Long-time readers may remember previous posts on Retail Holdings NV. “ReHo” is one of my longest-held and sadly, most stubbornly lackluster performers. Still, I remain convinced that Retail Holdings’ collection of profitable and growing Asian businesses and large discount to NAV will eventually result in substantial appreciation. ReHo recently published its first half 2015 results. Let’s take a look at how they did, and how the company’s earnings and NAV have developed.
Reho’s semi-annual report (available here) reveals a few major changes in the company’s assets and operations. First, Singer Thailand is no longer a Singer Asia subsidiary. In June, Singer Asia sold its 40% stake in Singer Thailand for $44.8 million. In CEO Stephen Goodman’s words,
“The sale reflects the unique circumstances of Singer Thailand: the Company only had a 40% stake compared to the very much larger, majority stakes in the Company’s other operations, and Singer Thailand employs a very different, direct selling business model, as compared to the retail and wholesale business models employed elsewhere.”
Mr. Goodman went on to say there are no plans for any immediate disposition of the company’s remaining subsidiaries, and the use of the proceeds of the Singer Thailand sale is yet to be determined.
The second major revelation is a large writedown in the value of the SVP notes that ReHo holds. These notes have been distressed for a long while and have undergone multiple restructurings. In June, SVP failed to make a full cash interest payment on the notes, and Retail Holdings moved to classify the notes as impaired, writing down their value from $25.9 million to $13 million. This large impairment necessarily took a toll on ReHo’s reported EPS for the half year. I must admit that the degree of the writedown surprised me. I had long valued the notes at less than par, but declaring the notes impaired by a full 50% indicates a great deal more financial difficulty at SVP than I had expected.
Operational results were good. ReHo’s consolidated revenues rose 14.3% year over year in US dollar terms. Retail Holdings’ two largest subsidiaries (via Singer Asia) are Singer Sri Lanka and Singer Bangladesh, and their fortunes moved in opposite directions. Revenues at the Sri Lanka company soared 26% with pre-tax income up 66%. The Bangladesh division struggled with the country’s continued political and economic instability, and revenues declined 7.6%, dashing earnings. Nonetheless, Singer Bangladesh remained profitable. Singer India also turned in a profit, while Singer Pakistan and the newly-established Singer Cambodia lost money.
ReHo’s reported first half EPS was $1.13 compared to $0.73 a year ago, but the figures are hardly comparable due to the SVP notes impairment and the gain on the Singer Thailand sale.
There are two ways to evaluate Retail Holdings NV’s worth: via its assets and via its earnings power. These are, of course, just the two sides of one coin. Still, a separate look at each is useful. Evaluating Retail Holdings from an asset perspective is easy. Retail Holdings owns 54.1% of Singer Asia, which in turn owns five business units in Asia, four of which are traded on local stock exchanges. Additionally, both Retail Holdings and Singer Asia hold unencumbered cash at the company level and Retail Holdings holds high yield bonds, the SVP notes. Neither Retail Holdings nor Singer Asia has any company-level debt.
Here’s a look at ReHo’s current NAV breakdown.
At a current mid-point of $18.63 or so, ReHo shares trade at a 38% discount to NAV. No surprise. This discount has persisted for years in various degrees. Now let’s take a look at the underlying earnings of Retail Holdings’ subsidiaries. The chart below presents trailing twelve months results for the various Singer entities, divided between the profitable and unprofitable segments.
By buying one share of Retail Holdings, you’re purchasing $1.22 in attributable earnings from Singer Asia’s profitable subsidiaries. The losses of the Pakistani and Cambodian subsidiaries can be ignored because they are separate legal entities that Singer Asia is not obligated to support. After backing out the value of the enterprise’s corporate cash, the SVP notes, and the stock market value of the loss-making Pakistani subsidiary, you’re paying a very reasonable multiple for these fast-growing and profitable businesses, Singer Sri Lanka in particular.
As if there weren’t enough tedious explanations in this post already, here’s the breakdown of the components of Retail Holdings’ share price.
Just to emphasize, Retail Holdings’ share price implies a 9.3x earnings multiple on profitable subsidiaries growing at well over 10% annually with no slowdown in sight. The Sri Lankan subsidiary in particular is attractive. The Sri Lankan economy is one of the world’s fastest-growing following the end of the decades long civil war in 2009.
