Steinhoff Africa Retail (Star), the African unit of Steinhoff International, listed on the JSE last week. This means that after a 14-year hiatus, clothing retailer Pepkor – acquired by Steinhoff in 2015 – will again be a listed entity, albeit in combination with other Steinhoff assets. In an environment characterised by constrained real income growth, we find the discount nature of Star’s portfolio attractive, particularly Pepkor’s focus on essential everyday products.
Since Steinhoff listed on the Frankfurt Stock Exchange in late 2015 to raise capital for its European expansion, investors have undervalued the group’s South African operations, focusing on its developed market assets. To facilitate the listing last week, Steinhoff sold down its stake in Star from 100% to 78%.
Steinhoff management has been looking at ways to demonstrate the value of its South African and African assets on a standalone basis – the primary rationale for the JSE listing. The aim is also to facilitate closer co-operation between the group’s African retail assets and Shoprite. Both Shoprite and Steinhoff have Christo Wiese as their largest shareholder.
At the time of listing, Pepkor (which includes heavyweight brands Pep and Ackermans) will account for 75% of Star’s revenue and 95% of its operating profit. The remainder of the Star mix consists of Steinhoff’s other South African retail assets, split between discount retailers such as Russells, Rochester and Bradlows, and specialty retailers like Tekkie Town, Incredible Connection and Hi-Fi Corporation. These are lower quality assets and therefore don’t command the same high valuation multiples that Pepkor does.
RISING MARKET SHARE
With 4 808 stores, mostly in South Africa, Star has the largest retail footprint in Africa, and is the largest non-food retailer on the continent. The discount nature of Star’s portfolio is appealing, especially Pepkor’s focus on school clothing and basic children’s wear. Pepkor’s South African market share has been steadily rising, from 12% in 2007 to 19% in 2016, largely at the expense of Edcon and independent retailers.
The Pepkor product mix is defensive, with a focus on essential everyday products. Accordingly, Pepkor doesn’t face the same fashion risk as clothing retailers such as Truworths or Foschini. Cash conversion is excellent at more than 100%, which illustrates the quality of the business.
Most investors don’t realise that Pep is the largest airtime retailer in the country. It also sells 60% of all mobile phones in South Africa and 90% of all handsets priced below R500. Pep is shifting towards more direct mobile handset imports, which should have a positive effect on margins.
DRIVING ORGANIC GROWTH
Pepkor plans to grow its store base by around 6% a year, while driving same-store sales growth through a greater focus on women’s wear. This should result in around 11% per annum revenue growth, which is below the average of around 15% over the last five years. Star’s gross margins of 34% are below those of peers such as Mr Price (39%) and Foschini (50%), which makes sense given the discount retailer model.
The shares listed at R20.50 per share, equating to a forward price/earnings ratio of 18.4 times. On this basis, Star is more expensive than Mr Price, Foschini and Truworths, but cheaper than Clicks and DisChem. In our view, this is appropriate given the differences in growth outlooks and cash generation.
Star has secured options to purchase the 23% of Shoprite owned by Christo Wiese and the Public Investment Corporation at R215 per share (versus the current R209 per share), as well as Wiese’s high-voting shares. This means that, should these options be exercised (which we expect will happen in the next six months), Star will gain control of Shoprite. This will then allow Shoprite and Star to pursue various synergies, ranging from improved bargaining power with property landlords to group sourcing and stores-within-stores.
The purchase price will be settled by issuing new Star shares, and the Shoprite stake will therefore account for 34% of Star after the deal is concluded. Should the Shoprite option be exercised, Steinhoff’s stake in Star will decline to 52%.
Following discussions with management, we’re comfortable that the planned synergies will be realised and that the two groups will fit together well. In the years to come, we would expect Star to try to grow its economic stake in Shoprite, and that Wiese would swap his Star shares for Steinhoff shares.
While Star’s share price doesn’t currently offer exceptional value, we like the group’s exposure to retail growth in South Africa and on the continent, together with the excellent inflation pass-through. This should deliver consistent earnings growth for many years to come.
We can assist you with
Discretionary investment management
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.
Outsourced investment service
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
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.