Good news from two companies I’ve written about: Retail Holdings and Awilco Drilling.
Retail Holdings – RHDGF
Retail Holdings NV is a holding company with a fully-diluted 54.1% stake in Singer Asia, a consumer goods conglomerate operating in South-East Asia. Singer Asia’s various subsidiaries are publicly-traded, making it simple to determine their value to Singer Asia and ultimately to Retail Holdings.
Retail Holdings’ objective is to liquidate, selling its investment in Singer Asia and returning cash to shareholders. Recently, the company announced it is considering an IPO of Singer Asia, renaming the company Sewko Holdings Limited. Retail Holdings would retain an equity stake in the company. The company’s chairman, Stephen H. Goodman, cautioned investors that the IPO might not happen for some time, if ever. Despite the uncertainty, the fact that the company is considering monetizing its main asset is a positive for investors.
A sale of most of Retail Holdings’ stake in Singer Asia would go a long way toward closing the significant gap between Retail Holdings’ trading price and the market value of its assets.
Singer Asia’s various subsidiaries have a market capitalization of $464 million USD, of which $146.53 million is attributable to Retail Holdings, or $27.59 per share. Retail Holdings also holds $4.24 per share in distressed debt, as well as some cash at the holding company level. Even haircutting the debt by 50% and excluding the holdco cash gives a per share net asset value of $29.71. The closing price of $19.60 represents a 34% discount. An IPO or other strategic transaction could close this gap, yielding a big gain for shareholders.
Awilco Drilling -AWLCF
Awilco Drilling owns two semi-submersible drillships that are contracted to oil companies drilling in the North Sea. Despite good revenue visibility and a management team committed to returning capital to shareholders, Awilco trades at a dividend yield of over 20%. One factor that may be holding down Awilco’s shares is persistent rumors that Awilco will contract for newbuild drillships. Awilco’s investor relations denied these rumors last time they came up, but that does not mean the story could not change. Ordering new rigs would obviously impair Awilco’s ability to pay dividends and would be reason for reviewing the entire investment thesis. A link to Awilco’s denial is here, but in Norwegian.
Yesterday Awilco announced the signing of a letter of intent with Apache and Taqa for Awilco’s WilPhoenix drillship. The contract will commence in the second half of 2014 and will employ WilPhoenix through mid-2017, with an option for two years of additional service.
The dayrate for the new contract is about $387,000, 22.9% higher than the current contract. With the signing of the letter of intent, both of Awilco’s drillships are fully booked for the next 29 months. Assuming a 10% marginal tax rate and that the company can maintain 90% revenue efficiency, the revenue increase from the new contract will contribute an additional 71 cents per share to Awilco’s bottom line each year once the contract begins.
I own shares in Retail Holdings NV and Awilco Drilling Plc.
1. As a fundamentals focussed investor, should’nt you be looking at the book value, RoE, RoCE of each of the subsidiaries to check if any of them is grossly overvalued/undervalued. That could say a lot more about the margin of safety.
2. I know Singer India just came out of bankruptcy restructuring – without gettting into details, I do not want to comment on if it is a positive or a negative.
3. Did’nt SVP holdings to which singer brand was sold (which I think is a wonderful consumer brand) has already extended payment of the amount due ? How would you price the risk of default/extension of this payment ?
4. I looked at the Indian company’s books but am unclear about the payment of royalty – I believe that can have quite a bearing on the valuation that accrues to Retail holdings N.V. If these are going to be paid retro-actively post IPO/liquidation event, that will be a big suck-out of cash.
Would love to hear your views on this
I was recently doing the same analysis. I own a position in ReHo based on a similar valuation to the one posted here, but had/have similar concerns. The Indian sub is a very small portion of Singer Asia, so I was not as concerned about that particular entity. That said, there were several questions that came up when looking at the two largest subs:
1) Cash flow seems weak & inventories high: extremely high inventory levels as a % of total assets; high receivables as a % of revenues.
2) The massive distributions reported by ReHo are a return of capital rather than a dividend. This means that there is not E&P at the sub level.
3) Related to the two items above, it does not make sense to me why ReHo would want to suck cashflow out of the subsidiaries, as cash flow is the lifeblood of growing businesses (which is the picture they are painting at the sub level with the extremely high inventories and negative operating cash flow).
4) Is it possible that using the publicly traded price may be misleading due to the % of the company that is traded and how thinly it is traded?
I see both view points. The upside of the first view point was worth a small position for me, but a little concerned about the ability of the subs to become cash flow positive given the structure of their revenues. Any thoughts to these points? Am I overthinking this?
One other thing that I noticed in the sub financials….
They packaged their receivables and spun them into a separate entity they own 99.9% of, then marked the entire entity using a model. This resulted in a massive gain getting booked to the balance sheet. Accounting tricks like this make me nervous. I understand that you can securitize receivables to sell to a 3rd party, but do not understand how it follows any accounting standard to use this treatment when they own 99.9% of the new entity. Any thoughts on this? Thanks
For any consumer franchise which does not own the brand, one of the most important things I would be worried about is the structure of arrangement – exclusive/non-exclusive, visibility of the payment of royalties (is it fixed/long-term and has a sense of predictability). People ignore royalty looking at it as small payment – typically 1-5 % of sales but think of it – it is often 50-60% of your FCF that needs to be paid irrespective of what your cost structure is. For the record, I have seen blue chip multinationals like hitachi and suzuki which have changed payments randomly to suck out cash from the Indian businesses because of compulsions elsewhere.
Think about it, without a “singer” brand, would the execution/financial risk change manifold ? The answer is “Yes” – If you could get a sense of how the sale happened and how “royalties” are structured. A lot of old, family owned businesses look at “owner’s earnings” more than potential Mcap and this could make them take decisions that are not in the interest of “long-term minority shareholders”.
Happy to disagree.
RHDGF is a value play in emerging markets. The analysis you have done is good but you do not include the SVP notes at 12% which even if you discount by 50% is a additional value. Also if an IPO was to happen I am guessing 1st Q 2014 or 2nd Q there is a fair amount of appreciation that would occur between now and then for not a retailer of household appliances but a finance company which they are becoming. I have an IPO target of $36-$40.
Albert – How do you come up with your IPO target?
My analysis perhaps is a little more aggressive and takes into account the SVP Notes. However my catalyst for this stock is not only that their household product retailing arm is so well positioned to capture the middle class growth in very emerging markets but that they are turning the company into a consumer finance company which will accelerate their growth. This growth will become apparent by mid 2014 when I believe the IPO will be an event.
Estimated Value of companies (Mid 2014) $340MM
RHDGF stake $188MM
SVP Notes (50% Discount) $10.5MM
Cash ReHo & Singer Asia $ 4.0MM
Please note this is an estimate for a mid 2014 event. I follow very closely the operating companies and have no doubt they can grow as per above during the next 12 months. In addition I am very conservative in discounting the SVP Notes by 50%. If the notes are not in default at the time of the IPO then you can realize a higher value. Please also note that Singer Asia has a great deal of hidden assets. Land & buildings are probably not carried at current market value and they have owned some of these assets from 50-75 years if not more. Also loss carry forward are hard to dollarize. There might be some good surprises in the balance sheet. Mutual Funds are tripping over each other finding good emerging market plays and they would love this one. For the record I am long RHDGF and have owned the stock for many years.
Any comments regarding the 2013 Financials results recently released?
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