With all that said, one question remains: why? Specifically, why does Retail Holdings NV trade at 62% of NAV and under 10x the earnings of its fast-growing subsidiaries? I don’t think the answer is difficult to find. ReHo’s corporate configuration could hardly be more awkward. What sensible company would be headquartered in a Caribbean tax shelter, operate solely in South-East Asia, and have its stock traded only in the US? On top of that, Retail Holdings’ stock is highly illiquid and the company is not an SEC filer. The cherry on top is repeated broken promises by management to IPO Singer Asia, only to see the IPO process abandoned each time.
I do have some small amount of sympathy for management. It seems that each time the company begins preparing the Asian operations for an IPO, some market or political crisis erupts that torpedoes the IPO market. But the fact remains that Retail Holdings NV is not likely to achieve its full value until an IPO is achieved.
If all Retail Holdings had going for it was the hope of a future convergence to NAV via an IPO of its Asian operations, I would not be interested. There are hundreds of holding companies that trade at a discount to NAV, and many times these discounts persist for decades. But in Retail Holdings’ case, the NAV is growing rapidly and will continue to grow as the Asian subsidiaries grow revenues at 10-15% annually. It doesn’t take long for serious value creation to result at those rates of growth. 9.3x earnings is a silly valuation for companies on this trajectory.
For that reason, I am happy to hold Retail Holdings for as long as its subsidiaries’ values continue to build. The Singer brand remains exceedingly strong, especially in the company’s primary Sri Lanka market. In the mean time, ReHo will continue to pay out most of its free cash flow in annual distributions, with the possibility of special distributions from asset sales, like Singer Thailand.
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For the Bangladesh sub I have ~77m shares outstanding, last price 166 BDT. Market cap ~164m$. Way off from your numbers. Looks like you took the number of shares outstanding from the annual report and did not adjust for the 25% stock dividend. Then again, I could be mistaken.
They have a tendency to ‘pay out’ these stock dividends in Bangladesh, annoying 🙂 . Have you ever looked at Beximco Pharma? Might be something for you as well.
Wouldn’t you know it, you’re right. I did use the figure from the last financial report and I missed the stock dividend. This means an extra $2.55 per share for RHDGF. That’s substantial. I may edit the post.
I think you are also missing the sale proceeds of the Sri Lanka restructuring since I think that sale closed after 30 June if you check the cash flow statement. Should add another dollar per share in value or so.
Yes, I ignored that deal since it hadn’t yet closed as of the half-year report. Just being conservative. Strange to say, but the gap is so large at this point that another dollar here or there hardly makes a difference.
Yeah, I’m personally marking down the notes even more but no matter what you do it’s pretty much impossible to end up < $30.
Agreed. I don’t know where the SVP notes sit in SVP’s capital structure, but it could be really interesting if they end up restructured with ReHo receiving some equity. Back in the sewing machine business after a decade!
Thanks for this follow up!
Can you expand on “The losses of the Pakistani and Cambodian subsidiaries can be ignored because they are separate legal entities that Singer Asia is not obligated to support.”? Thanks.
Sure. Let me use an analogy. Imagine XYZ Corporation, a holding company with two subsidiaries, A and B, and no holding company-level assets or liabilities. The subsidiaries are not related in any way. They each carry their own debt without cross guarantees and do not sell products to each other or exchange services. In other words, the subsidiaries are truly and totally independent. Now imagine that sub A earns $10 million year after year. Sub B, on the other hand, loses $5 million year after year. So XYZ Corp. earns $5 million each year. Some people might simply capitalize those earnings at 8-12x and conclude that XYZ is worth $40-60 million.
But that would be foolish. After all, an acquirer (or XYZ itself) could choose to shut down or sell the loss-making sub at any point without affecting subsidiary A’s earnings. Almost overnight, XYZ’s earnings would double. So as long as a loss-making subsidiary is truly independent, it’s valid to exclude those losses when computing a holding company’s P/E ratio.
