More than R100 billion was wiped off the value of Steinhoff International when its share price plunged more than 60% on the JSE yesterday.
This after chief executive Markus Jooste quit following the group’s admission of accounting irregularities.
The share price closed at R45.65 on the JSE on Tuesday and hit a low of R13.50 yesterday before closing 61.42% down at R17.61.
In an effort to limit the damage, the global retailer with more than 40 local brands in over 30 countries - including UK’s Poundland and South Africa’s Pep - has approached PwC to perform an independent investigation.
Steinhoff’s supervisory board appointed its chairperson, Christo Wiese, as interim executive chairperson. Pieter Erasmus, the previous chief executive of Pepkor Group, has agreed to join Wiese in an executive advisory capacity to assist with managing the group's various retail interests around the world.
The admission, late on Tuesday night, also led to the postponement of its annual results, which were scheduled to be released yesterday. The group said it would release the audited results when in a position to do so.
Jooste also resigned from the boards of Steinhoff Africa Retail (Star), PSG Group and PSG Financial Services, which are part-owned by Steinhoff, as well as Phumelela Gaming and Leisure, with immediate effect.
Steinhoff owns a 76.8% stake in Star.
The latest admission by Steinhoff came after it refuted a report by Germany's monthly Manager magazine in August, alleging that Jooste was among employees being investigated by German prosecutors in a 2015 case tied to possible accounting fraud.
At the time Steinhoff rejected the allegations of dishonesty, stating the substantial facts and allegations made by the magazine “are wrong or misleading”.
In November 2015, German authorities searched Steinhoff offices in the town of Westerstede and visited private homes as part of an investigation by prosecutors in the German town of Oldenburg into four current and former managers. Steinhoff said at the time it was fully committed to support the probe.
Industry analysts said the latest news was very damaging to Steinhoff.
Cannon Asset Managers chief executive and founder Adrian Saville said the share price was a clear indication of the damage.
“At the time of writing, the stock price was down 60%on the day, representing a decline in market capitalisation of R114bn on the morning, a fall from R196bn at yesterdays’ close to R82bn this morning,” Saville said.
He added that this was on top of a decline of 9% in market capitalisation on the previous day, resulting in a price fall of 62% in two days and a R134bn drop in market capitalisation over the two days.
“This particular cloud has hung over Steinhoff since the listing on the Frankfurt Stock Exchange in December 2015. Although many commentators and investors have dismissed the concerns that have been raised, it is evident from the Sens announcement last night that there is substance to the allegations of accounting irregularities, specifically the balance sheet treatment of transactions, along with criminal and tax investigations,” he said.
Neil Brown, a co-fund manager at Electus Fund Managers, said the reported irregularities were very damaging as Steinhoff was a Top 10 share by size on the JSE.
“Good companies should never have accounting irregularities and have to delay publishing their audited results,” Brown said.
He added that they would not invest any client money into Steinhoff until there were audited results and PwC had completed its independent investigation.
On the way forward, Brown said this was hard to say at this juncture.
“We would guess that Steinhoff might have to sell some of its assets to raise capital and repay debt,” he said.
Saville said to stop a further downfall, the retailer needed to deal with the immediate crisis and then the directors must set out a course of action to reverse the damage done by a multi-year, aggressive acquisition spree that had resulted in a distorted and, evidently, stressed balance sheet.
Jordan Weir, an equities trader at BayHill Capital, said a suspension of the share on the JSE might have provided some form of “damage control” for the underlying shareholder on the day of the announcement.
“These reports will definitely be damaging to Steinhoff over the short-to-midterm as they point toward an ethical flaw of a potentially material nature. Trust would need to be rebuilt over the longer run as long as the investigation does not pick up any further irregularities, which could place Steinhoff into a position of absolute distrust,” Weir said.
Saville said the decline in share price might not continue for long.
“We describe events like these as ‘man overboard moments’ and there is always the chance of a price bounce. It is the habit of markets to overreact. However, if the price were to recover, this would represent no more than a trading opportunity and not an investment case.
“The issues at Steinhoff are a material concern and add to our long-standing observation that Steinhoff’s aggressive acquisition strategy over the years has translated into a business where the balance sheet has grown materially while the return on capital has increasingly fallen below the cost of capital, making for a poor investment prospect,” Saville said.
In the nine months to end June, Steinhoff reported a 48% increase in revenue to 14.91bn, which the group attributed it to its acquisitions. But in 2016 it was also concerned about the weaker pound in Britain following Britain's vote to leave the EU in June last year.
The group said the fall in the British pound against the euro since that decision would affect foreign exchange translations on its businesses within the bloc. Despite these concerns, the group still managed to report profits.
Steinhoff last year splashed out R12bn in acquiring UK company Poundland while US Mattress Firm cost Steinhoff about R55bn.