This is going to be a rather brief post because the underlying thesis is quite simple and Dave Waters has already written about it on multiple occasions via his terrific (albeit quieter than it used to be…) blog otcadventures.com
Retail Holdings (ReHo) has been an extremely slow moving liquidation story. The short investment pitch is that it’s a Holding Company, has a collection of fast growing businesses, trades at a steep discount to their implied value, and has an incentivised management team who have been slowly selling the underlying holdings and returning cash to shareholders.
The proposition gets a little more complex when you begin to dig into the capital structure:
- US over the counter, public listing
- With a Curaçao domicile for the listed HoldCo
- With HoldCo’s only asset being a 54.1% stake in a Cayman Islands domiciled HoldCo (Sewko)
- Where Cayman HoldCo’s assets consist of three, publicly traded Asian companies
This bizarre structure, combined with the extremely drawn out process of liquidating the underlying assets and returning cash to shareholders (the plan began in 2007) goes a long way towards explaining why this is way off the radar for most investors.
The businesses & history
Although ReHo has had many different names and taken numerous forms over the years, it has always centred around the Singer brand. Originally the company owned Singer Worldwide – one of the oldest sewing machine manufacturers in the world – however, this was sold off in 2004. Today, Singer Asia, is mostly associated with a chain of retail stores that sells branded consumer durables. For example, Singer Bangladesh, which forms the majority of the current net asset value, operates 374 retail stores and has 425 independent dealers, making it the largest retailer in of household consumer durables in Bangladesh with an approximate 25% overall market share.
Each of the companies within Sewko (of which ReHo owns 54.1%) are publicly listed:
|Company||Ticker||Price (USD)||Sewko Shares||Value to ReHo (54.1%)|
|Singer Sri Lanka||COSE:SINS-N-0000||$0.281||35.56m||$5.35m|
1Based on the value of the put they have (LKR 47.00 at cross rate of 0.00592)
Each of the companies seems to be reasonably high quality and aren’t trading at ridiculous multiples:
|Company||ROE||5yr Sales CAGR||5yr EBITDA CAGR||PER||EV/EBITDA|
|Singer Sri Lanka||14%||15%||13%||13x||9x|
While not obvious upon first glance, the management team has actually created substantial shareholder value since the inception of the dividend distribution program in 2007:
- Initial share price: $6
- Cumulative distributions since: $28
Given a current share price of ~$12, a shareholder who has held onto their stake since the program began would currently have accumulated ~$40 in value per share. This represents a money multiple of >6.5X since 2007 and equates to a compound annual return of around 20%
Due to Sewko owning greater than 50% of both Singer Bangladesh and India, it has to consolidate the assets and liabilities of both onto its own balance sheet. And then because Retail Holdings owns >50% of Sewko, it has to consolidate everything onto its balance sheet too. However, neither Sewko or ReHo hold substantial liabilities at the Holding Company level. Therefore, 54% of the free cash at the Sewko level belongs to ReHo and any spare cash at the ReHo level should be unencumbered too.
|At ReHo level:||$2m|
|At Sewko/Singer Asia level:||$11m|
|Adjusted for 54% ownership:||$8m|
|Singer Sri Lanka|
|Put price (USD):||$0.28|
|Implied ReHo shares:||19.24m|
|Implied ReHo value:||$5.35m|
|Implied ReHo shares:||23.64m|
|Implied ReHo value:||$64.26m|
|Implied ReHo shares:||17.66m|
|Implied ReHo value:||$9.83m|
|Net Asset Value:||$87m|
|NAV per share:||$18.80|
Given the shares are currently trading for $11-12 this implies a fairly substantial discount.
What will cause the gap to close?
This investment does not require “Mr Market” deciding to price the security appropriately, because the management team is actively seeking to monetise the assets through sales. The cash is then distributed back to shareholders via special dividends, therefore, not requiring the market price to converge towards the net asset value. The company paints a very clear picture of what they’re trying to do on page 2 of the annual report:
“The strategy of the public holding company is to maximise and, ultimately, to monetize the value of its assets. ReHo intends to make regular cash distributions to shareholders and to opportunistically purchase shares. The objective is to commence the ultimate liquidation of ReHo within the next one to two years and to distribute the resulting funds to its shareholders.”
Analysing the incentives of the management team, it’s easy to see why they have established the current strategy:
- Chairman and 25% shareholder Stephen Goodman is 73 years old and this investment likely represents a material portion of his net worth
- The CEO’s bonus is such that he receives 3.5% of the aggregate amount paid to shareholders, from the period through to April 30, 2019
Based on management’s comments and the structure of the CEO’s bonus plan, I believe it is likely that the liquidation will be completed within the next few years. Given the current discount, even assuming a 5 year holding period would result in an annual return of ~10%
The liquidation process also looks to have accelerated around 2016:
One unique difference this “HoldCo” discount has is that the underlying businesses that make up the NAV are increasing in value each year. While they’re currently not “cheap” they are broadly in-line with their long run multiples and those of similar listed peers, meaning they are likely to continue increasing in value at a rate of 5-10% in USD terms (accounting for local currency depreciation). This is not a typical NAV discount based on a static or declining underlying asset value.
Finally, the reason for writing this article now, is because the discount to NAV is currently the widest it has been in a while, creating an attractive entry point as this long term liquidation is (hopefully) coming to a close.
Currently, the market price represents ~63% of the NAV, whereas when the major distribution was made earlier this year, it was closer to 80-90%
The first obvious risk is the value of the underlying investments fluctuates based on fundamentals and market sentiment. However, even if we adjust Singer Bangladesh and India to their 52 week low prices, the NAV per share is still greater than current prices:
|52 week low price (USD):||$1.97|
|Delta:||$46.50 – $64.26|
|52 week low price (USD):||$0.52|
|Delta:||$9.22m – $9.83m|
Therefore, the total delta is <$4. It’s important to remember that the management team are selective with when and how much they sell, therefore, it is unlikely that they would sell at an unattractive price.
The second key risk is currency related – specifically the conversion of LKR and INR back to US dollars. Historically, these currencies both depreciate against the dollar at around 4-5% per annum, due to inflation differentials etc. However, in the last few weeks, both currencies have fallen substantially – potentially reducing the short term risk of further depreciation given they tend to leg down then remain flat for a few years, before re-basing again:
The final risk results from a unique aspect in the Bangladesh investment. According to an agreement signed with the Department of Industries of Bangladesh in 1979 (when Singer Bangladesh Ltd was incorporated), the company agreed not to remit from Bangladesh any distributions received from certain shares, representing 20% of the capital stock of the Bangladesh Company. This means, that to date US$15m in potential distributions have accumulated, which are then lent back to the company. This could put off a foreign buyer, however, it makes no difference to a domestic investor. How this plays out I am not sure, however, I would argue, the nuance is probably already reflected in the market value of the listed stock.
Disclosure: I currently have a holding, and I may trade in or out of it without notification.
Do your own research. This is not advice.