Retail Holdings NV (OTC:RHDGF)

Summary

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.

 

Market data

Ticker: OTC:RHDGF

Price: $12

Shares: 4.62m

 

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:

Holdings Analysis
Company Ticker Price (USD) Sewko Shares Value to ReHo (54.1%)
Singer Sri Lanka COSE:SINS-N-0000 $0.281 35.56m $5.35m
Singer Bangladesh DSE:SINGERBD $2.72 43.70m $64.26m
Singer India BSE:505729 $0.56 32.65m $9.83m

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:

Holdings Analysis  
Company ROE 5yr Sales CAGR 5yr EBITDA CAGR PER EV/EBITDA
Singer Sri Lanka 14% 15% 13% 13x 9x
Singer Bangladesh 36% 11% 9% 21x 14x
Singer India 16% 16% 6% 24x 18x

 

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%

 

Valuation

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.

NAV Calculation
Cash
     At ReHo level: $2m
     At Sewko/Singer Asia level: $11m
     Total: $13m
          Adjusted for 54% ownership: $8m
Singer Sri Lanka
     Put price (USD): $0.28
     Sewko shares: 35.56m
     Implied ReHo shares: 19.24m
          Implied ReHo value: $5.35m
Singer Bangladesh
     Price (USD): $2.72
     Sewko shares: 43.70m
     Implied ReHo shares: 23.64m
          Implied ReHo value: $64.26m
Singer India
     Price (USD): 0.56
     Sewko shares: 32.65m
     Implied ReHo shares: 17.66m
          Implied ReHo value: $9.83m
Net Asset Value: $87m
Shares outstanding: 4.62m
     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%

Price: $12

NAV: $19

Duration IRR
1 year 58%
2 years 26%
3 years 17%
4 years 12%
5 years 10%

 

The liquidation process also looks to have accelerated around 2016:

rh2

 

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.

rh3

 

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%

 

Risks

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:

Singer Bangladesh  
52 week low price (USD): $1.97
ReHo value: $46.50m
     Delta: $46.50 – $64.26
($17.75m)
     Per share: $3.84
Singer India  
52 week low price (USD): $0.52
ReHo value: $9.22m
     Delta: $9.22m – $9.83m
($0.61m)
     Per share: $0.13

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:

rh1

 

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.

8 thoughts on “Retail Holdings NV (OTC:RHDGF)

  1. Regarding the non-remittance shares: not only dividends, but also proceeds of sales of these shares are restricted, i.e. cannot leave Bangladesh (see press release https://www.prnewswire.com/news-releases/retail-holdings-nv-announces-900-per-share-distribution-300529365.html ). RHDGF owns ~15m non-remittance shares. I would definitely not value these shares at face value. If they can reach a deal with the Bangladesh authorities (and that’s not a given) it will probably not be for free.

    Like

    1. I probably should’ve spent a bit more time in the post discussing the issues with the non-remittance shares, but it requires a lot of speculation. Even writing the 15m shares off to zero (which I think is overly conservative) I still get an NAV of around $13.50 which equates to a ~12% discount and a 5%+ annual return if everything wraps up within the next 2 years. However, given the management teams ownership in ReHo, they’re highly incentivised to work out a way to extract the value from these shares. My best guess is it will involve some sort of tax as this would be a win-win for the company and the Government.

      Therefore, I view the setup as the potential to make at least 12%, with a free call option on the management team being able to get some value for the non-remit shares.

      Like

  2. Interesting article which I have just read. Basically I agree with your value however I see a couple of areas you might have missed:

    1. IAL just became a sub from an associate investment. I expect a late 2019 IPO. This could add $1-$2 per share.
    2. Looking at cash at Sewko, RHDGF, and Operating Companies from the 6/30/2018 Summary Report I expect this to increase to an additional $1.50 per share net of the SSL sale by 1st Q 2019.

    So an additional $2.50-$3 per share to RHDF shareholders.

    There is an additional opportunity which I can not confirm and have left off my estimate. RHDGF sold the SVP notes for $1 which leads me to believe that some sweet heart deal was made. I suspect that royalty from a number of Singer countries will continue to be paid and the great majority of that royalty will be kept by RHDGF.
    The next few 2 months will tell us more.

    Like

  3. Very interesting value play with RHDGF. India and BD just published full 2018 results and they were strong. I agree that this is not a static asset but one that grows with time. I am calculating that the company will return capital to shareholders starting 3rd Q 2019 to 1st Q 2020. I have a value of +US $20 per share as a total amount until liquidation. At a present price of $10.72 this is a screaming buy.

    Like

    1. I think you’re probably taking the Bangladesh investment at face value to get $20, which is probably a bit too aggressive to underwrite as your base case. See the final part of my thesis where I explain how 20% of the shares are “non-remittance” and will be difficult to sell and get the capital out. I reckon the management team will get some value for it, but it is unlikely to be 100c on the $

      Like

      1. You are correct. I did take the full value of Bangladesh. Here is why:
        1. I believe that Singer has been in the country over 110 years and has some good relationships.

        2. I could see a sweetheart deal where control as well as the blocked shares are sold to a country national keeping it under Bangladeshi management/ownership. The country has become more pro business oriented and is pursuing foreign investments. So removing this decades old rule would be seen as the country opening itself up to a more business friendly environment.

        3. I have a hard time believing that if a company that controls the largest consumer durable company in the country and exiting that country that a deal is not made to allow local ownership.

        4. RHDGF has been trying to work out a deal to sell the BD business for years and if they had hit the wall they would have sold the non-blocked shares by now. I believe the reason they have not done so is that they want to sell a control position to one buyer and are working on that now.

        It might be wishful thinking on my part but I have been following this company for years now and I have not been disappointed.

        Now to the value,
        1. I have a +$20 a share price based on the fact that the final exit of RHDGF from Asia will take until the first Q of 2020. The 4th Q 2018 was very strong for both companies and they are in markets that have very strong prospects ( See 2019 Investor Presentations on the companies Web sites ). The value over the next 6-12 months will increase. Just look at the share price increase for them in the last week. This reflects the strong 4th Q and the future.
        2. There are other assets outside of the two business entities. You have cash at Sewko, cash at operating companies, cash at RHDGF. You also have the new sub IAL Bangladesh, the refrigerator manufacturer. I expect an IPO for this entity in early 2020.

        3. There is one possible additional asset and that is the royalties for trademark and technical assistance paid by the operating companies to Singer Asia. Once all revenue is made up of royalties it is unclear as the company has not disclosed details of the revised royalty agreement how much Singer Asia keeps and how much of it they pay to Singer SVP.

        I hope that in the next few weeks we will have additional light on the potential value.

        Like

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