Retail Holdings Tries Investor Patience, But Value Continues To Grow – RHDGF

I don’t spend much time revisiting companies I’ve previously written up for this blog, but now and then it’s fun to check in and see how the a business has progressed, as well as its stock’s performance. One company I’ve written on a few times is Retail Holdings NV. For anyone not familiar with the company, Retail Holdings owns stakes in various consumer durables companies in Southeast Asia, all of them doing business under the historic “Singer” brand name. When I first wrote about the company in 2012, Retail Holdings traded at a large discount to the value of its publicly-traded subsidiaries.

Fast-forward to today, and the company still trades at a large discount to the value of its publicly-traded subsidiaries. In fact, the discount has grown, due to the increasing value of those subsidiaries. Retail Holdings own stock has been frustratingly, tryingly lethargic. ReHo’s stock price at the time of my original article nearly two years ago was $22.75. Today? It’s $18.05. Even with the two $1.00 dividends in the interim, Retail Holdings’ shareholders have suffered losses while the market is up 40%+.

So what gives? ReHo’s underlying businesses have actually performed well, so that’s not the issue. Consolidated revenues hit a new record high of $458 million for the twelve months ended June 30, 2014, and adjusted operating profits rose 22% since the same period two years ago. And it’s not as if the market values of the company’s subsidiaries have fallen. In fact, the company’s Indian and Bangladeshi holdings have appreciated substantially in 2014.

I suspect that Retail Holdings’ performance is mainly due to two factors. The first and more serious factor is investor distrust. In June 2013, Retail Holdings announced it would pursue an IPO of its Asian holdings. Great news! The market would finally show the stock some respect once a large part of those stockholdings were converted to cash! But alas, it’s wasn’t to be. Several months later,  company scuttled the IPO process citing poor market conditions. Heartbreak. I can’t blame the company entirely. The market really did turn sour as investors grew nervous about the India’s economic stability. But the damage was done, and now the company suffers from a credibility deficit. Investors will be much less likely to trust Retail Holdings when the IPO process is eventually re-started. Second, investors woke up the reality of doing business in developing economies. And Retail Holdings operates in some of the most “developing.” Pakistan’s issues are well-known, and Sri Lanka only recently put a 30-year civil war to rest. Even Thailand, tourist hotspot that it is, was wracked by protests and work stoppages this year. Together, these nations account for almost half of ReHo’s asset value. Retail Holdings’ largest asset by market value, Singer Bangladesh, also suffered the effects of instability. Singer stores in Bangladesh were shut down for over two months in 2013 by strikes.

When I first wrote about Retail Holdings back in 2012, I pegged net asset value per share at around $27. NAV per share has risen at a healthy rate since on the strength of rising revenues and earnings. Precise market cap figures for some of ReHo’s subsidiaries are tough to track down, but today’s NAV breakdown looks much like this:

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In addition to its corporate subsidiaries, Retail Holdings also owns some securities, notes it was issued during its reorganization a decade ago. These can be generally described as “distressed” and have undergone multiple restructurings. The par value of these notes is $23.8 million, or about $4.50 per share. However, I think a haircut is warranted due to the non-marketability and dubious credit quality of the notes. Assuming a 30% discount yields per share value of $3.15.

Retail Holdings also holds some corporate-level cash, though the exact amount is uncertain and is probably low following the recent dividend. I’ll ignore it. The combined per share value of the public subsidies and notes is $34.81 by my estimate, a 93% premium to today’s closing price for Retail Holdings’ shares of $18.05. Put differently, ReHo shares are trading at a discount to NAV of at least 48%.

So what will it take for Retail Holdings shares to finally reach their intrinsic value? Probably an IPO of the company’s Asian assets, though who knows when that will take place. In the meantime, I am content to wait, so long as the intrinsic value of the company’s Asian subsidiaries continues to rise. This seems likely, as all the various operating subsidiaries have showed healthy gains in revenues and income over the past several years and occupy a strong market position in their economies. It will be a happy day when Retail Holdings officially completes an IPO or goes private, even if we investors must wait awhile longer.

