TWO exciting new companies have recently been listed on the JSE, namely Stadio and Steinhoff Africa Retail Limited (Star). These two companies are not entirely new to investors though, given the fact that both were part of listed companies Steinhoff and Curro before being unbundled and listed separately.
Star, which is all the African assets of Steinhoff, has been listed separately for mainly two reasons: firstly, to create an entity that is easier to understand and to value for investors, with the hope of unlocking value. Secondly, to separate the African asset from the developed market assets because of their distinct strategic and geographic differences.
The reasons for Stadio's separate listing from Curro are somewhat different to those of Star. Stadio, which is the tertiary education division of Curro, mainly seeks to raise additional capital to expand its operations. This would have been difficult for Stadio under the Curro banner, because of the various rights issues Curro has undergone in the past few years.
After the unbundling and listing, Stadio will undergo a rights issue in the hope of raising R 840m. It plans to use the money to fund current and future acquisitions, infrastructure development and a R200m BBBEE transaction.
Many investors will be looking to invest - we look at the investment case of the two companies:
Star owns various profitable assets, with Pep and Ackermans the most valuable and known of these. The Star brands fall in two main categories, namely discount-value brands, and speciality brands. The discount and value brands, of which Pep and Ackermans are the biggest, make up 77% of Star’s sales and 95% of its operating profit.
The company has various features that make it an attractive investment. These include, but are not limited to, the following: massive bargaining power, growing target market, recognised brands, integrated supply chain, experienced management, big consumer base, well placed strategy and a high cash generative business model.
The only concern for any investor will be the current valuation of the share price. Based on expected earnings, Star is currently trading at a 23 price-earnings ratio, whereas the industry is trading at around a 14 P/E.
Based on analysts’ forecasts, which include double-digit sales growth of 14% and increased earnings before interest and taxes (Ebit) margins, the forward P/E will be around 16 in FY19. That being said, investment analysts are of the opinion that the company will continue to trade at a premium to the market because of its quality assets.
Star has various initiatives that support its growth forecast. These include new store roll-outs, expansion of in-store services and the targeting of new fashion areas. Historically, it has a good track record of achieving double-digit sales and Ebit growth.
The share has performed well since being listed on September 20, increasing by 9.3% from R21.52 to R23.75. Nonetheless, most analysts believe it is fairly priced and that at current levels there is little room for error.
Any negative news might result in a rerating and a price drop. For this reason, investors may think twice before investing and also consider that Steinhoff is a cheaper alternative which will also give you exposure to Star.
Stadio is the exciting new separately listed entity that will house various higher education institutions they define as a “Multiversity”.
Stadio will have around 13 000 registered students among three higher education institutions with five faculties and will be geographically placed in Gauteng, Western Cape, KwaZulu-Natal, Eastern Cape, Botswana and Namibia.
The higher education space is an extremely attractive investment with soaring demand (both in SA and abroad) and limited spaces available. Stadio expects to service this sector which has a shortfall of about 60% that compounds annually. Thus, Stadio is not only a (potentially) fantastic investment from a returns point of view but also a socially responsible investment that will benefit South Africans as a whole.
Curro trades at a high valuation and this has led to many analysts questioning the share – I suspect Stadio will follow the same pattern.
The consideration that one needs to understand is that the company has a high operating leverage, which means profits move along a J-curve. In other words, as schools fill up and learners pass a certain number, the additional sales generated are pure profit.
Stadio will also have as business partners Curro and PSG, which bring exceptional experience, skills and business facilities to the mix.
With the above in mind, many analysts - and ourselves included - feel that Stadio is an exceptionally exciting prospect.
While both Star and Stadio are exceptionally exciting prospects, we would lean towards Stadio; although it is higher risk, it possibly has better future growth potential.
Star is established and has quality brands, but will struggle if the SA economy does not improve as it is in retail. Stadio should be less dependent on the SA economy and can focus on its internal operations to see a success story similar to that of Curro.
- Werner Erasmus is regional manager for Gauteng at Overberg Asset Management.