STEINHOFF CE Markus Jooste took a make-or-break bet in 2011 when he plunged the group into the ?1,2bn acquisition of Conforama, France's largest and Europe's second-largest furniture retailer. Defying sceptics, Jooste's bet is starting to pay off as Europe pulls itself out of recession.
Consumer confidence in the EU "improved markedly" in August, reports the European Commission, a development that signals better times ahead. Steinhoff, which in its year to June generated R65,8bn (57%) of its R115bn revenue in the EU, is starting to feel the benefit. July and August were "far better" than the same two months in 2012, says Jooste.
In France, where consumer confidence started rising only in June, Jooste says sales in July and August grew 5% year on year, beating its own forecast of zero growth. In the year to June Conforama's revenue fell almost 3%, to about ?2,3bn, while Steinhoff's overall EU retail revenue was flat at ?4,76bn.
Defying the negative factors at play, which included a poor performance by 56%-owned JD Group in SA, Steinhoff roared ahead in its latest year, lifting headline EPS (HEPS) 25%. At work were higher operating margins flowing from much improved buying power being derived from the Conforama acquisition. "A shift to centralised purchasing across the group is enabling us to secure better global procurement deals," says Jooste. "We have also streamlined our logistics processes and brought down global shipping costs."
Benefits began to be felt meaningfully only in the second half of the financial year. "We grew [HEPS] 5% in the first half and 48% in the second half," says Jooste, who has a further 2%-3% rise in group operating margin in his sights.
"There is still a lot of inherent value to be unlocked in Steinhoff," says Claude van Cuyck of Sanlam Investment Management. "The share is still cheap." Steinhoff's share price has made strong gains since June, rising almost 50% to a record high. Despite this, Steinhoff is still trading on a low 9,5 p:e. This is the lowest rating of any share in the JSE Top 40 index, which boasts an average p:e of 19,2 - the highest in its 18-year existence.
Measured against its European peers Steinhoff is also looking cheap. Examples include Home Retail Group, the UK's biggest furniture retailer, on a 14,6 p:e, and Kingfisher, Europe's largest home improvement retailer, on a 16,8 p:e. A concern among investors is Steinhoff's high gearing level. Shrugging off concerns, Jooste says: "Gearing is the least of our worries."
Jooste points to Steinhoff's improving gearing level. Jooste says net interest is covered seven times by Ebitda while net debt is only 2,5 times Ebitda. Steinhoff's retail footprint in Europe is set to increase even further, with the acquisition of Austria's second-largest furniture retailer, kika-Leiner Group, announced in June. Still subject to regulatory approval, kika-Leiner's acquisition will add ?1,2bn in sales, taking European revenue to about ?6,3bn, or 62% of total group revenue in 2012/2013.
This leaves Steinhoff very much a play on Europe and the region's ability to sustain the momentum of its recovery from its longest recession in 40 years. Global fund managers polled in September by Merrill Lynch believe the recovery will last. "Belief in Europe's economy is robust," says Michael Hartnett, chief investment strategist at Merrill Lynch Global Research. If they are correct, Steinhoff's share price rise could be just getting under way.