Pepkor, which slashed its debt by half in the year ended September 30, now finds itself in the enviable position of having a manageable balance sheet that could enable it to expand or make acquisitions.
This is a far cry from the days when Steinhoff pushed up to R14.1bn debt onto Pepkor's balance sheet in the years following its acquisition of the retailer for about R63bn more than five years ago.
Pepkor's debt is now R7.1bn, after the group reduced it by R6.9bn in the past six months.
But analysts say that while Pepkor is perhaps the apparel retailer best placed to benefit from the expected prolonged economic downturn that will result from the Covid-19 lockdown, the spectre of Steinhoff could still haunt it.
At issue is the 68% interest in Pepkor that is still owned by Steinhoff, which itself is under new management and trying to put its troubled past behind it after being engulfed in one of SA's biggest corporate scandals nearly three years ago.
68%
Steinhoff’s stake
Steinhoff lost more than 90% of its value in December 2017 when Markus Jooste resigned as CEO amid alleged accounting irregularities.
The group is proposing a R16.5bn settlement in an attempt to resolve most of its legal woes.
If it can't get affected parties to agree to this it could face 90 separate shareholder lawsuits amounting to more than R136bn, which could cripple the company.
Part of this proposed settlement with shareholders would also include some of Steinhoff's shares in Pepkor.
Steinhoff has already sold down a portion of its interest in Pepkor to its current 68%.
A worry for analysts is a scenario where other lawsuits come out of the woodwork and Steinhoff is forced to sell the entire stake in Pepkor in one big grouping of shares.
"I would say everything is pointing in the right direction for Pepkor, but the problem is Steinhoff and what they do with that stake and unfortunately this is not in the hands of Pepkor management, who have done everything that they can do right," said Shane Watkins, chief investment officer at All Weather Capital.
"Steinhoff is an uncertainty and we don't know when they will place that stake or if they will place that stake, but it seems likely that a large portion or all of that is eventually coming to the market."
Shares are ultimately a function of "supply and demand irrespective of the underlying quality of the company", said Watkins.
"The concern is it would be a huge overhang on the share and the day that Steinhoff announces it is placing that stock, the Pepkor share price is going to be down 10% for sure. Eventually it will recover, but it will be a short-term negative when that announcement comes and given the legal claims against Steinhoff it seems inevitable that the majority of that stock will come to the market."
Sasfin Securities deputy chair David Shapiro said the problem for Pepkor is that "anything related to Steinhoff still has a stigma attached".
"It's something we worry about as well. There are so many private court cases and I don't think we have seen the end of litigation around Steinhoff.
"I think they will have to sell down assets and we don't know how this is going to end and how this could affect Pepkor," said Shapiro.
So while the Steinhoff saga could well and truly be behind Pepkor and "might only be an outside worry", it is "still something that overhangs the group and so we wait for that".
Steinhoff will have to
— David Shapiro
sell assets and we
don ’t know how this
could affect Pepkor
As far as Steinhoff and its plans are concerned, Pepkor CEO Leon Lourens says it has been almost three years since the corporate scandal erupted and "the one thing we have learnt is that you can't be fixated with what happens with their [Steinhoff's] actions over that period of time because it is just distracting".
"We try and focus more on the operational side as far as we possibly can and in that sense there is no interference from Steinhoff at all. We run the businesses as well as we possibly can and we have done so relatively successfully, if I might say so myself, over the three years."
Lourens said how and when Steinhoff would elect to sell down Pepkor shares was "the one thing we obviously don't have control over and we seriously don't even know what they plan and what they will do about it".
But, he added, this "sort of potential event" is built into Pepkor's share price.
Lourens believes that when Steinhoff reduces its interest in Pepkor it will be an "orderly sell-off of the shares over time, which is a better way of doing it".
He said it is not in Steinhoff's interest to "dump all the stock".
"If they sell too many shares then it starts affecting their share price and then it affects their most important asset."
Steinhoff spokesperson Tyrrel Murray confirmed that part of the proposed settlement to litigants would take the form of Pepkor shares, saying that if the group's proposal was accepted, Steinhoff's shareholding in Pepkor would be reduced to around 52%.
Murray said Steinhoff had previously told the market that the settlement could be a positive for Pepkor because "this uncertainty would be lifted and there will be more shares available in the market to be traded".
But it would seem Steinhoff will hang onto some interest in Pepkor.
Asked about this, Murray said Steinhoff had previously stated that "Pepkor is a great asset".
Pepkor's resilience was underlined in the latest set of results, with the group reporting a 3.6% growth in revenue to R63.7bn for the year ended September 30.
It said "this was an exceptional result considering the fact that the group lost approximately R5bn in sales during the hard lockdown period when retail sales were closed".
Watkins said Pepkor reported "good numbers, both from a revenue perspective, a profitability perspective and a balance sheet perspective, because they have paid down so much debt".
Pepkor's weakness had always been its balance sheet, but the R6.9bn paydown in debt during the period under review had reduced debt to "within manageable levels".
"I think they've [management] done a very good job from a revenue perspective, which I think demonstrates the resilience of their business even in very trying times. I think it is one of the best apparel businesses in SA and I think these numbers vindicate that."
Shapiro said: "Companies like Pepkor who are focused on the bottom end of the market, whether it's affordable clothing or even homeware, are very well placed and better placed than other retail companies."
Pepkor also reported it was gaining market share across its various categories, saying "240 basis points is a big market share gain" for clothing footwear and home. It gained 370 basis points on cellular handsets.
"So it's really been a very good period for us in that sense," said Lourens, who declined to disclose the group's total market share.
The group is also confident about keeping the market share that it has won.
"We caught the rest of the market unawares, so we will have to see how they react to this," said Lourens.
"But it is very pleasing for us and I think going forward, even if the economy is not great, we will at least be able to hang onto the market share, so that is what we will be fighting for going forward."
As for acquisitions, he said the group would "have to see what opportunities come along".
"One thing I will say is relatively clear to most of us is that there will be opportunities. It's just the circumstances of Covid that will force that to happen. Whether the right opportunity is local or abroad, that we will have to see when it comes along.
"But if the right opportunity comes along we will be interested."
