Retail Holdings NV is a holding company with a market capitalization of $119.9 million. The company owns stakes in publicly-traded subsidiaries and also holds debt securities and some excess cash. The total asset value of the company’s underlying holdings is at least $142.2 million, 18.6% higher than the company’s market capitalization.
Singer Asia Limited
Retail Holdings’ primary asset is a 54.1% stake in Singer Asia Limited. Western investors may associate the “Singer” brand name with sewing machines. However, in Southeast Asia, Singer is an extremely well-known and successful retail chain that sells consumer durables like washing machines, televisions and kitchen appliances. Singer Asia owns hundreds of retail centers and also sells through thousands of wholesalers in India, Thailand, Bangladesh, Sri Lanka and Pakistan.
It should be noted that Retail Holdings once did own the Singer Sewing Machine Company, but sold it to a private equity firm for cash and promissory notes in 2004. (More on the promissory notes later.)
While Singer Asia itself is not publicly-traded, its subsidiary companies are.
While their values fluctuate with stock market movements, Singer Asia’s ownership interest in its subsidiaries has a public market value of $232.96 million. Singer Thailand is the company’s most valuable subsidiary, followed by Singer Sri Lanka. At December 31, 2011, Singer Asia had no debt and $2.6 million of corporate cash.
While some of the subsidiaries have appreciated in value recently, others have declined. On the whole, the value of these subsidiaries seems likely to grow in coming years as the Southeast Asian middle class grows in size and wealth. Singer Asia as a unit posted a 25.4% growth in revenues in 2011. Year over year revenues for the first six months of 2012 rose another 7.1%.
SVP Notes
In 2004, Retail Holdings sold its Singer Sewing Business and Singer Sewing trademark to KSIN Holdings for $134.6 million. Retail Holdings received $65.1 million in cash, transferred about $47 million in debt to KSIN Holdings and received the balance of the payment in unsecured, subordinated promissory notes with a principal value of $22.5 million, bearing interest at 10%. The notes were originally to be due one-third on September 30, 2010 and the balance one year later.
KSIN, subsequently renamed “SVP,” paid the interest on these notes dutifully until 2009 when the financial crisis put stress on the Singer Sewing business. Retail Holdings agreed to restructure the notes, extending their maturity and increasing the interest rate. This process has been repeated multiple times. The notes are now due in February 2014. On June 29, 2012, Retail Holdings announced a pay down of $5.0 million on the promissory notes at a 15% discount to notional value. This action reduced the principal value of the remaining notes to $21.6 million. While SVP continues to pay interest on these notes, the repeated difficulties suggest that SVP’s default risk is high and the notes should be treated as junk-level credits. If Retail Holdings were to sell the notes, receiving 100% of par value is not certain. Neither is final payment of the notes. Investors may be wise to assign a discount to par value when determining a valuation of Retail Holdings on the whole.
Retail Holdings NV Valuation
Retail Holdings owns 54.1% of Singer Asia Limited, yielding a market value of $126 million. Given the repeated extensions and restructurings afforded the SVP notes, a 25% discount seems warranted. The $126 million Singer Asia stake and the discounted SVP notes with par value of $16.2 million combined to equal $142.2 million. Retail Holdings and Singer Asia Limited each hold excess cash at the corporate level, but I have chosen to ignore these amounts for the sake of conservatism.
Retail Holding’s current market capitalization of $119.9 million represents a significant discount to asset value. Still many investors will ask: what’s the catalyst? What will cause Retail Holdings stock to appreciate to the value of its underlying assets? I believe fervently that value is its own catalyst. Retail Holdings has in fact appreciated from a low of around $13 in early 2011 to its current price of $22 and change. I have been lucky enough to participate in most of the rise. For investors who are not willing to wait around for convergence to intrinsic value, there are two factors that will accelerate Retail Holdings’ returns.
1. Dividend policy – Retail Holdings has been exceptionally generous in paying out its earnings to shareholders. Annual dividends in recent years have been well in excess of 10% of the share price. As free cash flow from Singer Asia and interest and principal payments on the SVP notes flow in, Retail Holdings has not been reluctant to distribute the excess to shareholders. Here are recent years’ dividend amounts per share:
2012 – $2.50
2011 – $2.50
2009 – $0.80
2008 – $0.75
2007 – $1.00
2. Long-Term Liquidation – CEO Stephen H. Goodman has repeatedly expressed his intention to liquidate the company over the medium term. Singer Asia has been gradually decreasing its stakes in its subsidiaries over the years. Singer Asia itself was rumored to be for sale in late 2011, but a transaction never transpired. Singer Bangladesh was under contract to be sold in 2010, but poor market conditions scuttled the sale. Mr. Goodman and his spouse together own 25.2% of shares outstanding, leaving him highly incentivized to maximize value.
Disclosure: Retail Holdings NV is my portfolio’s largest holding
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Hi,
I’ve been doing some of my own research on Retail Holdings, and came across some issues that I found disconcerting. First, I thought that a major risk was the lack of a timeline for liquidation, with longer horizons making this trade unprofitable if equity is returned to shareholders in the form of dividends. Another which I was hoping to get your opinion on is the reliability of the financial numbers we’re getting from the firm. The company went bankrupt, changed their name, and is incorporated in Venezuela, which raised a few yellow flags for me. They are audited by KPMG, albeit the Thai subsidiary.