 

Alluvial Capital Managment, LLC holds shares of Retail Holdings NV for client accounts.

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

Rand Worldwide, Inc. – RWWI

It’s good to be back! I hope readers will excuse my weeks-long radio silence. A full travel itinerary took me to Chicago, Savannah, and elsewhere for business purposes and otherwise. During this stretch I also found the time to participate in a webinar, talking about strategies I use to identify attractive companies. A replay can be found here. My segment starts about an hour into the recording, though sadly the audio recording and the Powerpoint slides I used seem to be badly out-of-sync.

Today’s value idea is a company I came across only recently, and one I own in size for Alluvial Capital Management, LLC clients. It has practically everything I like to see in a micro-cap stock: healthy top-line growth, expanding margins, excellent free cash flow, capable and shareholder-oriented management and best of all, a very modest valuation.

Rand Worldwide, Inc. is a value-added software reseller. Design and engineering companies use complicated and expensive software suites from companies like Autodesk, Dassault Systemes, and Autonomy. However, these software packages are not exactly effective if employees are not properly trained in their use, or if the software won’t integrate with other software systems, often older or proprietary. This is where Rand Worldwide steps in, providing training and software management services that help companies maximize their software investments. Rand’s relationship with Autodesk is especially important, with Autodesk products accounting for 95% of Rand’s software resale revenues.

Rand’s recent results have been strong, with total revenues rising 11.0% in fiscal 2014 to a record $91.6 million. This revenue growth is being buoyed by chief software supplier Autodesk’s own strong results. After years of moribund revenues, Autodesk returned to growth with sales rising 3.9% year-over-year for the twelve trailing months completed July 31, 2014. More recent results have been even better, with revenues rising 8.6% for the quarter ended July 31, 2014 versus the same quarter one year ago. For the fiscal year ending January 31, 2015, Autodesk is guiding for revenue growth of 7-9%. These results are worth watching, because Rand’s own revenues appear to track closely with the rising and falling fortunes of Autodesk.

Rising revenues and good cost control creates positive operating leverage. Rand’s results are the perfect example. The year’s 11.0% revenue increased resulted in a 59.6% increase in operating income and a 42.8% increase in EBITDA as the company was able to spread stable fixed costs over a larger gross profit base. Operating margins, adjusted for a one-time goodwill write down and contingent consideration change, rose to 8.2% from 5.7% the previous year. Looking below the operating income line, the company’s minimal interest expenses and net tax benefit allowed it to report a large net income figure for the year just ended.

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In Rand Worldwide, we have a company experiencing healthy grow and record revenues, which is leading to margin expansion and large earnings increases. A nice scenario. However, that’s just the start. Since the end of the fiscal year, Rand has taken multiple steps to increase its market value. First, the company has sold off a loss-making division, Rand Secure Data. The sales proceeds were minimal, but by selling the division Rand disposed of a major headwind. In 2014 alone, Rand Secure Data was responsible for an operating loss of $2.6 million. Rand’s trailing operating income ex-Secure Data would have been 34.1% higher.

Second, Rand Worldwide is in the midst of completing a huge share tender funded via a debt issuance. In the tender offer, Rand Worldwide will repurchase 27.5 million shares, equal to 50.5% of basic shares outstanding. The tender price is $1.20 per share and will cost the company $33.0 million. The cash outlay will be funded from cash on hand, plus a term loan of $25 million. Rand will also enter into a revolving line of credit sufficient to support business operations.

