Retail Holdings (RHDGF) is a well known stock in value circles with a simple story, and because of that I’m going to keep this post short. The company owns a majority stake in Sewko Holdings that has operating subsidiaries in Sri Lanka, Thailand, India, Pakistan and Bangladesh (selling home appliances, consumer electronics, sewing machines and other products). Because these operating subsidiaries are all publicly listed the value of Sewko Holdings can easily be determined. Besides the publicly listed companies there is also some net cash at the various holding companies and a note receivable:
As you can see the company is trading at a sizable discount, and the good news is that there is a catalyst on the (far) horizon for this discount to close since the company wants to liquidate, but only at a good price. Last year Retail Holdings wanted to do an IPO in Singapore, but this plan was shelved because it didn’t think it could realize fair value. In the mean time Retail Holdings pays out generous dividends and with the CEO and his wife owning 25.7% of the company I’m confident that they will try to maximize shareholder value.
There is a lot more that can be said about Retail Holdings but since not a whole lot has changed the past years I recommend you check out these posts on OTC Adventures (post 1, post 2 and post 3) and this post from WertArt Capital. Note that the discount that the author of the WertArt Capital blog applies to account for the license fee that Retail Holdings pays for the use of the Singer trademark is not appropriate. The operating subsidiaries also pay royalties to the parent company to use the trademark so this is already reflected in the market value of the various operating companies. It might actually have a small positive value since Retail Holdings has also licensed the trademark to a couple unrelated companies operating in Malaysia and Australia.
Author is long Retail Holdings NV
This one’s a real classic! Had it in my portfolio a couple of years ago.
I’d suggest to take a look at singer sri lanka reports, if you want to have a good laugh…
What exactly should I be looking for?
I sold my investment in Retail Holdings about 1,5 years ago and haven’t seriously looked at it recently. The discount however looks very similar to what it was back then.
– A holding company should trade with a discount to the value of the holdings (taxes, added cost etc).
– The companies owned do business in countries with a significant country risk and currency risk. Simply looking at the discount to market value ignores the fact that the company owns shares, which trades at some valuation, which may be low or high.
– Stock market regulation seems non-existent in some of the countries, where the companies owned operate. That is what I meant with Singer Sri Lanka reports.
I sold my investment in Retail Holdings after I took a look at what is really owns and what kind of valuations I would be comfortable with after factoring in the country/regulation risk.
I agree with you that holding companies almost always should trade at some discount, and Retail Holdings is probably not an exception, the question is what discount is appropriate?
The issues you list aren’t big issues for me. The country risk should be accounted for in the market valuation of the operating companies, and it’s not only risk you get: you also get more diversification. Same thing applies to the currency risk. Is betting it all on EUR (and/or USD) the smart thing to do? Or is some diversification in currency exposure better?
I also think the lack of stock market regulation isn’t a big problem because Retail Holdings owns in almost all cases a controlling stake in the operating companies. They don’t need regulations to protect them: they control what the companies will do! This is by the way also the reason that the valuation based on public market prices might actually be understating the true value of the assets. The controlling stakes that Retail Holdings own should be worth a premium compared to the minority interests of outside shareholders.
The discount should be based on extra cost from the holdco structure. I.e: overhead cost, extra taxes etc. There are probably liquidation costs as well (if i remember right, the long-term goal is to sell the holdings and liquidate).
I tend to agree with holding company providing the governance.
Your diversification argument does not address the main concern I had, namely not looking at the companies owned and their valuation. If this is about the discount only, you should probably hedge against shares owned going down. Otherwise, you are betting on the companies owned being at least fairly valued or undervalued. Diversification by buying overpriced shares does not make any sense.
Far point about valuation. I haven’t looked really hard at the valuation of the operating companies themselves because I do trust market valuations to some degree, and when the P/E of Retail Holdings is ~10x (adjusted for IPO expense) I’m not too worried about overpaying. Since a precise estimate of value is pretty hard a more detailed look would probably be a lot of work just to conclude that it is in the range of reasonable.
And yes. I’m in the stock because of the discount, but that doesn’t mean that I only want to bet on that even if I could (I don’t have access to most of the markets where the subsidiaries trade, and I doubt that for example the market in Pakistan is developed enough so that you can borrow shares and take a short position). And it’s though for your margin requirements because probably both the long and short legs wouldn’t be eligible for margin.
But more importantly I think betting on Alpha + Beta > Alpha. But that’s a completely different discussion.
Ps. doubt that there are significant liquidation costs. The parent co is located in Curaçao. Should be pretty tax efficient.
Pps. Appreciate the comments. People that used to be long but sold often know the negative sides and the risks the best.
I agree that shorting equities from Bangladesh, Thailand etc is probably practically impossible for a private investor.
I analyzed ReHo’s holdings last time in January. At that time, I decided not to buy, because the holdings seemed to be selling at a reasonable price, except for Singer Sri Lanka. Sri Lanka was valued at MCAP/EV = 3 with >20% revenue gwth/year, which is clearly very cheap.
With Retail Holdings you get a lot of beta, if that really is what you’re looking for…:)
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What about the non-remittable shares of Singer Bangladesh that Sewko owns? According to the IPO prospectus, money for this portion of equity cannot be remitted outside of the country, either in dividends or capital return:
“We are the beneficial owner of 74.99% of Singer Bangladesh. Pursuant to a permission letter by
the Ministry of Industries in Bangladesh dated February 27, 1979, 20% of the total equity of Singer
Bangladesh Limited is not eligible for remittance in foreign exchange either as dividend or capital.
Therefore, if a dividend is declared in respect of these shares or if we were to dispose of any or
all of these shares, the dividend payable or the proceeds from the sale of the shares would not
be eligible for remittance from Bangladesh. However, we may use the proceeds to make other
investments within Bangladesh.”
Would you haircut the valuation of Bangladesh by 20% since they might be able to get this capital out of the country, even in a sale?
Good point, I think a 20% haircut is reasonable. Probably a bit too conservative since it is still going to have some value (you can still get dividends from Bangladesh) and/or tax laws can change (or a workaround might be possible).
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