Steinhoff’s share price 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 the company, which has lost almost 98% of its value in seven months.
Still, its share price has been running hard since the results. It has gained almost 12% over the past two trading days, and is now 28% higher than at its weakest point this year.
Here are some reasons investors may be more optimistic about a company that still looks precarious at best:
"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."
Steinhoff reported a positive net asset value of €0.58 (933c). 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.
Steinhoff : Mattress Firm audited has made substantial EBITDA losses over time . Why would anyone have taken it out at such a premium ? Better assets anywhere , SEC needs to take a look as price paid insane vs price at the time !! Possible profits made somewhere ?— Cy Jacobs (@Cy36ONE) June 29, 2018
4/ Steinhoff. Further issues:— Karin Richards (@Richards_Karin) June 30, 2018
• €9.3b of goodwill & intangibles remain on balance sheet.
• Thus tangible NAV is negative.
• Cash flow is negative.
• The entire supply chain is threatened as trade terms tighten.
• Cost of borrowing has risen materially.
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.
Steinhoff has decided to pay out a dividend again to investors in Steinhoff Investment Holdings preference shares. Trading in these shares has been suspended last year because the company didn’t submit its financials in time.
The dividend of 427.42 euro cent will be paid to holders of the SIH preference shares on July 23rd.
If Steinhoff can pay a dividend to preference shareholders — it indicates that the company is solvent, says Redelinghuys.
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.
"Looking at the numbers and considering that sustainable operating profit is being generated on a normalised level it is not impossible to argue that some value managers might be buying the share that has been clouded with pessimism," says research analyst and portfolio manager at Gryphon Asset Management, Casparus Treurnicht.
But while some investors may feel that Steinhoff would be able to pull through, the rally over the past two days hardly makes a dent in the massive meltdown in recent months, said Treurnicht.
There are still too many uncertainties, especially Steinhoff’s tax liabilities, he added.
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