is battling with working capital shortages, which is why the operating performance from the European, UK and US divisions were much poorer, he adds. 

While some investors may feel that Steinhoff would be able to pull through, the current rally hardly makes a dent in the massive meltdown in recent months, Treurnicht says. 

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