I’d really appreciate any thoughts you might have on this angle
Thanks,
Dean
Hello Dean,
Let me try to address the points you have raised.
1. Liquidation timeline. Obviously, a liquidation would be the fastest route to achieving full value. However, it’s not like Retail Holdings is dead in the water until the IPO arrives. The company’s holdings continue to grow their earnings and appreciate in value as the economies of South-East Asia expand. Consolidated earnings at ReHo continue to record new highs. Personally, I don’t care if the IPO ever arrives, provided that ReHo’s intrinsic value continues to grow at a double digit annual rate. Sooner or later that value will be reflected.
2. Domicile and History. It is inaccurate to say ReHo is headquartered in Venezuela. The company is headquartered in Curacao, a former Dutch colony that remains politically connected with The Netherlands. Though it sits just off the coast of Venezuela, Curacao has no political connection with Venezuela at all. In reality, Curacao is a tax haven, much like the Cayman Islands. Retail Holdings’ Asian subsidiaries pay income tax in their own jurisdictions, and ReHo avoids double taxation by being domiciled in Curacao.
ReHo’s predecessor company did go bankrupt, but that company had an entirely different collection of assets, liabilities, operations and management. Like many companies, ReHo used the bankruptcy process to streamline its operations and shed non-core assets, becoming an entirely different and very profitable company in the process. ReHo really should not be compared to its predecessor, which was a very different operation.
As far as the reliability of the numbers, I think there is very little doubt on that. First, cash is king. ReHo has paid generous dividends for years on end, which is very tough to do if the cash is fake. The sum total of those dividends far exceeds the reported cash balance at each year-end, so those dividends are being funded from real operational cash flow. Second, ReHo owns 56% of Singer Asia, but the remaining 44% is owned by a private equity firm. That firm is definitely keeping an eye on its investment and has insider access to the books.
I have followed this company and I believe it is trading way under market value. The 3rd Quarter operating results for the underlying companies was very strong and I see this momentum carrying over into the end of 2013 and the start of 2014. This is a consumer goods company with a consumer credit arm in a very emerging market with proven sales and audited bottom line. In addition a brand that has as high a name recognition as Coca Cola. The stock is held very closely and the company has said that their near term goal is to monetize the assets to shareholders. If you want to do your own DD please review the operating companies financials which are easily found on the Web. Other tangible assets are the SVP notes and cash held by the company. In addition there might be some hidden jewels in RE (company has been around Asia since 1870’s) and loss carry forward.
Could not agree more. ReHo is one of my largest positions and a long-term investment. I trust management to liquidate the company rationally and for the right price, and I get paid to wait as the intrinsic value of the subsidiaries continues to grow.
Not pleased with 4th quarter results. Will this make the IPO a bit more difficult? I tend to think so. The dividends are great but what we are all waiting for is the eventual sale of the assets. It looks like this might be a 2015 or 2016 event.
Not pleased with Q4 results either, but most of the profit decline was due to pre-IPO expenses. The political turmoil in Bangladesh certainly didn’t help either. In my view, the timing of the IPO depends more on the state of Asian stock markets than it depends on ReHo’s results. When the market is feeling bullish and awarding high valuations, then ReHo will IPO Singer Asia.
Looking forward to second quarter results. They should be better than last year. Hopefully the stock wil move.
Would love to receive feedback re 1st half results and what options RHDGF has to monetize assets.
Thanks
Starting to look more and more attractive .. I have NAV ~$34 now with $18 share price.
Good timing, I was just about to write on it!
I’m guessing from your analysis that ReHo has no liabilities at the holding company?
None that are signficant. No corporate-level debt.
What do you make of the large accounts receivable and negative cash flow?
I would say it’s fairly normal for a growing company in an emerging market. The company invests substantially in working capital to fund growth.
Good to see the Thai business sold. Not sure why they do not float or sell the business locally. Not sure whole business will be sold as a portfolio as there is no synergy. The Thai business represented 10.1% of net 2014 profit so you can put a nice high value for the whole business if sold individually. But concerned the 14 Bhat per share was close to the 52 week low.
Good to see indeed, and now the Sri Lanka structure has been simplified. Good moves. As they noted in the press release, the Thai business operated under a different model that may not have been as attractive as the rest of Singer Asia.
Agree. The Sri Lanka business is on fire and not sure the market has caught up with it. Might be interesting now that RHDGF is flush with cash to buy the remaining 16% of the SL business. Finally after so many years the company is starting to monetize the assets. Another possibility is to buy shares in the open market. At a 5.3 million float and a reasonable $20 a share it might not take too much capital to reduce the float by a million or so. Either way the remaining holders should do well.
So the Annual reports mention a bonus goes to Mr. Goodman if a certain amount of cash is returned to shareholders in form of a dividend. There is no mention of the dividend level or amount of compensation that I can find. Any thoughts?
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