Steinhoff International: a trail of numbers ending in zero

An accounting scandal at Steinhoff International has left many of the exposed investors and lenders pondering a simple question: is the share price going to zero?

For such a retail conglomerate with roots in South Africa, the question is partly one of debt, and what is left if the group can no longer support it.

Steinhoff blazed a trail in Europe, buying up chains such as the UK's Poundland and Mattress Firm in the US, largely funded by borrowing. Some of those bonds trade hands for about half their face value, and groups of creditors have formed committees should there be a fight over assets in the event of any restructuring or liquidation.

The shares have lost about nine-tenths of their value, but the group still has a market capitalisation of €1.6bn.

What happens next is a matter of cashflow, the lifeblood of any retailing business. At Steinhoff, assessing the cash is complicated by investigations into the accounts. Previous financial statements have been withdrawn as unreliable, while PWC revisits the work done by auditor Deloitte.

There is a story to tell in the numbers, however. While it is possible Steinhoff will get a clean bill of health and trade through this period of uncertainty, the figures suggest a business struggling to generate cash. A major risk is that its reported cash reserve figure of €3bn cannot be relied upon.

Paying the bills

A modern retailer tends not to own very much, beyond the intellectual property of its brands. Stock comes in, sits on shelves or showroom floors, and the trick is to keep enough money coming in to pay staff, suppliers, landlords and governments.

Creditors often purchase insurance against invoices going unpaid. In a January presentation Steinhoff said that there was regular ongoing dialogue between such credit insurers and its operating companies.

"If you get to the point where credit insurers stop writing policies to suppliers, then you very quickly get into a problem", says Ross Miller, a partner with a restructuring speciality at law firm Simmons-Simmons.

At Steinhoff, signs of stress on cashflow can be seen in the amount of time it was taking to pay suppliers. A common measure is days payables outstanding: the trade payables figure recorded on a company's balance sheet, expressed as a proportion of the cost of goods line on the income statement.

At the end of March 2017, the most recent figure available, Steinhoff's Days Payables Outstanding was 152, or about five months. The comparable figure for DFS, a large listed furniture retailer, is 94 days.

Joshua Bamfield, of the Center for Retail Research, points to other types of creditors that can trigger proceedings which bring cashflow problems to a head: "It tends to be landlords and local councils wary about their business rates, rather than suppliers."

"It's when you get to quarter days. Rents tend to be due every three months", he says.

Landlords can offer forbearance, if there are few other obvious tenants for a property, and a group can inspire confidence about its prospects.

A spokesperson said "Steinhoff has now largely addressed the group's near-term liquidity requirements. Building on the recent stability measures, a key focus for the group in the coming months is to consider the group’s strategic options, and to develop a plan to address the group’s financial indebtedness in conjunction with the group’s financial creditors."

What happened to the cash?

For Steinhoff's stock to have value, the company has to avoid a restructuring of its obligations which devolves into a fight over the assets. If lenders don't get repaid in full, shareholders are typically wiped out.

The company has asked some lenders for waivers, "to continue to create a window of stability until 30 June 2018", to let management focus on maintaining the trading performance of the individual business units and development strategic options, such as asset sales.

In terms of debt, the group "expects to be in a position to pay cash interest on all its existing financial indebtedness at the ordinary contractual rate over the near term forecasted period."

What concerns some investors, however, is the repayment of at least €1bn of bank debt due in the second half of the year, if its bankers choose not to roll over facilities. At last count Steinhoff owed €9.6bn to lenders, and another €5.2bn to trade creditors.

How a sprawling conglomerate once valued at as much as €22bn got into such a mess is a question for the various investigators trawling through its books. A pressing issue might be, what happened to Steinhoff's cash?

At the end of June 2014 the group reported €2.6bn of cash and equivalents on its consolidated balance sheet. Each financial year since Steinhoff logged positive cash flow from operations, and the cash balance grew to €3.1bn at the end of March last year.

What is curious, however, is that Steinhoff habitually sold stock, an expensive form of financing, rather than dip into that growing cash pile.

Investors typically have confidence in cash balances, as these should be straightforward for auditors to verify. Outsiders also have to be, as the only payments which can be externally verified are those for dividends, and to purchase other businesses.

Since June 2013, cash outflows on dividends and acquisitions have been more than covered by cash inflows from financing - share sales and new debt.

Here are those outflows and inflows taken from the cash-flow statements of the last three annual reports, and Steinhoff's most recent half year results (it's year-end moved to September in 2016):

Only in the 2016 period was the cash paid out for dividends and acquisitions more than that flowing in, by just €170m.

All the analysis provides on its own is a suspicion. It is strange for a company doing deals to have sat on €3bn of cash for so long.

For instance, when Globo tried to raise high yield debt in 2015, while also reporting cash on the balance sheet of $104m, it attracted the attention of short sellers. After the UK-listed group failed, administrators recovered about £180,000.

However, the suspicion arises at a time when the group's accounts have been withdrawn following the discovery of accounting irregularities.

The spokesperson said, "the Steinhoff board has appointed PwC to conduct a forensic investigation into the reported irregularities. Their scope is unlimited and they are being given unrestricted access to the group. The investigation may take some time, but as and when material developments emerge, we plan to make announcements."

The board is working with the auditors, Deloitte, to deliver 2017 accounts in addition to restating those for 2016 and 2015, he said.

A trading update is promised this month. Perhaps it would be an appropriate juncture for the board to give investors confidence about the amount of cash Steinhoff has on hand.