Steinhoff - Top-down alternative
All,
Please find our unchanged model here.
AGM presentations do not usually contain new information. But on this occasion, the Steinhoff shareholder presentation did contain a new perspective. Having for years very much followed a bottom-up approach through the lens of an entity-priority waterfall model, the hitherto so misleading top-down perspective came like a breath of fresh air - all wrong, but fresh. The acceptance of the Grand Settlement has made Steinhoff a much simpler affair and has prompted us (everyone) to take a broader perspective.
Margin Loan:
- As per previous note Steinhoff is increasingly looking like a mere cascade of SPVs with margin loans on a variety of unrelated retail assets scattered throughout the world.
- Steinhoff achieves no synergies between the assets and so, along with the purpose of the entire company, management’s own raison d’être has effectively expired, safe for an asset management role. That is not to subtract from the significant achievements management ought to be recognised for, but from here on, a closed-ended fund structure might be more appropriate.
Leverage:
- After the Grand Settlement, Steinhoff is on a proportionate basis approx. 10x net leveraged with the entire net debt stack PIKing at 10%+. The equity is trading another two turns above that.
- Except for its minority stake in Mattress Firm and Poundland, the retailer is EM-based.
- Growth is good and IPO multiples in Poland and soon the US (waiting for better market) have been / should be accretive.
- Steinhoff entities are predominantly positioned in the discount and homeware retail market, which has received a boom during the pandemic. The net effect of inflation on these entities remains to be determined. On the one hand, inflation should narrow for retailers’ margins. On the other hand, it should grow its top line and in particular in the discount segment might drive customers to trade down.
Valuation:
- The equity creates Steinhoff at effectively 12x EBITDA - in line with valuations on Pepco and expected, for Mattress Firm, but above Pepkor and perhaps aggressively for Greenlit. We note that Steinhoff has a few other remaining assets, but the large ones are fully valued (through the equity).
- The SFHG A2s trade at approx. 8.5x EBITDA, with equity-like economics. They and portions of the SFHG A1s could be equitise, although that should be heavily dilutive for the Shares. Unless Steinhoff can raise more of its own equity to take out the SfHG debt, the latter would be the one to own between them.
Positioning:
- Ultimately that is how we are positioned. We continue to hold positions in both SFHG bonds with a view to capturing more upside. Over the coming months, we might reduce our weighting a bit, but that merely documents how much the positions have grown.
- The SEAG A2 debt is the one in the strongest position, closest to the majority of the assets and struct. Sr. to the SEAG debt. In a restructuring as outlined in our analysis, the SEAG debt could probably negotiate a share in the SA security as well. But the music lies in SFHG.
Please reach out to discuss.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003