Steinhoff results for the six months to end December

Steinhoff results for the six months to end December were released in the afternoon. This is a company that is about to transform into the second biggest furniture retailer on the planet. Read that line again. This is a company that deserves a whole lot of attention from ourselves. In my conversations with people about the stock I strangely sit somewhere in the middle. The reason I say strangely is that often we are more outspoken than other people on stock specific stuff, probably because we are business owners of the asset management function and do not work for a bank or financial institution.

I have heard lines from, management are incredibly sharp and nimble to their accounting practices are too aggressive and they sail a little too close to the wind. I have often asked the question of why they would want to own the whole supply chain and the retail outlet (in Europe). Remember that Steinhoff tried to have a go for JD Group, those were the days, I thought they would never end. Was that Nana Mouskouri? A quick Yahoo Google search suggests that it was Mary Hopkin. Wow. If you are old enough to remember that, keep it to yourself, ok?

OK, I am going to do this differently from now on. Quite simple I am going to try and keep an objective for and against argument and then a conclusion. That is much easier to then understand. And prior to that, a score sheet section. Any other ideas on formatting, let me know, perhaps a section describing what the business does, but I guess most people would have an understanding of that.

The score sheet. There is quite a nice breakdown of the Steinhoff sales by region and segment in their results review, here goes: "Revenue per geographical region: 49% Southern Africa, 33% Continental Europe, 5% Pacific Rim, 13% United Kingdom" Total sales were lower by three percent to 23.994 billion ZAR. That is a big number. And then "Revenue per segment: 30% Retail: Household goods, 21% Retail: Automotive, 36% Manufacturing and sourcing, 11% Logistics services, 2% Corporate services" I was amazed at how high that retail, automotive was as a percentage of overall sales. 21 percent? Think Hertz. Dealerships. Parts. And then suddenly it gets huge. This was part of the Unitrans transaction.

"Headline earnings maintained at R1,630m (1H10: R1,554m) despite a 15% lower ZAR translation rate". Basic EPS flat at 113.2 cents. For the six months. Next question, why is their tax payment so low? 254 million Rands. I was once told that it is simple to find how profitable a business is REALLY, take your tax payment. Take the corporate tax rate. Divide tax by corporate tax rate = taxable profits.

Steinhoff has an unusually low corporate tax rate, check it out: "The taxation rate of 12.3% was in line with that of the comparative period (1H10: 12.5%) and management anticipates, in relation to the existing operations, that the average group taxation rate should not exceed 15% of pre-taxation income in the foreseeable future."

The reason for the unusually low tax rate is spelled out in the annual report: "The group operates in a number of countries in which the statutory tax rate is lower than in South Africa. The group owns and manages most of its brands in Switzerland, where the taxation applicable to intellectual property holding companies ranges between 8% and 12%. The group benefits from various taxation dispensations in selected eastern European countries where it operates." Take what you want from that. And read into how it would all change over time, if at all.

Investment case for Steinhoff. There is quite a nice explanation on their own website under Investment case, let us list the headings: "Diverse geographical footprint, Integrated supply chain, Logistics services, Flexibility and balance and Mass-market appeal." Added to this, Conforama is going to be transformative. They bought it for 1.2 billion Euros, or 11.53 billion Rand. 37.5 billion Rand is the current market cap. So, this is huge. A quick web search suggests Conforama has annual sales of around 3 billion Euros. So nearly 29 billion Rand for the full year. So roughly this would pump revenue by 60 percent and change the mix drastically, by revenue per region. This is the good.

Investment case against Steinhoff. Lots of moving parts. Factories of raw materials in South Africa, India and the UK. Think foam and chip board. Factories in New Zealand. Poland. Zimbabwe. Weird one that, anyone know it well? Logistics. I sort of like it, but not with enough conviction. I must be honest, that tax rate bothers me, because it would bother the authorities, we know of the well documented fight with SARS, which they settled for a whole lot less. Pretty high debt levels, not unmanageable by any stretch. Perhaps in time they need to report in Euros and not Rands, the currency is volatile for them.

Conclusion, the one man jury. The management team is highly regarded. Margins have ticked up, and Marcus Jooste is highly regarded by those in the know. I worry about the "bad" things that I hear about the group, aggressive accounting. Furniture is a reasonable category, it is OK. Will they be able to match Ikea? Is the industry transformative? Is this more a SABMiller in the making? Not exciting enough, we will pass on this one.