“New-money opportunity on recent price weakness”
Share price: SNH:GR 448 euro cents, SNH:SJ 6473 SA cents
Recommendation: A Trading Buy and Portfolio Buy, fair value at €4,85 or R70 on the JSE at R14,50/€.
Recent weakness in the share price, post six month results, represents a new-money opportunity. The stock has declined by around 10% in both euro and rand since the end of May. Price action is probably being affected by the impact of corporate action and expectations of delivery around that.
Steinhoff is going through a period in which there is extensive acquisitive activity, combined with the raising of new equity. So, there will be “noise” in the numbers for a while. But, investors should look through that as I have previously quantified that normalised earnings per share contributions from acquisitions will be accretive from next year.
Mattress Firm in the US and Poundland in the UK were the largest deals, acquired with effect from 30 September 2016, with Fantastic Furniture in the books from 1 January 2017. Further deals since March have either been concluded or are under consideration.
With effect from 28 September 2016, Steinhoff raised €2,4 billion in new equity through the issue of 332 million shares at €5,055 with a further 152 million in treasury shares sold (a total of 484 million shares). This means shares in issue as at 31 March 2017 are 15% higher at 4 266 million.
Steinhoff amended year end from June to September and pro forma financial information was previously provided.
The interim results were in line with my estimates for the full year. Like-for-like revenue grew by 9% with operating profit up by 21%, taking the comparable margin from 7,1% to 7,8%. Like-for-like earnings grew by 12% to €697 million and due to the higher number of shares EPS on this basis decreased by 6% to 16,4 euro cents. My estimate for the full year is 30,4 euro cents, down 5%.
The balance sheet is strong and cash flows robust. Whilst net debt of €6,5 billion (almost R100 billion) seems high it is supported by an equity base of €16,6 billion, giving a debt to equity ratio of only 39% with annualised EBITDA interest cover a comfortable 9x.
I have EPS rising to 38,6 euro cents in F2018 and then 43,2 euro cents in F2019. Three-year compound growth is 10,6%, notwithstanding the EPS dilution due to additional shares to service.
The tax challenge by the German authorities has yet to be resolved. Whilst management is confident in reaching a favourable settlement we don’t know the exact nature of the investigation or the ultimate consequences. My sense is that it relates to transfer pricing. Previous analysis and caution on this issue is unaltered. I have assumed that the US acquisitions will raise the effective tax rate.
The share price of €4,48 equates to a PE of 14,7x on a forward basis to September 2017 but if I look forward to September 2018 this drops to 11,6x. The forward dividend yield is 2,8%. There is no need to chase the stock. Levels closer to €4,20 would mean great value short term but even at the current price investors are unlikely to be disappointed on a longer run view. I am keeping fair value at €4,85 for now which at an exchange rate of R14,50/€ translates to R70 per share on the JSE.
Mark N Ingham
Steinhoff has come off from the top of the channel recently and is below the 200 day moving average (orange line at R71.41). In the short-term we would look to pick up Steinhoff below support, near R62.50
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