A leveraged recapitalization makes abundant sense for a company like Rand Worldwide. The company generates a ton of cash and has minimal investment requirements. Prior to the recap, the company used practically no leverage, so replacing a large chunk of the capital structure with cheap debt should reduce its cost of capital significantly. From a sheerly mathematical perspective, the figures are incredibly compelling. Per its press release dated September 29, Rand earned 16 cents per diluted share from continuing operations. At a repurchase price of $1.20, rand is buying its own shares at an earnings yield of 13.3%, compared with a cost of debt that will likely fall in the mid single-digits or lower.

Rand has released pro forma financial statements for the recently completed fiscal year as if both the Secure Data sale and the tender offer had been completed at the very beginning of the fiscal year.

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In additional to the company’s own projections, I’ve gone ahead and provided net income estimates at normalized tax rates. On a trailing basis, the Secure Data divestiture and tender offer/recap would have had a major impact on normalized earnings per share.

As I write, Rand shares last traded at $1.29, with a market cap (pro forma for the tender offer) of $38.1 million, fully diluted. The company is extremely cheap on both an absolute basis and in comparison to similar technological services companies.

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I always like paying mid single-digit multiples for healthy and growing businesses, but Rand has another factor that sweetens the deal: highly competent and incentivized owners. Once the tender offer is completed, Rand’s majority owner will be Peter Kamin, by way of his 3K Partnership. I have long admired Mr. Kamin and his track record (in general and with micro-cap stocks) is to be admired. Peter Kamin was a founding partner at the extraordinarily successful ValueAct Capital, and left to found his own firm in 2011. Long-time readers of this blog may recognize Mr. Kamin’s name from his involvement in Calloway’s Nursery and Rockford Corp.

In connection with Mr. Kamin’s takeover, he will also install his own choice for CEO (the company’s current CFO, Lawrence Rychlak.)

Examining another of Mr. Kamin’s ventures may shed some light on a potential future course for Rand Worldwide. Peter Kamin is a large shareholder and director of MAM Software Group, Inc. a company that sells enterprise software to the automotive after-market industry. This software provides function like inventory and store management for tire distributors and other similar businesses. Rand Worldwide and MAM Software Group are not identical; Rand mainly sources its software elsewhere while MAM develops and sells its own. However, the two businesses are like enough that similar strategies apply to managing and growing each company.

When Mr. Kamin joined MAM Software as a director in May, 2012, MAM traded over-the-counter at a price of just over $2.00. Trailing revenues were $25.7 million and trailing EBIT was $3.9 million. MAM’s enterprise value was $26.9 million for an EV/Revenue multiple of 1.0 and an EV/EBIT multiple of 6.8. Fast-forward to the present. Since May of 2012, MAM uplisted to the NASDAQ and grew its trailing revenues by 19.3% to $30.7 million. Operating profits are actually down on higher R&D and marketing expenses, which the company characterizes as investments in the company’s future. But the company’s share price? Up 128%. MAM now trades at an EV/Revenue multiple of 1.9.

That’s the power of moving from the obscurity and neglect of the OTC markets to the spotlight of the a major exchange. MAM’s business certainly grew, but the price appreciation was mainly a factor of increased investor awareness, which lead the company to trade at a more normal industry multiple.  I anticipate a similar story from Rand Worldwide. If the company can build on its revenue and profit momentum, I expect Mr. Kamin will list the company on a major exchange and allow the market to re-price Rand to an industry standard multiple. An EV/Revenue multiple of only 1.0 times current revenues would mean 68% upside for shares.

Or, he’ll take it private. He’s done that, too. Anybody remember Abatix? Also Kamin.

Of course, things might not turn out so rosily for Rand. If customers were to sour on Autodesk’s software offerings, demand for Rand’s training and management services would be impacted. It’s also possible that a bad economy could hurt revenues, or the company could make an ill-considered move into an industry where it lacks expertise.

All in all, I view Rand as a very cheap way to invest alongside a very shrewd operator in Mr. Kamin, and to take advantage of the company’s smart financial engineering before the market takes notice.

 

Alluvial Capital Managment, LLC holds shares of Rand Worldwide, Inc. for client accounts.

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.