Ghost Bites (Mondi | Steinhoff – Pepco)
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Mondi completes the Duino mill deal
The deal was first announced in August 2022
Mondi is a good example of a JSE-listed company that has a significant international footprint. This footprint is growing, with the acquisition of the Duino mill in Italy now completed.
The total deal consideration was €40 million, so this is a very small deal in the context of Mondi’s market cap of over R146 billion.
This is a strategic deal for Mondi’s efforts in Central Europe and Turkey, as the mill is close to two important export harbours. There will be many changes at this mill, with plans to convert the existing paper machine to produce high quality recycled containerboard.
The estimated investment required for this project is €200 million, which is 5x the size of the acquisition price. This is a solid example of a company buying a base to work from.
Pepco: a window into Europe
The latest quarter is a reminder of what Steinhoff could’ve been
Pepco is owned by Steinhoff. It’s a great business. Sadly, it sits far down in the group structure, with a ton of debt sitting above it at group level. For that reason, the creditors are rubbing their hands in glee about this business, with shareholders set to be squeezed out.
Nevertheless, Pepco is a really useful barometer for the state of play in Europe, particularly in value retail. This means retail formats aimed at lower income shoppers who are highly price sensitive. In other words: most people.
In the three months ended December (the first quarter of this financial year), revenue was up 27% on a constant currency basis and 24% as reported. There’s a major effort underway to increase the store footprint, evidenced by like-for-like growth coming in at only 13%, well below the total growth (but still impressive). The difference between reported growth and like-for-like growth is the new stores that were added in the past year.
The excitement is firmly in the Pepco format, with growth up 19.7% on a like-for-like basis vs. only 4.4% at Poundland Group.
The growth in the footprint isn’t slowing down. There are currently 4,066 stores in the group and the rollout plan is for 550 net new stores in this financial year (including those opened in the quarter just reported on).
When growing quickly, the challenge is always (1) not going bankrupt from running out of cash and (2) maintaining margins. Holding company Steinhoff has already nearly achieved the first outcome, so hopefully lightning won’t strike twice. This leaves us with margins, which need to be watched closely. It takes a while for new stores to ramp up to the desired level of profitability, hence why EBITDA is only up “mid-teens” at a time when revenue is growing in the mid-20s, a clear example of margin contraction.
Investors (also known as the people Steinhoff owes money to) will be looking for margin expansion to come through as the store rollout matures.
Little Bites:
- Andrew Waller (a name you may recognise from Grindrod) has bought shares worth R1.68 million in Spar. He is a non-executive director of the retailer.
- York Timbers has clarified the extent of the shareholding of A2 Investment Partners. The activist investment group owns 11.12% in the company directly and controls a further 20.2% via Peresec.
