Steinhoff - a top-down view on a bottom up story

All,

Steinhoff have published their FY 2018 accounts (12 months through September). There are a lot of new bits of information in the release, but the consolidated view is hardly the way to go with Steinhoff. For our bottom-up / entity priority analysis (still to be updated, but not materially) click here.

The consolidated view is highly distorted and we ourselves are certainly not looking at the company in this way. However, within the confines of “interesting”, Let’s have a look at it anyhow.

Top-Down Metrics:

- Overall Net debt stood at 9bn and thus Adj. EBITDA leverage stood around 9.3x (adjusted for holding Conforama at Equity). Again, its not news, but it lends a top-down consolidated perspective.

- OCF was flat, due to strong WC outflows. If following a restructuring these outflows can be reversed (very broad assumption), then that could delever the company by a good half turn.

Normalised Top-Down view:

So a back of the envelope on E960m of Adj. EBITDA, EV = E5.8bn at 6x. Add a generous E1bn of excess cash (after having re-claimed some WC) and creditors should recover an average of approx. 75c/E.

- Adj. EBITDA: E960m

- Taxes: E-200m

- CapEx: E-500m

- Norm. FCF: E260m

Debt Service Capacity: E130m t 2x Interest Coverage

New Debt interest: 5%

Debt Capacity: E2.6bn

LTV: 45%.

=> So with some debt trading above and some below that value, perhaps the outlines of a future Steinhoff are beginning to take shape after all.

Upsides:

- It’s reasonable to assume that the company will be trading better once it puts the scandal and liquidity constraints behind it.

- Large minority shareholdings in turnaround stories Mattress Firm and Conforama

- Central and Eastern European Pepkor is on fire. The division was known to be doing very well, but now we have annual data for it. The UK arm appears to have offset some of the growth in profits.

- The company continues to hold valuable real estate assets that could be spun out at accretive multiples to the assumed 6x above.

Downsides:

- The execution risk is still high and shareholder litigation is yet to gather pace.

- LSW are still litigating.

We will be updating our bottom-up model in due course.

Wolfgang