There’s a big exception, and that’s if the loss-making business segment will require ongoing capital infusions from the holding company. If XYZ Corp. indicated a stubborn desire to inject capital into subsidiary B year after year, or had provided guarantees for sub B’s debt or pension plan, that’s a very real liability that must be included when modeling future cash flows.
Singer Pakistan operates near breakeven and does not require capital infusions, so I am comfortable excluding its losses when calculating the value of Singer Asia’s earnings power.
Thanks for the analysis. Another reason the price is low is where the companies operate. Very very emerging markets and with caution paramount in Wall Street at the moment this company is under the radar. In MOO even if there was an IPO the market would not price in the value due to emerging market risks. Saying that I would start accumulating positions due to its low stock price. Yes disturbing that the notes were written down but reading through the CEO’s comments it looks like they sided on the side of caution and took a bigger write down to cover themselves. Would not be surprised if this was corrected within the next 6 months. There is no way RHDGF would take a piece of the sewing action. The CEO sold the sewing business 11 years ago and I am sure has no plans to get into the sewing business. Most likely they will hold. One area that does not get mention is the RE value in the company. RHDGF has been operating in these countries for over 100 years. They own a few store locations as well as offices and I am sure these are very undervalued. Instead of an IPO why does the company not sell their positions in each country to investors or on the open market?
Oh, there is definitely an emerging markets discount in play. But the strange thing is what a large discount RHDGF trades at compared to its subsidiaries. In the local markets, each subsidiary trades at a P/E of 20 or higher. And here you have RHDGF at less than half that.
I also believe the notes will ultimately be worth more than where they are booked, and I agree that the company would rather sell them than own a piece of Singer equity following a restructuring.
As for why the company doesn’t simply sell the subsidiaries on the open market, I believe they are trying to get a higher price by selling the entire complex. They may be trying to realize a control premium. I know I would be willing to pay more for a controlling stake in the entire business network than I would for a stake in any individual country unit.
I believe Stephen Goodman gets a bonus for the company distributing a certain amount of dividends. Any thoughts as to what that amount is and how much?
Excited to see that the company is returning to shareholders cash from the sale of Thailand and consolidation of Sri Lanka. This is confirmation that the company is on track to liquidate and return capital to shareholders. In addition the operating companies owned by Retail Holdings are having a great 2015 if you look at their results for the three quarters of 2015. This is a very undervalued company.
Any comment on the fact that Singer Bangladesh’s debt to equity ratio has recently increased from 23% to 78%? I understand that at the current discount to NAV the downside is quite protected but this figure gives me pause. Perhaps it has something to do with the financing arm of the company and it would be more appropriate to split the balance sheet into retail and financing sections–with debt to equity being the appropriate gearing ratio for the former and equity to assets for the latter? I await your thoughts.
How are distributions like the cash dividend treated? Arn’t they taxed at an individual level?
Under Bush era tax laws, qualified dividends (stocks held at least 60 days) will be taxed at the Long Term Capital Gains rate. Depending on your income level, tax rate would be 5%, 10% or 15%. Currently 5% & 10% brackets are discounted to 0%. Also, considerable investment income is subject to AMT rate and Medicare taxes.
Since it seems like all the distributions are going to come as dividends, shouldn’t NAV be discounted to take into account ones LT capital gains rate?
On another note, shouldn’t the NAV also discount the CEO’s 3.5% deferred cash award ?
I am unsure what you mean by discounting NAV based on ones tax rate. We each decide whether or not to trade the stocks, and how long to hold them. So we choose to sell them at a gain (including enough to cover our tax) or pay the tax out of our cash dividend. For a single taxpayer who makes less than $50,000, they are allowed about $37,000 of capital gains at 0%. Let’s say you own 400 RHDGF at $18 each, and hold the shares from now to 1st week of September, then collect $1 per share of qualified dividends. That is $400 tax free (if income is low enough). If it is not low enough, your tax is $60, so you still made $340. Also, if you sold the 400 shares for a small profit on the ex-dividend date, $18.32 per share, you made another $132 in short-term capital gains. Tax on this is paid at your marginal tax rate (taxed as ordinary income, unless you have capital losses to set against it).
