Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
the curse of an embarrassing parent
Head of Equities
Jun 13, 2018
STAR, which is 71% owned by Steinhoff, currently has more than 5 000 stores, the most of any South African retailer. The group’s broad business model is based on the premise that low prices attract customers, especially when coupled with an extensive footprint.
Over 90% of the value in STAR sits in its two key brands, Pep and Ackermans, both part of the old Pepkor stable, which was sold to Steinhoff in 2015. These businesses have thrived under various owners over decades, delivering more than 10% growth per year over the past 20 years until 2017. They also have great histories of converting accounting earnings to cash, which undoubtedly formed part of the attraction to both private equity owner Brait until 2015, and Steinhoff thereafter.
Pep’s model is designed around servicing lower-end customers, often in South Africa’s more rural areas. The company offers the lowest prices on its products, with best-price leadership on 99% of items. Coupled with ease of access to stores (there are over 2 100 in Southern Africa, compared to 1 450 for the entire Shoprite group), the business creates significant loyalty among its customer base.
The primary focus of both Pep and Ackermans is on children’s wear, which makes these operations less sensitive to the occasional fashion misses of Mr Price, Woolworths and Foschini. The simple fact that children grow means that demand tends to be more stable throughout the cycle than at its peers. The corollary to this is that during periods of strong economic growth, Pep and Ackermans generally lag the fashion retailers, an impact then exacerbated by their peers’ higher degree of credit sales.
The old JD Group – owner of brands like Bradlows, Russells, Incredible Connection and HiFi Corp – forms a small part of STAR, accounting for 14% of revenue. Since delisting after being bought by Steinhoff, this business has right-sized its footprint and returned to profitability.
The third piece of the STAR puzzle is the mix of specialty clothing and footwear stores, the largest of which is Tekkie Town. Despite the founders’ unhappiness with the Steinhoff shares they received as part of the 2017 sale, the business itself is performing well.
The results for the first half of the 2018 financial year showed a group performing to expectations operationally, but with a substantial charge related to a 2011 management incentive scheme. The original Pepkor shares in this scheme were swapped for Steinhoff shares in 2015 as part of the purchase. This collateral covered the value of external loans by six or seven times when STAR listed in September 2017, but the subsequent collapse in the Steinhoff share price means that Pepkor’s guarantee on this loan is now relevant and has been provided for. More relevant is that the lawyers and auditors say there are no other surprises.
STAR also recently refinanced its R16 billion of loans from Steinhoff with external banks, which released the group from any guarantees relating to Steinhoff debt. Management assured the market that no further guarantees exist, but scepticism in this regard is only natural.
The market’s key remaining concerns centre around three issues: poor disclosure, potential litigation and ‘unknown unknowns’. While disclosure should improve when the next results are released, the outcome of litigation by Tekkie Town’s sellers and the Steinhoff class action suit will take time, as will showing the market that there are no hidden skeletons.
The above items appear fully baked into the market price, with Mr Price trading at 40% to 50% higher valuation multiples than STAR, depending on which metric is used.
The board, led by Chairman Jayendra Naidoo, who represents BEE investor Lancaster and is thus aligned with minority shareholders rather than Steinhoff, is pushing hard to distance STAR from Steinhoff. The first move is the planned name change to Pepkor. Subsequent efforts will determine whether STAR can emerge from the shadow of its tainted parent and spread its own wings.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
are they a good investment?
The great lockdown:
one year on
Head of Equities
IHG: focus on
quality pays off
Sanlam Active UK Fund
BUDGET 2021: THE RIGHT INTENT,
BUT RISKS ABOUND
Investment Economist at Sanlam Investments
INVESTING IN 2021:
WHAT TO EXPECT
Sanlam Private Wealth
MINING: IS THE
THROUGH THE HYPE
Head of Equities
Jack is back – business
as usual for Alibaba?
Global Equity Analyst, Sanlam UK
South AfricaSouth Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStar
Rest of AfricaSanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth Mauritius
GlobalGlobal Investment Solutions
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.