Thursday, March 29, 2012

Retail Holdings

Here's an interesting 'liquidation play' I've had for a while (paid $10/share or so a while back) but still might look pretty interesting.

Retail Holdings (ReHo/ RHDGF) is just a holding company that owns 56.2% of Singer Asia, which is just another holding company that holds shares in Singer Bangladesh, Singer Sri Lanka, Singer Pakistan, Singer India, Singer Thailand and some others.

There interesting point here is that most of these holdings are publicy listed themselves and Retail Holdings itself (ReHo) trades for way below the current market value of these entities. 

The Singer stores in these countries are basically retailers that sell white goods, consumer electronics and even motorcycles.  The two big ones are Singer Sri Lanka and Singer Bangladesh.

Retail Holdings just announced their 2011 results and the stock popped 20% yesterday.  Their annual report in the past couple of years has included the calculation of the market value of their underlying holdings. 

Anyway, I don't want to go into the detail of each company (you can look at annual reports of the respective companies or read the annual report for Singer Asia that summarizes it all.  The ReHo annual report too summarizes each company's results), but here is the gist of the play.

In the beginning of Reho's annual report is the mission statement:

  "ReHo's strategy is to maximize and monetize the value of it's assets, with the medium-term objective of liquidating the company and distributing the resulting funds and any remaining assets to its shareholders".

Sum of the Parts
The ReHo annual report conveniently breaks down the value at Reho if you sum up the market value of the listed subsidiaries as of December 2011.   The valuation takes into account three main components of Reho's value:  The value of the listed (and other) subsidiaries, cash held at Reho and the SVP Notes (notes from an entity that ReHo sold assets to).

The market value of holdings attributable to ReHo at December-end 2011 was $157.1 million
The notional amount of SVP notes $26.8 million
and Cash of $2.9 million.

This totalled $186.8 million. With 5.3 million shares outstanding, this comes to $35.20/share.

Here is the table for Singer Asia's holdings from ReHo's annual report (ReHo owns 56.2% of Singer Asia):

So even with the current stock of ReHo up to $21/share, it is trading at 60% of what it was worth at the end of December 2011.

I did a quick check on the holdings as stock market data is available online for Bangladesh, Sri Lanka etc...  

Using current prices, current holdings attributable to ReHo would be worth $128 million due to some weakness in some of these stock markets.   Adding up the other parts we get a value of $158 million.  And again, with 5.3 million shares outstanding, that comes to $29.80/share

So even with the decline in value of the holdings, ReHo is trading at 70%, or a 30% discount to the value of the underlying assets.

Singer Asia For Sale
We know, because ReHo has said so many times, that Singer Asia is for sale.  There was an article in the Sri Lanka Daily News back on September 8, 2011 that said "Singer Asia for sale for U.S. $350 million".  The article sited a source that said Singer Sri Lanka is worth $200 million and Singer Bangladesh is worth up to $120 million.  It said that the other parts, Pakistan, India and Thailand are too small (to make a difference in total valuation).

If Singer Asia was sold for $350 million, that would be worth $197 million to ReHo as ReHo owns 56.2% of it.  With 5.3 million shares outstanding, that comes to $37/share versus the current stock price of $21/share.

Of course, just because a local newspaper said that Singer Asia is for sale for a certain price doesn't mean it will get sold at that price or even that it will get sold at all.

But what makes this idea really interesting, actually, is the operating momentum at the companies.

Here is the consolidated revenues of Singer Asia:

Thailand is in blue because it's not a consolidated subsidiary (equity method holding).  The sales amount attributable to Singer Asia was added back to show the underlying trend in the owned businesses.

You can see the revenues slowed or reversed during the global financial crisis and is gaining momentum as the economies recover. 

Singer Sri Lanka

From the above table, we see that $126 million of the $276 million in value is in Singer Sri Lanka.  Sri Lanka is not a particularly large country (population of 20 million or so), but what is really interesting is that Sri Lanka may be operating under it's own dynamic; the civil war ended in 2009 and economic growth has really taken off since then with back-to-back years of economic growth above 8%/year.   If this trend continues, this can really add some value to ReHo.  It may also interest some serious buyers for Singer Asia, either as a whole or parts of it. 

Sales for the group (Sri Lanka) grew +40% and operating profits grew +50%.

Part of the delay in liquidiating Singer Asia/ReHo has to do with the global financial crisis, but if the economies start to normalize and this sort of operational momentum continues, then a sale at a pretty decent price is not a total stretch.

As of December 2011, I think Singer Sri Lanka was valued at 13x or so p/e ratio, so it wasn't expensive by any means.

I may post something about these separate subsidiaries in a future post as I think it is very interesting to look at.

