Steinhoff - Holding on

All,

Please refer to our significantly updated analysis of Steinhoff here. 

Apart from a rather illiquid arbitrage opportunity involving Steinhoff NV shares, we most prefer the position we already hold - the B2s. 

As regards Luxco 1 debt, we continue to find it trading marginally rich, although there may be a good chance that overall the leakage of value to litigation parties will be smaller than we assume. If that is so, those bonds could appreciate strongly, but we are leaving that assessment for another time, until we have better information on the current negotiations.

Fundamentally, Covid-19 has been wrecking havoc on retailers and the various Steinhoff entities are no exception. After all we are losing Conforama for good now. But as is often the case with economic shocks, strong and growing businesses tend to remain so afterwards too. 

The company is increasingly made up of two assets:

1) Pepco had been seeing LfLs of +8% and that despite the phenomenal roll-out across E-Europe. The company does not feel any threat from online in the foreseeable futures and so, despite the inevitable setback from Covid-19, we expect the company to continue to grow at almost the same speed going forward. For investors incidentally it is not a bad thing to hold on to the company for a little longer. 

2) Pepkor in South Africa has also seen a strong hit to its performance this year. The company had been suffering from economic conditions beforehand, but it was able to stabilise its balance sheet by issuing equity and it too should be emerging in not too diminished condition.

Minor 3) Mattress Firm has likely taken a heavy knock from Coronavirus. The company had been on the verge of a turnaround following its exit from Ch11 last year. But before as afterwards, Mattress Firm has been struggling with the continued migration to online ordering and we suspect that trend will have seen a lasting boost from the lock-down period. 

Minor 4) Greenlit Brands had also been struggling prior to the pandemic, particularly in the mid-market segment. We are assuming earnings to take another step lower.

Other) Conforama is lost. As per recent communication, the remaining holdings of Conforama France as well as its property portfolio will be sold for E70m. Two further property portfolios remain as well as a long tail of small assets. 

So the large assets look to be in better shape than the small assets, despite the fact that they are each in EM jurisdictions. Oddly the EM status may no only be negative under Covid-19. While usually EM countries are harder hit by any shock (will be the same post Covid-19) citizens of these economies are less likely to be able to continue their work from home, driving a faster rebound in traffic than what we see in developed nations. We are therefore holding on to our B2s for a while longer - at least until we can see some recovery from Covid-19.

Wolfgang