The scale of the Steinhoff deception

When Steinhoff International released its interim results for the six months to March 31 last year, it reported a healthy operating profit of €903 million (R14.5 billion). The group’s operating margin was 7.5%.

Markus Jooste, the CEO at the time, hailed the group’s performance.

“This solid revenue and margin performance underscores the resilient model of the group,” he said. “This has been further underpinned by both our product and geographical diversification in what remains a resilient discount market. The strong leadership and execution from our operationally focused management teams also continues to deliver good growth.”

However, on Friday Steinhoff restated these 2017 numbers when it reported its 2018 results, and what emerged is something astonishingly different.

Revenues for the six months to March 31, 2017, which were originally quoted as €10.2 billion (R163.6 billion), were restated as €9.9 billion (R158.8 billion). The operating profit had vanished entirely, and was instead an operating loss of €168 million (R2.7 billion).

In other words, Steinhoff had overstated its operating profit for this period by more than €1 billion (R16.1 billion).

The restated results also show that the group’s operations in the US and UK were both heavily loss making last year. In the USA, the operating loss was €80 million (R1.3 billion) for the six months to the end of March, while in the UK it was €14 million (R225 million).

The group also noted a substantial change in its reported total equity position. For the year ended September 30, 2016, Steinhoff reported a total equity position of €16.6 billion (R266.9 billion). However, its restated total equity is just €5.7 billion (R91.4 billion), which is 65.8% lower.

In total, when re-stating the accounts, the group impaired overstated assets and the reversed non-arms’ length transactions worth €6.1 billion (R98 billion).

However, as these remain unaudited results, these are not definitive amounts. It remains possible that even larger restatements could follow.

As one local asset manager noted: “You have to be very careful not to draw conclusions. It could be even worse.”

Negative tangible net asset value

Steinhoff’s balance sheet also reveals to what extent its position is highly precarious. Of its total assets of €19.838 billion, €9.359 billion, or 47%, is listed as goodwill or intangible assets.

The group’s total liabilities, however, are €16 045 billion. These exceed its tangible assets by more than 50%.

This negative tangible net asset value remains this high even after an impairment of €1.5 billion to goodwill and a further €144 million to trade names relating to Mattress Firm.

The PSG guarantees

Of further concern to shareholders was the revelation in the results that Steinhoff had entered into derivative contracts with two PSG Group investors when it increased its shareholding in that company in 2015. This appears to be new information that had not been previously disclosed.

At the time of the transaction Steinhoff agreed with a number of PSG shareholders to swap their PSG shares for Steinhoff shares. However, two shareholders entered into derivative agreements through which they retained economic exposure to PSG.

Through these agreements, Steinhoff was liable to pay out the difference in value if PSG shares outperformed Steinhoff shares. If Steinhoff outperformed, then Steinhoff would receive the difference in value.

The amounts concerned were not enormous, but nevertheless created a liability for Steinhoff. The group settled one contract for €0.7 million (R11.3 million) and the second for €13 million (R209 million). This again raised concerns about companies doing deals that create a potential liability for shareholders without those shareholders being aware of them.

Brought to you by Moneyweb