Singer Bangladesh
This is the other large piece of Singer Asia.  Earnings-wise, it's not doing as well as Sri Lanka (as far as momentum is concerned), but sales seem to be growing at a nice clip.

Sales grew +5.4%, but if adjusted for a difference in accounting for local taxes, sales grew +14%.

Singer Thailand
Singer Thailand is small, but larger than India or Pakistan in terms of market value.  Thailand also seems to be turning around and growing revenues.

So ReHo is certainly looking pretty interesting even if the value of the public holdings are down 20% or so year-to-date. 

If this operating momentum continues, the value of the subsidiaries may increase and buyer interest may emerge to make possible a liquidation.

Other Issues
I have read some other analysis on ReHo as a sum-of-the-parts/liquidation play, but none of them really focus on what would happen if Singer Asia is not liquidated.  If that is the case, then the $2 million or so in compensation and other costs have to be capitalized and deducted from the value of the whole; the sum of the parts don't include a deduction in these expenses 'below the line'.

Also, I have an email out to ReHo, but I wonder about the license/royalty fees paid to SVP Holdings.  ReHo sold the rights to the Singer name back in 2003 or so and Singer Asia has to pay 1% of consolidated sales as a licencing fee to SVP every year. 

I looked at the notes in the annual reports for both Singer Bangladesh and Singer Sri Lanka and I don't see an item for this royalty.

If the listed subsidiaries do NOT pay this royalty to Singer Asia but Singer Asia DOES pay it out, then this 1% of sales cost is not deducted from the sum-of-the-parts valuation using the market values of the listed subsidiaries.

I was wondering if the listed subsidiaries in fact pays these royalties to Singer Asia in some way.  If not, then this 1% has to be deducted from the sum of the market values of the listed entities.

I will look further into this issue as it can have a large impact on the value of Reho (even though it would reduce the discount).

[ Since posting this, I have learned that Singer Asia does in fact get paid royalties/licences from subsidiaries and others and those payments received by Singer Asia are larger than the amount paid out by Singer Asia, so this is a non-issue.  (This comment added on April 2, 2012) ]
In a later post, I will take a long term look at Singer Sri Lanka and Singer Bangladesh from their annual report and will make an update post on the licensing fee/royalty issue if I get an answer from ReHo.

This is certainly an interesting play but there are risks, of course.  This a Curacao based company (not U.S.) and is only listed on the pink sheets so it is not very liquid.  I don't have a good understanding of Curacao corporate law or laws regarding shareholder rights (not that I have a good understanding of that in the U.S. either, but...).

I don't follow and haven't followed the economies/politics in Bangladesh and Sri Lanka so I can't say I have a good feel how these economies would react to an implosion in the Chinese economy, slowing Indian economy and things like that.

These companies are in emerging, if not frontier economies and things tend to be volatile in this area so I would not feel comfortable with too large a position here. 

This idea is certainly not for everybody. 

As usual, do your own work!


  1. Excellent Job! Thanks for creating a sensible topic that suits the taste of your readers. Keep up the good Work.

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  2. I was wondering if you have updated your view on RHDGF as the IPO did not occur. The third quarter results for the operating companies was strong and I am estimating that the momentum will carry into the 4th Q of 2013 and of course 2014. Outside of an IPO there is always the possibility of an outside party buying the company. I see lots of opportunities outside of the operating results such as undervalued RE as this company has been doing business in Asia since the 1870's.

    1. Hi,

      I haven't actually taken a close look in a while; I should. As long as the underlying businesses are doing OK, it should be fine. We all know emerging markets are having problems, so from a market point of view, value may not be realized soon, but that's fine. When emerging markets recover or stabilize, there should be other opportunities for them to realize some value.

    2. Very disappointing results for year end 2013. Looking for incremental growth specially Sri Lanka in 2014. In a year where emerging markets took a big hit RHDGF kept investing and that is a big unknown if that was the right strategy. There are a few of us that follow the stock but our patience is wearing thin. Not sure if an IPO can be realized considering 2013 results. Would selling each individual business locally make more sense.

    3. Hi,

      Yes, a little disappointing, but I think a lot of it is just cyclical; emerging markets are just in a sort of down cycle market-wise (China really cheap) and economically (linked to China slowdown etc.). But I don't think a lot of this disappointment is the doing of management.

      Value realization may take time, but when things turn up (which they eventually will) they may be able to realize a lot of value.

      This isn't one of those holdings that I would track too closely in terms of near-term performance due to the seemingly heavily cyclical nature of the markets and economies.

      On the other hand, I do understand the impatience as if the value isn't realized at some point, international competitors can become a factor... But judging from their progress to date, that may not become a factor for a long time... (intl retailers have a very different model and might need a bigger and wealthier middle class).

      Anyway, we'll see how it goes.