Tag Archives: RELLA.CO

Annual results: Conduril, Ming Fai, Retail Holdings & Rella

The last week of March was a busy month with several of my portfolio companies releasing their results for 2014. My biggest position is Conduril, and they released their results for 2014 yesterday. As usual the annual report is at the moment only available in Portuguese, the translated English version should follow in a couple of weeks.


Conduril’s performance for 2014 was satisfactory, but there are a couple of clouds in the sky. Their backlog dropped from €750 million at the end of 2013 to just €450 million at the end of 2014, one of the lowest levels in years. Generating free cash flow also proved a problem in 2014. This wasn’t exactly a surprise since the company announced in their interim report that the Angolan government settled a large outstanding receivable with certificates of public debt. But even when we ignore this item we see that working capital is growing while revenues have been shrinking the past years. The good news is that the company announced that it will pay a €2/share dividend this year and that it is still dirt cheap. It’s trading at a P/E ratio of just 4.2x and of P/B ratio of just 0.6x which is a small discount to NCAV.

An updated summary of their financial performance for the past six years is provided in the table below. A large part of the positive differential between other income and other expenses is caused by foreign exchange gains. Probably repeatable for 2015 given the decline of the euro this year, but of course not sustainable in the long-term:

Historical results Conduril (2014 AR update)

Ming Fai International Holdings

Ming Fai also reported results for 2014. My thesis for the company is based on the fact that the profitability of their core business is ‘hidden’ by two loss-making divisions, but since one of these divisions has been shut down mid-2014 I expected that reported results would soon improve. Reported net income did indeed jump by 67% in 2014 while the dividend was also increased by 29%. While this is, of course, good news there was also some bad news buried in the financials. The profitability of their crown jewel, the amenity segment, decreased while losses in the retail segment only got bigger:

Segment details Ming Fai (2014AR update)

Retail Holdings

Retail Holdings also reported their 2014 results yesterday. Results for 2014 weren’t particularly impressive, but the company continues to trade at a 40% discount to NAV, announced another $1/share dividend while the long-term strategy is still to monetize the value of its assets. It’s for sure taking a long time, but we get paid to wait and intrinsic value can grow in the meantime. The chairman of the company is pretty optimistic:

I remain optimistic about 2015 and later years. I anticipate a marked improvement in Sri Lanka’s performance, reflecting accelerating economic growth, helped by lower oil prices, an improving agriculture picture, an increase in government salaries, and an uptick in consumer confidence, as well as the launch of a major new financial services initiative. In Bangladesh, a lot will depend on political developments, but the Company’s performance should improve in any case, particularly in the second half of the year, as the Company’s new refrigerator factory begins production, and other improvements now under way impact results. Pakistan and Thailand’s performance should also improve as new initiatives impact results. I expect India to continue to grow strongly. Revenue and profits in 2015 and later years will also benefit from the rollout of the new Cambodian business and from the Company’s ongoing investment in new and renovated shops and in new products, brands and services.

The holding company currently consists of the following assets:

Retail Holdings NAV (2014AR update)

What I also found interesting was the following paragraph in the annual report:

During 2014, the Company returned to equity $49,000 of the 2009 distribution, representing unclaimed distributions of non U.S. shareholders; an additional $13,000 was escheated. During 2013, the Company returned to equity $175,000 of the 2008 distribution, representing unclaimed distributions of non U.S. shareholders; an additional $3,000 was escheated.

I’m not familiar with the relevant laws in the US. I’m wondering if shareholders that don’t claim their dividends lose the right to receive them after 5 years? And what will happen if the company eventually liquidates? It appears that approximately 5% of dividends go unclaimed, and if this eventually accrues to other shareholders it could be a nice bonus?

Rella Holding

Since Rella announced that they would sell their stake in Aller and liquidate it doesn’t really matter what the latest results are. Despite that fact, the annual report did contain a couple of interesting items. The company increased the estimated liquidation proceeds from 77DKK/share to 77.5DKK/share. What I also found noteworthy is that the company renewed their share repurchase authorization. I don’t know if they are going to use it, but it would allow Rella to bet on its own liquidation. Could generate a bit of value for remaining shareholders.


Long Conduril, Ming Fai and Retail Holdings. No position in Rella anymore.

