Steinhoff - Its technical.

All,

Please find our updated model of Steinhoff here. 

Please note: This name has now gone almost fully private, which would require us to go private ourselves to follow it with any sense of confidence. This would be the first private name for Sarria and so we would welcome your opinion on dipping our toes in this direction and on continuing coverage of Steinhoff.

We have lost a lot of value in the last months as the wheels have come off at Pepco. But is PLN18 the right value for the company? We think that a significant part of the deterioration is actually driven by the fear that post restructuring Steinhoff is incentivised to dump significantly more of its holdings onto the open market. The Warsaw market would be very small to do that and Steinhoff would do far better to sell blocks or one block only, rather than to try to break out 72% of the stock out to Polish stockholders. 

Investment Rationale:

- We liked it at 65c/€... But we have news: Pepco is slowing down and we will most likely receive a negative LfL sales print in Q4, which usually comes with a disproportionate hit on earnings. 

- We also think that the almost 50% drop in Pepco shares is significantly driven by market fear of Steinhoff dumping their over 72% of the stock on the market because in the restructuring the company committed to exiting its assets. However, trying to drop €1.7bn onto the Polish index would help nobody, least of all Steinhoff investors. So we think there will be a statement calming down the market - whenever calm returns to Pepco itself.

- So we will be holding on to our position for the time being, expecting to recover some of the valuation lost to above technical effects. 

Pepco:

- Pepco’s sales have been softening over summer. At first management and investors agreed that the strong comp data from April/May 2022 was to blame, where Ukrainians flooded Poland and sent packages with clothes and other items back into the Ukraine. Thereafter apparently LfL sales turned positive again in June July. The company had upheld its guidance on the July call, already having to answer repeated questions about that outlook.

- Then CEO Trevor Masters suddenly departed in September and along with him more management left Pepco. A hasty press release confirmed that sales had taken a turn for the worse, but provided little more substance. So things will likely get worse before they get better, but we doubt they will get worse than what the stock market has come to imply. As per above, we think the stock is also subject to technical effects.

- Pepco's leverage is moderate and cashflow has been good. We expect the 10% p.a. expansion CapEx to be 3/4 culled and much of it redirected towards refurbishment of existing stores and to fund closures.

- We are not expecting any crippling reduction in underlying EBITDA (safe for any write-offs etc. for which we would be adjusting.

Mattress Firm and Pepkor:

- The sale of Mattress Firm to its largest supplier Tempur Sealy was announced earlier this year. The price should be relatively fixed and Tempur’s share price has been steady (equity portion of the sale is largely for shares). However, the transaction is still subject to anti-trust approval and it’s between the largest mattress manufacturer and the largest retailer in the US. Failure to substantially close the transaction would be value-destructive to SEAG creditors.

Pepkor has been growing at below inflation rate following its battle with civil unrest and floods across South Africa. The effect of the cost-of-living crisis can be witnessed in the low ~4% growth rate of its cash revenues, while credit sales are up in the mid-teens. South African retailers' credit arms have always drawn the ire of international investors, but delinquencies have historically been under control.

Please let us know if you would like us to continue covering Steinhoff on a private basis. Happy to discuss,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk