Unbelievable! Steinhoff falls to another new low

Steinhoff has billions in assets, but its debt burden is much bigger – which should remind investors of the old stockbroking phrase of trying to catch a falling knife.

Steinhoff shareholders got another beating on Thursday, with the share price crashing 20% after the group announced that it had sold more of its assets.

This time it sold R4.9 billion worth of Pepkor shares, following the sale of Pepco shares a few weeks ago, which raised R5.8 billion.

Maybe shareholders – or, more accurately, very optimistic speculators – are starting to realise that miracles are rarely handed out to save people from bad investments.

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In December 2022, Steinhoff crashed from R1.70 to 44c after it announced a proposal that would see creditors bagging 80% of the group’s shares, leaving shareholders with the remaining 20%.

It also said it would delist from the Frankfurt Stock Exchange and lose its secondary listing on the JSE.

Out of time …

Management hinted then that Steinhoff had run out of time and that hopes that the underlying operating companies would perform well – or well enough to see their share prices rising faster than Steinhoff’s corporate debt – were fading.

The announcement referring to the plan to reschedule debt repayments until 2026, stated that the value of Steinhoff’s assets remained lower than its liabilities, and that this was unlikely to change before the end of June 2023 when Steinhoff needs to settle debts.

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While the recent placement of Pepco shares and this week’s placement of Pepkor shares raised a massive R10 billion, this is nowhere close to being enough to change Steinhoff’s trajectory. The Pepco sale raised €315 million and the Pepkor sale €257 million, while Steinhoff’s corporate net debt stands at €10.1 billion (R192 billion, give or take).

The group’s latest annual report, published two weeks ago, notes that interest on the debt amounted to €985 million during the year to 30 September 2022. It described the accrued interest as “Paid-in-Kind” or PIK.

PIK is generally defined as interest expense charged by a lender that accrues towards the ending debt balance (capitalised), sometimes offered to improve a company’s cash flow.

In fact, it means that Steinhoff cannot keep up with its interest payments.

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Going concern

Steinhoff chair Moira Moses says in her overview of the 2022 financial year that the underlying operating companies performed well, despite substantial challenges.

“We believe, however, that the trading environment in many of our markets will remain challenging and that consumers will continue to be negatively impacted. At a group services level it is disappointing that the constrained global economic environment has been the cause of market values of the operating subsidiaries not being able to grow at the rate required to cover the PIK interest that has been added to the group services’ debt,” says Moses.

CEO Louis du Preez and CFO Theodore De Klerk were more forthcoming.

They say in their commentary that the recent proposal to reschedule debts (the maturity extension transaction) will eventually result in giving the group time to “optimise the orderly, expeditious and value enhancing monetisation of assets; achieving the consents necessary to extend the maturity of the group services’ debt from the current maturity date of 30 June 2023 to at least 30 June 2026; and significant changes to equity voting and economic rights, and is expected to result in the delisting” of Steinhoff.

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Then the shocker …

“There is a reasonable and informed expectation that the Maturity Extension Transaction will be implemented and therefore in preparing these 2022 Consolidated Financial Statements and 2022 Separate Financial Statements, the going concern basis has not been adopted,” according to the management team.

They explain: “IFRS [International Financial Reporting Standards] does not provide definitive guidance when the going concern basis is not appropriate. There is also no general dispensation from the measurement, recognition and disclosure requirements of IFRS if an entity is not expected to continue as a going concern.

“As a result, the Management Board has deemed it appropriate to continue to recognise and measure all assets and liabilities in terms of the applicable IFRS standards as at the reporting date. The contents of this annual report have to be considered in the context of these announcements.”

Then there’s the matter of interest

The annual report also says the huge debts continue to accrue PIK interest at “material” levels.

“Developments during the reporting period have resulted in the net equity of the company as a separate legal entity moving from positive €121 million at 30 September 2021 to negative €3.5 billion at 30 September 2022, mainly as a result of the increase in the liability arising from the CPU shortfall (corporate payment undertakings).

“This increase in the CPU shortfall was largely caused by the decline in the Pepco Group share price and the accrual of PIK interest on the debt,” according to an explanation in the annual report.

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A subsequent announcement stated that the agenda for the upcoming AGM would include a proposal to approve the Maturity Extension Transaction (including the equity reorganisation elements).

(The AGM will take place on 22 March 2023, according to a notice published on Wednesday).

Shareholders have to approve the transaction, and will get to retain an interest of approximately 20%. The alternative has been hinted at, in which creditors just take everything.

In essence, Steinhoff is only inches away from the abyss, despite some of its underlying companies performing well. These include Pepco and Pepkor.

Steinhoff holds 72.9% in Pepco after the recent share placement. Its interest in Pepkor was sold down dramatically (every time it had to pay bills or settle litigation).

Pepkor placement

The Sens announcement following the placement of Pepkor shares disclosed that Steinhoff sold 265 million Pepkor shares after initially aiming to place 240 million.

“Following strong demand, Steinhoff elected to increase the size of the placing, which remained significantly oversubscribed at close.

“The placing shares were placed at a price of R18.50 per share, a 5.3% discount to the pre-launch Pepkor share price as at market close on 8 February 2023. Accordingly, 265 million placing shares, constituting approximately 7.2% of total issued Pepkor Shares, will be allocated in the placing.

“Following the conclusion of the placing, the company’s interest in Pepkor will reduce from 51% to approximately 43.8% and the free float of Pepkor will increase from approximately 49% to 56.2%,” says the announcement.

In addition, Steinhoff owns 50% of the US Mattress Firm, 100% of Conforama in Europe, 100% of the Australian Greenlit Brands and a portfolio of properties in Europe.

All this is worth billions, even in euro.

However, Steinhoff’s debt burden is much bigger, which should remind investors of the old stockbroking phrase of trying to catch a falling knife.

This article originally appeared on Moneyweb and was republished with permission. Read the original article here.

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