An unexpected catalyst for Rella Holding

Value investing often requires a leap of faith, especially when you buy something cheap with no real catalyst on the horizon. While Rella Holding had an active share repurchase program – so you could do far worse on the catalyst spectrum – I wouldn’t have expected that anything big would happen in the near future. Rella owns a large stake in Aller through non-voting B-shares, and the majority of the value of Rella is derived from the cash and securities that are owned by Aller. With insiders strongly at the helm at Aller – a struggling weeklies company – you wouldn’t expect any change anytime soon. See my write-up from 2012 for more details.

But when there is a large discount between intrinsic value and market price there is always the possibility that something good will happen. Yesterday Rella Holding announced that they would sell their complete stake in Aller to Aller and liquidate the company. Estimated distributions will be 77DKK per share versus a share price of 46.70DKK: representing a premium of 65%. I think it’s a reasonable fair price. My latest value estimate of Rella is a bit outdated, but the net current asset value + real estate values haven’t changed a lot:

Rella 2013 look-through balance sheet

They are paying a bit less than my estimated liquidation value of 83.40DKK/share, but I think that’s fine: to make a good deal it has to be a win-win for both parties. This transaction allows Rella shareholders to realize value and Aller can purchase a huge chunk of stock at a big discount to book value (and a slight discount to intrinsic value).

With the stock currently trading at 72.50DKK versus expected liquidation proceeds of 77DKK I think it also offers a good risk/reward for those wanting to play the merger arb game. The transaction is expected to close before 1 July 2015, and the two biggest shareholders of Aller, representing 87.8% of the outstanding A-shares, have already agreed to vote in favor of the transaction. The only thing that will be required is shareholder approval at Rella.


Long Rella. Might sell soon when the price is right

Some thoughts on holdco and CEF discounts

My recent article on FFP received a lot of attention, but most comments were along the following lines: “sure there is a 50% discount, but what if the discounts stays at this level?”. I would say: that’s exactly what’s value investing is about! You buy cheap, and you have to have some faith that at some point in time the market will recognize how much its truly worth. This is what Benjamin Graham had to say about the subject in 1955 to a Senate commission (the full transcript is available online):

The Chairman: … One other question and I will desist. When you find a special situation and you decide, just for illustration, that you can buy for 10 and it is worth 30, and you take a position, and then you cannot realize it until a lot of other people decide it is worth 30, how is that process brought about – by advertising, or what happens?

Mr. Graham: That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. We know from experience that eventually the market catches up with value. It realizes it in one way or another.

I’m not saying that the discount will completely be eliminated in time, because there are valid reasons why a holding company or a closed-end fund should trade at a discount. These are overhead costs, tax inefficiencies and potential value destruction. In general overhead costs for holding companies are low, while closed-end funds incur higher costs because there is an ‘active investment manager’ that gets a fee based on AUM. Holding companies on the other hand are often less tax efficient. Dividends cannot always be passed through from the operating companies to the holding company in a tax free manner. In most jurisdictions this is not a major issue: It is usually possible to pass through dividends in a tax free manner if the holding company has a sufficiently big stake in the operating company.

The last important ingredient that should determine the discount is whether or not the manager is adding value, subtracting value, or is value neutral. I think the best assumption is usually the last one. Most CEF’s invest for example in large cap companies: they don’t underperform the market before trading costs in the long-term, but they also don’t deliver outperformance. If you already account for trading costs under the overhead the manager probably doesn’t add further negative performance. Holding companies are very often passive vehicles, and since they are passive there is neither value destruction nor creation. Rella is a nice example of a holding company that is actually creating value, simply by buying back undervalued shares.

Discount fluctuations

Both CEF discounts and holdco discounts usually vary over time. Sometimes they are small, and sometimes they are big. My thesis is that these fluctuations can be partly explained by the perceived attractiveness of the underlying assets, general investor sentiment and the fact that both holdco’s and CEF’s have a fixed supply of shares outstanding.

I wrote for example about mortgage closed-end funds two months ago. Rising interest rates resulted in declining prices for the underlying assets and at the same time the number of investors willing to invest in CEF with these type of assets also declined. As a result the discounts to NAV increased at the same time as NAV’s declined. If the market would be efficient this would be hard to explain since the lower underlying asset prices should already have reflected the bad news.

