Bangladesh and Sri Lanka

OK, so I took a closer look at the Singer operations in Bangladesh and Sri Lanka  (this is a post-script to the Retail Holdings post).

Sum of the parts is a good and fine, but if the underlying stocks are overvalued or trading at silly levels, then it doesn't matter if something is trading at a 50% discount to the sum-of-the-parts (unless you can buy the parent and short the subsidiaries).

So anyway, I just wanted to take a quick look at Singer Bangladesh and Singer Sri Lanka to see if it is reasonably valued, not that I would know what stocks traded in these markets are worth.

All I need is for reasonable valuations, not something bubble-like and silly and I would be happy.

First, let's do the easy one.  Singer Sri Lanka has already published their 2011 annual report.  You can get it on their website and it's in English.  So this wasn't a hard one to do.  Singer Bangladesh is trickier as they haven't published their 2011 report yet even though the ReHo annual report shows 2011 full year sales and operating earnings.  Also, 2010 was an abnormal year for Singer Bangladesh as they booked a huge gain on a sale.

Singer Sri Lanka
Anyway, let's take a look at Singer Sri Lanka first.

Here is some historical data from their annual report.

Sales growth has averaged around 18%/year since 2002 and pretax profits have grown +24%/year.  EPS has grown +22%/year.  Since the end of the civil war in 2009, sales grew +35% in 2010 and 37% in 2011.  If this is a country specific issue (end of civil war), then this trend may continue and if so, Singer Sri Lanka can be worth quite a bit.

At year-end 2011, the p/e ratio of Singer Sri Lanka was 13x, but the price has come down to a recent 107 Rupees, for a p/e ratio of 10.6x.  That's pretty cheap for a company that has grown sales and earnings in the past decade with accelerating growth and with very good return on average net assets.

Of course, this is an emerging market so there are political and other risks that I can't quite quantify.  But if money starts moving back into emerging markets (money has been moving out recently since the financial crisis), I can easily see this trading at a higher multiple.

The average year-end p/e ratio since 2002 just so happens to be 13x.  (So the year-end 'mark-to-market' of Singer Sri Lanka on ReHo's books is not unreasonable at all).

So Singer Sri Lanka's valuation passes the smell test, at least the initial pass.



Singer Bangladesh

Here is the historical data for Singer Bangladesh, but only going up to year-end 2010.  The 2011 annual report is not out yet.  I will post an update when that comes out.  But for now, let's look at this one:



I just wanted to get a p/e ratio on recent earnings, but 2010 had a huge gain on a sale of a subsidiary and the 2011 figures are not available yet.

So first, we can just look at a normalized earnings figure for 2010.  In 2010, they had a gain of 1.8 billion Taka, so their operating profit excluding that would have been 470 million Taka.  Using a 27.5% tax rate, that's gives an after tax profit of 340 million Taka.  With 3.93 million shares outstanding, that's an EPS of  around 87 Taka.  The stock is trading at 2,180 so that gives a p/e ratio of 25x.

The average p/e ratio of Singer Bangladesh since 2001 has been 22x (excluding 2010 which had the huge gain and showed a p/e ratio of 8.2x).

So Singer Bangladesh is trading at pretty much where it always trades, with a high above 30x p/e and a low p/e of 11x (on a year-end basis).

For the first nine months of 2011, Singer Bangladesh had an EPS of 79.18, so just doing a simple 4/3 annualization of that gives an EPS of around 100, which would give a p/e ratio of 22x.

So on this basis, 22x p/e seems to be just about the average p/e for this stock since 2001.  Singer Bangladesh has grown sales 16%/year between 2001 and 2010, and as stated in the ReHo 2011 annual report, on a tax adjusted basis, sales grew 14% in 2011.

It seems that it is growing well along with the economy.

Conclusion
I just took a quick look at these entities that are the two big components of Singer Asia/Retail Holdings' value.  Of course, this is not meant to be an in depth look/research into these companies.  That would be difficult as the historical annual reports are not available and these companies do not file 20-F or 10-K's.

But even a quick look like this would give quite a bit more comfort than the usual sum-of-the-parts, "hey, this stock is trading for way less than the sum of their listed holdings!".

At least we know that things are not ridiculously overvalued or anything like that.

Anyway, I do intend to follow this as further details are announced (Singer Bangladesh's 2011 annual report etc...), so stay tuned.

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.


Fundamentals
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.

Risks
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!