Steinhoff trading update sizzles

We have liked Steinhoff for a while now on the basis that Europe is not going to be as bad as everyone thinks. This is because they have big exposure to the European consumer through their Conforama business and also why they look so cheap based on earnings. It is a complicated one to assess. Steinhoff have been very busy of late restructuring with the likes of JD Group and KAP. Before we look at the numbers let us try and understand what the Steinhoff structure actually entails.


I'm not going to explain how this was all done because that is a whole new story all together, Sasha did a good job, in January this year in an article titled: Steinhoff looking to take control of JD Group. So let's look at the structure of the business as we see it today. Steinhoff Europe constitutes that Conforama business which is the second biggest furniture retailer on the continent. They also do manufacturing, sourcing and logistics all over Europe.


Locally they own 62% of KAP which is a R7bn listed company and has a whole host of brands in Timber, Logistics and industrial. This is from the ShareData description. "KAP International Holdings Ltd is an investment company with a portfolio of diverse manufacturing businesses. These include canned and value-added meals, maize milling, leather products, footwear, bottle resin, automotive products and towelling products."


They also own 50% plus one share of JD group who have brands such as Joshua Doore, Russels, Unitrans, SteinBuild and Incredible Connection. Many of these brands have been integrated from Steinhoff as an exchange for equity in JD group. Lastly they own 20% of PSG following a deal between Marcus Jooste and Christo Wiese whereby they swapped Steinhoff shares for PSG. As you can see it is all very complicated with a separate listing of the European business on the cards. In interviews with Marcus Jooste he says they are looking to be an investing holding company mainly in furniture retail, transport and you manufacture. There are lots of potential synergies there.


Ok here's the trading update, which looked good:


"Accordingly, shareholders are advised that both the earnings per share ("EPS") from continuing operations and headline earnings per share ("HEPS") from continuing operations of Steinhoff, for the year ended 30 June 2012, will be between 30% and 35% higher than the EPS and HEPS from continuing operations, as reported for the comparable period ended 30 June 2011."


These results include the first full year of Conforama results as well as the consolidation of JD group and KAP. Last year the company made 258.9c so we should be expecting around 345c. For a company trading at R25.80 they look very cheap. I guess there are a few concerns. Europe is of course facing a long term recession or stagnant growth at the least. That European business is 65% of revenues. There is also the complexity of it all. It's difficult to understand the business as well as what Marcus Jooste will be up to next. We continue to like it as a contrarian view on Europe but only for the hardy investor with a high pain threshold.