The reason that this doesn’t happen is that there is no (easy) arbitrage between share price and NAV. So when investors want to exit anyway only one thing can happen: the discount increases. Similar mechanics are at work behind the holdco discounts, except that there is even less of a possibility of arbitrage between share price and underlying value. When a closed-end fund starts trading at a huge discount activist investors can usually acquire a big enough stake to push for liquidation while holdco’s are often tightly controlled by their founders. They might want to take advantage of the discount by buying back shares at some point, but it’s also possible that you simply have to wait for sentiment to change.

Possible returns

I have no idea when investor sentiment is going to change for FFP, but I do think it will probably change at some point in time. Between 2007 and today the discount varied between 30 and 50%, and in the next five or ten years I would be surprised if it wouldn’t move back to the bottom of this range at some point in time. And you shouldn’t underestimate the amount of alpha you can create when this does happen.

If it would take 10 full years for the discount to shrink from 50% to 30% you still generate 2.9% alpha annualized (this is after accounting for 0.5% in overhead costs). If it takes ‘just’ 5 years you are looking at 6.4% annualized alpha. I don’t know about you, but that’s certainly attractive enough for me!



Couple of quick updates (RELLA.CO, ASFI, IAM.TO)

While I was on vacation last week a couple of companies released their yearly results (RELLA.CO and ASFI), and another holding of mine was finally sold (IAM.TO). I’ll briefly discuss the various developments.

Rella Holding A/S

Rella is the holding company that owns the biggest part of Aller, a Scandinavian publisher of mostly weeklies. Aller only reports once a year, so when they do it’s a good moment to review how the company is performing. Comparing the balance sheet of Aller with previous year version should give a good indication on what happened with the asset value:

Rella/Aller 2011 and 2012 balance sheets side-by-sideWhile the share price of Rella is up roughly 25% since I first wrote about the company it’s almost just as cheap today as it was then. The book value of Aller is growing while it’s repurchasing shares and paying out dividends, and as a result Rella is owning an increasingly bigger part of Aller. At the same time Rella is using the dividends received from Aller to repurchase it’s own shares. That’s a combination I like!

The biggest part of Rella’s value consists of the securities on Aller’s balance sheet, but it’s also important that the operating entity remains profitable. The results of primary activities were down significantly in 2012 compared with 2011: 142M DKK in 2012 versus 246M DKK in 2011. This decease is primarily due to employee costs in connection with staff reductions. Revenue is actually up a tiny bit, and I also think it’s positive to see that prepayments from subscribers are up a bit compared to last year. Weeklies aren’t dead yet, and next year should also be slightly profitable:

Based on the current activity level and the 2012/13 budget figures from the leading subsidiaries and the accounts for the latest time periods, a result of primary activities (EBIT) of DKK 100-150m is expected.

As long as Rella continues to trade significantly below tangible asset value, Aller remains profitable and both companies continue repurchasing shares I’m not going anywhere.

Asta Funding

After a bit of a delay Asta Funding finally published it’s 10K last week. I haven’t found any big surprises in the 10K compared with the press release that was issued a month ago. Due to some accounting peculiarities it’s not directly visible how cheap ASFI is based on it’s asset value, but it certainly is. The company has currently a $123M market cap while it owns $106M in cash and investments, and it does not have any big liabilities (there is only non-recourse debt). Besides the cash we find $12.3M in consumer receivables on the balance sheet and $18.6M is invested in the personal injury litigation financing business.

Besides these assets that are visible on the balance sheet the company also owns a large number of consumer receivables that have zero book value (fully amortized portfolio’s). Last year these assets generated $36.4M in zero basis revenue. Since the company is not replacing it’s aging portfolio of consumer receivables we should expect that revenue’s will drop in the future, and this could become problematic if there are a lot of fixed costs. They can’t continue on the current path indefinitely. So this is something to keep an eye on, but so far ASFI is still cheap and using a lot of cash productively by repurchasing shares.

Integrated Asset Management

Buying this company last year was a mistake. It looked cheap because it had a negative enterprise value and had a history of profitability, but in what could best be described as a beginners mistake I  failed to realize that there were a lot of accounts payable and a lot less accounts receivable. So logically the company had to use a bunch of their cash this year, and IAM was not as cheap as I thought. At the same time the financial performance of the company was also disappointing last year. Since the company is very illiquid it took some time for me to exit my position, but managed to do so this month at a small loss (-3.4%).



