Retail Holdings N.V. (OTCPK:RHDGF) is an obscure and undervalued holding company with three principal assets:
- cash and cash equivalents,
- seller notes, such as the KSIN Holdings, Ltd (“KSIN”) 11% notes due February 2014, and
- a 56.2% equity interest in Singer Asia Limited (“Singer Asia”), a distributor of consumer durable products, primarily for the home, in selected emerging markets in Asia, with consumer credit and other financial services available to qualified customers.
At a recent trading price of $14, the company is trading for almost a 30% discount to intrinsic value on an earnings basis and a whopping 65% discount to intrinsic value on a net asset value basis.
Retail Holdings (the “company”) is a holding company with no operations at the holding company level. All of its operations come from its majority ownership of Singer Asia. The company’s strategy, as it has stated many times over the years, is to maximize and monetize the value of its assets, with the medium-term objective of liquidating the company and distributing the resulting funds and any remaining assets to its shareholders. The company foresees monetizing its investment in Singer Asia either through a public offering and subsequent distribution of any remaining Singer Asia shares or through a private sale of the Singer Asia company.
Singer Asia has been operating in South Asia since the late 1800s. Singer Asia is also a holding company, with an aggregate of around $257 million in trailing twelve months (TTM) revenue, which owns majority stakes in publicly traded subsidiaries in Bangladesh, India, Pakistan and Sri Lanka and a minority stake in a publicly traded subsidiary in Thailand. The Bangladesh, Pakistan and Sri Lankan subsidiaries are large retailers of durable consumer and electronic products that have very large presences and market share. The Indian subsidiary is a wholesale distributor of sewing products that also owns a network of 17 Singer retail stores in attractive locations in India as well as being one of only two multinationals with the legal right to operate a nationwide retail operation in India.
The Thailand subsidiary is the largest direct (door-to-door) retailer of durable consumer goods in Thailand, and they have recently increased their profitability after two years of cost-cutting efforts. Singer’s long operating history of over 100 years in South Asia has also afforded the company with great brand equity and trust among consumers.
As an aside, the CEO, Stephen Goodman, owns 19.6% of the company’s shares and his spouse owns another 5.6% of the company’s shares through a trust. This has the great effect of aligning management’s interest with shareholders. The company has also expressed an interest in using free cash flow to repurchase shares, since it sees a discount in the market value of the company versus its tangible book value of $13.30 per share. (The tangible book value does not take into account increased value in the Singer Asia subsidiary based on publicly traded market prices.)
The best way to look at valuation is to separate out the (1) cash and cash equivalents and (2) KSIN Notes and (3) then taking two different views on valuation of the Singer Asia holdings.
Cash and cash equivalents
Since the company consolidates its majority controlled subsidiaries onto its balances sheets, it’s rather difficult to pick apart the amount of excess cash and cash equivalents that would accrue to the company’s equity holders.
Thankfully, two recent developments have made it easier for us to figure out the amount of cash that might be due to shareholders. The June 30, 2010 Semi-Annual Summary report shows that cash and cash equivalents, net of bank overdrafts, went from a positive $8.6 million as of December 31, 2009 to a negative $1.6 million as of June 30, 2010. On August 18, 2010, the company also announced that, in July 2010, the Bangladesh subsidiary divested its remaining 35.6% equity interest in International Leasing and Financial Services Ltd. (“ILFS”) for a total net profit of $22.2 million with earnings per share of $1.76 attributable to the company’s equity holders.
Based on those numbers, the company should have at least $7.3 million in excess cash and cash equivalents or $1.40 per share.
In September 2004, the company sold the Singer worldwide sewing business and the ownership of the Singer trademark to KSIN, now called SVP Holdings Ltd. (“SVP”), an affiliate of funds managed by Kohlberg & Co., LLC. As part of that sale, KSIN issued a subordinated promissory note to the company that is currently worth $25.26 million that is due in February 2014. That disbursement should be worth roughly $4.82 per share.
For the next two sections, please reference the attached spreadsheet.
Based on the August 18, 2010 special announcement concerning the one-time gain of $22.2 million to Singer Asia or $1.76 per share to the company’s equity holders, the company is forecasting 2010 profits of in excess of $37 million at Singer Asia with $3.25 per share attributable to the company’s equity holders. In other words, in addition to the $4.2 million or $0.80 per share that the company has already made for the six months ended June 30, 2010, the company is forecasting an additional $0.70 per share for the second half of the year. This represents a total earnings per share of $1.50, and I believe that the differential between accounting depreciation and appreciation and maintenance capital expenditures would show free cash flows of $2.00 per share.
From the spreadsheet, assuming that the company can grow their earnings/FCF at a long-term 3% clip, which would seem a bit low for an emerging markets company, and discounting at 11%, we get a share price for the company of between $13.28 to $18.58 per share. A quick multiple check indicates that both calculations fall within an 8-9x multiple, which is again pretty conservative for emerging markets companies.
From an assets point of view, we can figure out a valuation for the company’s holdings of Singer Asia based on a sum-of-the-parts for its publicly-traded subsidiaries.
This page shows Singer Asia’s ownership amounts in each of its subsidiaries:
From there, we can find the publicly quoted market capitalization for each of the companies from the official stock market exchanges in each of the countries:
The spreadsheet adjusts each of these market caps for (1) the company’s 56.2% ownership in Singer Asia, (2) Singer Asia’s ownership in each of the subsidiaries, and (3) the exchange ratio for each of these countries into U.S. dollars.
Although some individuals think a discount is justified for the holding company structure, I think that a discount is not applicable here. (Even if it is, my calculations show that a 50% discounted asset value calculation comes out to $16.95 per share.) Since the company plans to sell its holdings of Singer Asia and distribute the proceeds to the company’s shareholders, I think that a full valuation of $177.7 million or $33.90 per share is a more appropriate valuation for the company’s share of Singer Asia.
In summary, when we bring the earnings power calculation or the asset value calculation together with the cash and KSIN calculations, we get a range of intrinsic values for the company from $19.50 to $40.12 per share. When we put this together with management’s repeated statements that they are looking towards monetizing their holdings of Singer Asia and the KSIN notes before liquidating the company and distributing the proceeds to equity holders, I feel pretty comfortable that the eventual value that shareholders receive over the years will be closer to $40 per share than $19 per share.
- The company recently decided to issue a $0.80 per share dividend for a yield of around 6%. The company has stated that it is interested in continuing to issue increased dividends in the future as a way to return value to the shareholders, which should put the company on the map for other investors.
- The company will likely distribute the excess cash from monetization of the KSIN notes via a special dividend, which would bring more investor awareness to this company.
- Currently, each of Singer Asia’s subsidiaries (except for the Pakistan subsidiary) is trading at an all-time high, which might could be an indication that that time is nearing for the company to execute its strategy of monetizing the Singer Asia asset.
- The company’s monetization of the KSIN notes depends on either SVP’s ability refinance the note in a year (dependent on the credit environment), SVP’s ability to repay the note based out of cash balances or profit (dependent on the economic environment) or Kohlberg & Co.’s willingness to inject equity into the company to pay off the debt.
- Singer Asia’s profitability is dependent on the economic climate and consumer spending in each of the company’s operating geographies.
Disclosure: Long RHDGF.PK