On Monday afternoon Nedgroup Investments sent out a note to its clients to clarify which of its funds were caught holding Steinhoff International securities on December 6 when the news broke that CEO Markus Jooste had resigned. Since that announcement, the company’s share price has fallen 80%.

The firm acknowledged that these Steinhoff holdings had led to losses for clients, and it had therefore engaged extensively with the managers of each of these funds. Their responses make for interesting comparisons.

Reliance on published financial statements

“Our investment thesis on why we own Steinhoff shares on behalf of investors is premised on fundamental analysis of the company’s financial statements and judgment of its future economic prospects, to determine a fair market value range,” noted Foord Asset Management, which manages the Nedgroup Investments Value and Stable Funds. “This process focuses on the publicly available facts rather than market speculation. In executing this mandate, Foord places material reliance on the accuracy of audited, published financial statements.”

It noted that the published statements showed a balance sheet that was geared at acceptable levels, and that management had structured the debt with enough care to mitigate liquidity risks.

“The allegations of potential historical reporting irregularities are not new and have been refuted by management,” Foord noted. “As part of our due diligence work, we have also engaged with a respected non-executive director of the Steinhoff group, who has stated that, to his knowledge, there was no financial misstatement, thereby discrediting the allegations. If, however, the audited financial statements were fraudulently or negligently materially misstated, we will reserve the rights of our investors with respect to any remedy that may be available to stakeholders that have suffered loss.”

Is it now extremely cheap?

Abax Investments, which manages both the Nedgroup Investments Rainmaker and Opportunity Funds, noted that it had taken a shareholding in Steinhoff based on an attractive valuation, strong earnings growth forecasts, and the strength of the company’s management team. When serious allegations of accounting irregularities occurred, it also took a number of steps to look into the issue.

“After publication of an article on Steinhoff in Manager Magazin in Germany (August 2017), concerns arose around a dispute Steinhoff had with a former JV partner,” Abax said. “Through independent research we learnt that the individual concerned is by nature an aggressive litigant and we engaged an independent legal firm in Germany to advise us on the veracity of the claims and evidence. In addition, due to management being implicated in the article, we engaged with one of the non-executive directors on the supervisory board and this gave us much comfort.”

The asset manager said that while Steinhoff now appears extremely cheap, it will not be adding to its position until more certainty emerges.

“While very little further information has emerged, we would expect the accounting irregularities to have occurred in their European operations only,” Abax said. “With the uncertainty surrounding the outcome of the investigation, it is extremely difficult to establish what the true fundamental value is for Steinhoff. Our current view, based on a sum of the parts calculation following recent market changes and assuming a negative impact from unrecoverable assets (Steinhoff est. €6bn), is a price per share value of R29.36.”

Too many risks

In contrast, however, the managers of the Nedgroup Investments Growth Fund, Electus, sold out of its entire Steinhoff position last week.

“We acknowledge that Steinhoff has some very good investments such as Star, Pep (Europe), PSG and KAP, which might underpin the Steinhoff valuation,” Electus said. “I understand that this is the reason why many good investors would now want to hold onto their Steinhoff shares, rather than realise a big permanent loss. However, based on the above risks, and especially as we have no reliable or accurate financial statements for Steinhoff, based on our risk-management, we will not look to hold any Steinhoff shares in the Growth Fund, at least until there are audited financial results and the conclusion of PwC’s independent investigation.”

It added that it has serious concerns about the group’s accounting.

“At Electus, we suspect that it may ultimately transpire that there has been accounting and tax-related fraud at Steinhoff, and there have been indications of these possibilities due to recent German and Dutch investigations,” it noted. “It is concerning that Steinhoff’s main auditor, Deloitte, is not also the auditor of all of Steinhoff’s underlying investments and operations.”

Holding on

Truffle Asset Management, which is responsible for the Nedgroup Investments Balanced and Managed Funds, said that Jooste’s resignation and the announcement of an investigation by PwC into accounting regularities had “significantly changed the risks and return associated with our original Steinhoff investment case”.

“While we have been aware of ongoing litigation involving Steinhoff, the severity of the statement and delay of the audited financial statements surprised us,” Truffle said. “As custodians of our clients’ capital, we have been engaging with company management to improve its corporate governance and general disclosure. We expected, based on our discussion, that we would see a significant improvement at the results presentation.”

It added, however, that the company’s current share price means that Steinhoff has a market capitalisation lower than the value of its listed assets.

“Even after deducting the group net debt of R23 a share, the current share price would imply that the rest of the Steinhoff assets, (European property, and European, UK, US, and Australian retail assets) appear exceedingly cheap,” Truffle said. “We have taken the decision to hold our current position at this price level, but are evaluating this on a continuous basis.”

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