I am sorry if I have confused you. It seems you may have been talking about UK taxes. I have no clue how the taxes work there, but I assume your tax would still be gross proceeds less cost basis, however, it seems your taxes are charged at the time money changes hands, so you likely have to file a tax form of sorts to recapture taxes related to the cost basis, or an exemption at the time of investment. (Just guessing.)
Also, if the deferred cash award is going into your private account for retirement, that can be withdrawn without restriction, it would seem it would not be taxed at the time it is withdrawn, but the growth would be taxed along the way.
In the U.S. we can defer such awards and not pay taxes until they are withdrawn, but the account is managed by a trustee to assure it is managed correctly.
I am in the USA. As for the taxes – I found out that these dividends are treated as a non-taxable distribution (http://www.retailholdings.com/disclosureStatements/disclosureStatementsFile_103.pdf).
However, I still have slight concerns about the bonus Stephen Goodman gets for distributing a certain amount of dividends as mentioned by @ndl
Remember that not all distributions/dividends are return of capital, as some are truly dividends. If his pay is for distributing a quota of real dividends to shareholders, it could possibly create a conflict of interest, depending on how the pay is structured. If it is for the company to ‘return capital’ in effort to buy back shares, then it makes sense that he would get a bonus for reducing outstanding shares, wouldn’t you think. A person would actually have to understand his contractual agreement to know if it is reasonable compensation or self-paid gratuity. Also, I most definitely would think any corporate officer would have pay controlled through shareholder vote.
My understanding is that distributions from holding companies of any kind are tax-free in Curacao, so Goodman’s compensation agreement likely doesn’t distinguish between dividends from profits and capital returns.
Is this still a buy at $14.50? When is the distribution to be made? Thx.
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Good to see RHDGF well on its way to liquidation. Usually I look negatively when a company suspends its dividend, and such a rich one for this company. However, buying back stock at 50-60% of its market value looks like a good bet. The operating companies reported excellent results for the first 6 months of 2016 and I expect the second half to be strong. In my opinion the float will be around 4.5 million in late 2017 from 5.3 million in late 2015 and with improved results the company can sell shares of the operating companies in the local market generating a very attractive dividend in late 2017. This stock has a bright future.
How much corporate cash is on the dance sheet?
As of 6/30/2016 $10 million at Retail Holdings and estimating $20 million at operating companies. They will probably generate another $5 million by the end of 2016 and $5 million by mid 2017 at Retail Holdings. So a lot of ammunition to buy the stock at $14-$16 per share.
Anyone have an updated NAV?
I estimate somewhere in the $30 range.
Would welcome any comments re RHDGF 3rd Q 2016 financials at operating companies.
Any thoughts as to the recent price/volume spike?
Chris DeMuth wrote it up as ‘opportunity of the year 2017’ for his subscribers on SeekingAlpha ..
My spreadsheet says around $33 as of 12/31/16. I have a float of 4.8M. The analysis that came out today on Seeking Alpha has a higher float and does not recognize cash at operating companies. Third Q results were very strong and I expect the same for the 4th Q. I am putting a NAV of $35 by July 2017 and expect the company to sell in the open market soon after that. My analysis writes off the Singer notes to zero.
Who would RHDGF sell to?
Local strategic buyers or mutual funds looking for emerging market retailers.
Float is now 4.650 million from 5.296 million end of 2015. Good news.
Looking forward to 4th Q 2016 results in the next 2-3 weeks. I expect an announcement also on the float. It could be surprising and under 4.650 million. A dividend play in mid 2017 with a reduced float would be very attractive, The question is how big of a dividend.
Yes, it will be fun to see what they managed to do. You can get a preview of earnings by looking at the results of the underlying companies. Strong second half to the year.
Did not disappoint. Results over the roof. Expect a strong dividend on a reduced float.
I agree. Excellent figures. Some unrest in Sri Lanka right now but it doesn’t seem to be affecting operations.
Not sure why RHDGF is waiting until the end of March to report 2016 numbers when all the operating companies have done so. Perhaps a new announcement?
interested in future results
Check out Seeking Alpha there have been two recent articles regarding RHDGF which points to a very attractive gap between present price of $20 and net asset value of operating companies. This could be real hidden gem.
With one asset remaining and some cash, could be interesting post dividend tomorrow?