Rella Holding A/S (RELLA.CO)

Rella Holding A/S is a Danish listed holding company that owns shares of Aller Holding: a Scandinavian publisher with a 60% market share. Rella Holdings own 58.2% of Aller Holdings and uses the dividends it receives from Aller to repurchase it’s own shares and more Aller shares. The big attraction of Rella Holdings is that it is almost trading at net cash value and at a discount to NCAV and book value. The company trades at approximately a 25 percent discount to NCAV and a less meaningful 67 discount to book value. Some quick stats:

Shares outstanding: 22.880.336
Last price: 32.00 DKK
Market cap: 732.2M DKK
NCAV per share: 42.67 DKK
BV per share: 98.79 DKK

It should be noted that the numbers above are based on my own calculations. Rella Holdings investment in Aller is listed on the balance sheet based on historical cost. The Aller Holding B-shares are unlisted, but do trade on some obscure Danish OTC market.

Asset value

There are three sources of value inside Aller.

  1. A big amount of cash and securities.
  2. Significant real estate holdings
  3. A profitable operating business in a declining industry

I’m going to start simple and value Aller based on it’s asset value and the book value of it’s real estate, while ignoring goodwill, publishing rights and licences, and other fixed assets such as machinery. The main tangible items of Aller’s balance sheet are reproduced below with the value of Rella’s Aller stake in the right column. There is also some debt at the Rella company level, creating the following picture:

The most meaningful measure of asset value is probably NCAV plus real estate value. Most of the current assets are cash and securities that are marked to market so there is little doubt about the value there. The real estate is the other big item and is mainly an office building that was bought in 2009 for 800M DKK and is located at the Copenhagen waterfront. You never know if it can also be sold again for that amount, but probably for an amount somewhere in that direction, and that’s close enough when you are buying assets at a >50% discount.

Looking at a 32DKK share price and 74DKK in tangible assets per share looks like a big upside, but we do need to discount this a bit. Holding companies almost always trade at a discount, and almost always for good reasons because it’s often not a tax efficient structure and there are overhead costs. Administrative expenses are minimal for Rella running at 1.3 million DKK yearly. This is just 0.1% of the current market cap and an even lower percentage if we look at the underlying asset value. So the biggest reason for a discount should be the tax inefficiencies. Aller dividends paid to Rella are taxed at a 15% rate, so a discount between 15% and 20% seems fair based on the expenses and tax inefficiencies.

Earnings power

Buying assets at a discount is not going to do you any good if value isn’t preserved, so the second big question is how much money is Aller making or losing. Some historical key figures from the Rella site:

As is visible the company has been profitable four out of the five last years with 2009 being the only negative year. Average EBIT, including results from associated companies, has been 142M a year. While it’s not directly visible from the numbers above the circulation numbers are declining. In 2006 Aller sold 3.3 million magazines weekly while last year it sold 2.7 million, a 20% decline.

One thing to realize is that the real estate on the balance sheet is used to generate the above earnings, so if we would simply take the sum of the cash + real estate + operating business we would be double counting a bit. If the company would need to lease an office building the net income would presumably be significantly lower.

This source gives a gross rental yield of around 5 percent for Denmark, and with 1.2B in Real Estate on the balance sheet this would imply that the company would need to pay 62M DKK in rent per year. Using the 5 year average number – which isn’t entirely accurate since the balance sheet changed in 2009 with the purchase of the new office building – this would give us an average EBIT of 90M a year.

There are some other questions that need to be answered before we can complete the valuation picture:

  • How much cash is excess cash?
  • How to measure earnings? Look at reported earnings or cash flow?
  • What is the right multiple for a declining business?

Excess cash

I don’t think there is a single right answer with regards the question “how much cash is excess cash?”. Given the current balance sheet I think it’s obvious that there is excess cash, but how much depends on what you think is a proper capital structure. I think the company could easily run without the 2.3B DKK securities position, and that would imply that it could return 54 DKK in cash per Rella share (ignoring taxes).

This would leave the company with 543M DKK in cash and 1,064M total in current assets while total liabilities excluding pension provisions would stand at 1,503M DKK. This is probably a bit on the aggressive side for a company in a declining industry, but the liabilities include 424M DKK in prepayments from subscribers, so it seems to me that it would be a workable capital position. When you have customers that prepay you don’t need a lot of working capital. Maybe it would be a bit more prudent to reserve 300M DKK of the securities to cover the pension provisions, so that would leave the company with 2.0B DKK in excess cash (still 41DKK per Rella share).

