Steinhoff - Thesis 3 - Positioning
All,cPlease find our unchanged analysis here.
Steinhoff continues to do very well and of course the IPO of Mattress Firm should provide the next event for investors. With concerns about the web of intercompany relationships somewhat giving way to a broader discussion, however, about what to do with the group overall, it is worth considering our position more broadly. Thesis 1 and Thesis 2 have materialised. So what about Thesis 3?
Inflation:
- Like Matalan and Takko, we consider Pepkor and Pepco reasonably well protected as discounters usually are relative to the mid-market. As regards Mattress Firm, however, we are less convinced. Mattresses are a medium-ticket replacement item that is easily forgotten and postponed when disposable income drops.
- Mattress Firm moreover will have benefitted from cheap available credit that is likely to become significantly more expensive in North America. In that regard Mattress Firm’s exposure to the US may be positive as far as overall economic growth is concerned, but interest rates are also rising that much faster.
- For Euro denominated liabilities in Europe the US exposure should benefit from positive translation effects, but the South African exposure the ZAR has just gone the other way.
-> Overall, it’s a retailer, not all of it is discount and while translation adjustments should be level between US and ZAR, we are concerned about the US outlook.
Equity:
- Looking forward 12-18 months, as per analysis front page, we think the SFH bonds (to differing degrees) will have to be partially equitised. Given public equity is already in place, this can be either messy or dilutive. We fancy neither.
- Moreover, we are concerned that the SEAG A2s will want to dictate terms on the SFH bonds if they struggle to find full refinancing, which we think unlikely.
- A good equity should have a story. We fail to see the ultimate raison d’être for this company, however. The story here might as well be a solvent liquidation now.
-> It’s now a high-beta PIK with significant uncertainty towards the end of next year. No doubt there is upside in the name, but the story is less idiosyncratic now and has become more aligned with markets overall.
Theses 1,2 and 3:
- We have been in Steinhoff since January 2018 - before we even founded Sarria in its current form. Since then we have more than doubled our money in the name and it’s been easy to forget about the exit. But the thesis then had been based on the survival and recovery of the various assets as well as the relative positioning, dips and exposures of the different bonds and later loans. That has happened.
- With the signing of the LUA later that year the thesis drifted into a bet on the Grand Settlement being achievable. That too is now effectively behind us.
- From here, the fundamental development of the subsidiaries has stepped into the foreground - with some uncertainty around the next restructuring.
-> We are not fans of drifting theses. Thesis 1 and 2 have materialised. We would at least have to reset our position if we were to bet on Thesis 3.
Positioning:
- We are therefore exiting half of our positions of 5% and 6% of Nav of the 2021/22s and 23s at 68c/€ and 78.5c/€ respectively.
- Steinhoff has swollen to become our largest combined position on the book. Relative to the opportunity set today and taking into account the macro headwinds it faces, it no longer deserves this weighting.
- We retain half the position for now as the company (see first line) continues to do very well, but we may reduce further over the remainder of the year. If there is really a Thesis 3 in the next restructuring, the SEAG A2s could have the longer end of the stick.
Please reach out to discuss.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003