Long term debt is very low and stands currently at 28.8M DKK. There is a 437M item in the balance sheet titled “Other debt”, but based on the cash flow statement I think those are some sort of spontaneous liabilities, not interest bearing debt.


The earnings reported by the company seem to match economic reality to me, so that’s easy. Cash flow is significantly higher than reported income, but the company does spend a decent amount every year on new equipment and intangibles such as publishing rights. In 2011 the company invested 121M in goodwill and publishing rights and 71M in buildings and machinery/equipment. Cash from operating activities was 449M, subtract the 192M in capex and we get 257M in free cash flow: a reasonable match with the reported 220M operating income


It’s not easy to figure what kind of earnings multiple would be appropriate. How long can the company remain profitable while circulation numbers keep dropping? I don’t know, but magazines aren’t going to disappear overnight and the fact that Rella is a market leader in Scandinavia should be valuable in a declining industry. They should be one of the last companies in business since they can spread fixed costs over the biggest number of subscribers, and when competitors disappear Rella’s decline will slow down.

A PE multiple between 7.5 and 8.5x is appropriate for a business that isn’t growing, so that is absolutely an upper bound for the valuation of the company. I honestly don’t know what’s reasonable for Aller. The business doesn’t seem to be declining that fast, so I think that a multiple around 4x or 5x isn’t that bad of a guess. I don’t think being precise is very important, as long as the business does have a positive value I’m already in a good position thanks to the real estate value and excess cash.

A guess

Since a guess is better than nothing I’ve based a quick and easy valuation based on the following assumptions:

  • Excess cash is 2.3B in securities minus 300M in pension provisions
  • Real estate value is 1.3B, fictional rent 62M/year
  • Average EBIT is 142M, taxrate is 25%, interest expense is ~2M/year
  • PE-multiple: 4x
  • Holding company discount: 20%

These assumptions create the following picture:

This would imply that Rella is worth 67DKK per share while the current share price is 32DKK. It also shows that the valuation isn’t very sensitive to the exact value of the operating business: it’s mainly about the assets on the balance sheet.


Aller was founded in 1873 by Carl Julius Aller and the company is to this date controlled by the Aller family who own the A-shares (27% of total outstanding shares). Rella Holding owns 69% of the non-voting B-shares. The fact that Aller is fully controlled by the family is probably one of the key reasons the company is cheap: you don’t have to expect a catalyst from a private equity fund or activist investors.

I don’t think that’s a problem: value can be it’s own catalyst, and the fact that you are not competing with private equity funds or activist investors might actually be a reason why there is an opportunity in the first place. It does introduce one major risk: the Aller business is probably perceived as a family legacy, and when things go bad it’s easy to see the family throwing good money after bad in order to preserve the legacy. It’s a risk I’m willing to take given the large margin of safety based on the current asset value, and the fact that the family has a large economic interest in Aller as well. After the poor results in 2009 the company cut costs, and in the current annual report Aller also signals that it is willing to close down or sell non-strategic and/or loss-making activities.

Another small positive note is that insiders have bought Rella shares on multiple occasions the last few years, and the last purchase was in March this year when the company was trading at almost the same price as today.

Also interesting: not only Rella is buying back it’s own shares: Aller itself also started buying it’s own shares. Apparently some Danish regulation that prevented Aller from doing this before has been lifted.


There are a lot of uncertainties with regards to the exact value of Aller and Rella, but one thing is certain: there is a huge amount of asset value, and while magazines and weeklies are perhaps a dying business it is, for now, still a profitable business. This is really the key of the thesis: the easy to value assets are the biggest part of the pie, and the hard to value business isn’t that important as long as the business is not turning into a massive cash drain, and there is no real reason to expect that this is going to happen.

With the current discount I think there is a good margin of safety. A lot can go wrong and/or a lot of mistakes can made in the valuation before an investment at current prices will turn in a disaster.


Author is long RELLA.CO

Further reading

The company was written up earlier this year at Oddball Stocks when it was trading at a significantly lower price, so interesting to compare differences in valuation. A more recent write-up can be found on VIC.