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Retail Holdings N.V.: A Closer Look

August 04, 2011 | About:
ttonca

ttonca

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The company was originally incorporated in Antilles, Netherlands on Dec. 21, 1999, as Wordsworth Co. N.V. and changed its name to Singer N.V. on Aug. 2, 2000. On Sept. 14 2000 the company became the parent of several operating companies which together made up the old Singer Company N.V.

This occurred as a result of the old Singer Company N.V. re-organizing under Chapter 11 bankruptcy. Amidst this re-organization Singer N.V. acquired the ownership rights to the Singer trade name and as an unsecured claim holder acquired the remaining Singer Company assets.

Singer N.V. subsequently changed its name to Retail Holdings N.V. in August 2005. Retail Holdings (ReHo) is now the holding company for Singer Asia Limited via their 56.2% majority interest in the company.

ReHo has no operations other than those conducted through Singer Asia Limited. Singer’s operating subsidiaries in Bangladesh, India, Indonesia, Pakistan, the Philippines, Sri Lanka and Thailand are engaged in the wholesaling, retailing and direct distribution of a wide variety of consumer durable products such as home appliances, electronic products (plasma televisions, DVD players, etc.) as well as home furnishings.

Singer also operates a credit division which extends financing to customers desiring to purchase the company’s products, but who are unable to pay cash in full.

Singer Asia has been operating in South Asia since the late 1800s thereby establishing a reputation as a trusted and reliable source for brand name consumer products. In each of the markets in which it operates Singer is the leading retailer in terms of market share for durable home products with a significant share across multiple product categories.

Singer Asia also has the largest distribution network in South Asia with a total of 792 stores across Bangladesh, Pakistan and Sri Lanka. The affiliate company in Thailand is also the largest direct seller in the country with a total of approx. 2,441 independent representatives as well as 183 direct selling locations.

The operations in India, where opportunity may loom largest, commenced in 1870. There, Singer is only one of two multi-national companies with a nationwide retail license enabling it to operate company stores throughout the nation.

Since the company operates in three distinct segments: Wholesale Distribution & Direct Selling, Retail and Consumer Credit, I think it is appropriate to take a brief look at the underlying economics and businesses of each.

Wholesale Distribution & Direct Selling

Singer Asia’s wholesale distribution business is primarily based in India and Thailand via direct selling.

Singer Asia currently owns 80.1% of Singer India (a publicly traded company on the Bombay Stock Exchange) after the recent restructuring of Singer India which was necessary from a financial standpoint as it was deemed a “Sick Company” by the board for Industrial & Financial Reconstruction (BIFR) in May 2005.

Since then Singer India has re-organized and either re-financed or settled with its creditors. The company is expected to exit from BIFR in the second half of 2011.

Presently, Singer India sells Singer and Merritt brand consumer sewing machines and other sewing related products to distributors and dealers and through its own small retail network of 20

“Singer” retail/sewing stores in high traffic locations in India, and through Brand Trading Pvt. Limited (a wholly owned subsidiary) to certain government agencies and to military canteens. It has done so since the business got started 1870.

Retail

Singer Asia’s retail businesses in Bangladesh, Pakistan and Sri Lanka are by far the largest component of the company’s operations.

Together, these businesses comprise over 792 retail storefronts ranging in size from 200 sq. feet to approx. 14,360 sq. feet. Some of the larger “mega” outlets are the largest department stores in their respective countries.

It should come as no surprise then to learn, that in each market which it serves Singer’s retail operations are both the largest in terms of size and overall market share:

- Sri Lanka: 30% overall market share (which includes a 37% share in washing machine sales and a 54% share in refrigerators)

- Bangladesh: 16% overall market share (17% share in refrigerators and 16% share in televisions) these figures are also supplemented by distribution agreements with approx. 972 independent dealers.

- Pakistan: 8% overall share (supplemented also with sales by over 230 independent dealers)

This performance is driven by Singer’s powerful brand in the markets in which it does business where customers have positive emotional tie-ins with the company and associate it with trust due to the company’s long standing operations in the communities which it serves.

According to a brand awareness survey recently conducted in its operating markets, approx. 92% of respondents where aware of the Singer company with no surveyor assistance.

Consumer Credit

Extension of consumer credit has been an integral part of the Company’s operations since shortly after the business was founded almost 160 years ago.

In 2010 approx. 48% of Singer’s sales were on credit and interest charges on consumer installment accounts represented about 8.1% of Singer’s total revenue for the fiscal year, not an insignificant amount.

One must keep in mind though that the markets in which Singer operates often lack alternative forms of credit for low and middle-income consumers which is the primary driver behind the large credit sales figure, in this respect comparing figures with a similar operation in a more developed part of the world is not relevant.

Singer’s collection has also generally been good. With a current total of 426,035 installment accounts representing $70.8 mil. in receivables, the average percentage of installment accounts in arrears as of Dec. 31, 2010 was 1.9% with a low of only 1.0% in Bangladesh (where it has the largest number of outstanding installment accounts) to a high of 4.5% in Pakistan.

Other

Given Singer’s outstanding brand and name recognition, it is worth noting an additional component of the company’s business which is its licensing.

The Singer trademark is owned by Kohlberg & Co. LLC. via an affiliate fund (SVP Holdings Ltd.) which was sold to it by ReHo in September 2004 in exchange for $65.1 mil. in cash, $22.5 mil. in unsecured, subordinated promissory notes as well as the granting to Singer Asia of a royalty bearing license for the use of the trademark in the markets in which it currently operates as well as China, Australia and New Zealand.

This is notable because Singer has chosen to seek licensees throughout Asia where it does not currently have existing operations. One such agreement with a third-party licensee has already been arranged in Malaysia. In exchange for granting the local company (Singer Sdn. Bhd.) the right to use the Singer name and trademark, Singer Sdn. will pay a royalty calculated as a percentage of revenue on a yearly basis.

A similar agreement has also been reached with an Australian licensee and more such arrangements hope to be reached in the future, which will over time substantially contribute to Singer’s revenues and earnings.

Finally, seeing as how no qualitative overview of a business is complete without a discussion on what may be the most important component - management, here presented are my findings.

While in total the Singer Asia company has approx. 3,934 (7,597 personnel when independent representatives are included) the executive level of the company is quite lean (top heavy is unflattering) with a grand total of 3 executives at ReHo’s head office and another 7 at Singer Asia’s administrative office.

These executives together with Singer’s directors (combined total of 11 persons) received an aggregate of approx. $2 mil. in compensation and bonuses. While this figure does not include amounts expended by the company for automobiles, travel and other business expenses to corporate executives, it is still nevertheless a respectable figure in comparison with any other executive pay package at comparable firms around the world.

More importantly, long term incentives are aligned correctly in that they depend entirely upon the performance of the business and management’s stated operating goals rather than the price of the stock or something other outside of the leadership’s control. I present this passage from ReHo’s 2010 Annual Report:

“ReHo has put in place a special bonus program for the Company’s Chief Executive Officer whichprovides a cash award following the liquidation, dilution, wind-up, merger or sale of the Company, in theevent that the aggregate distributions to shareholders, including any final distribution, exceed a certainthreshold amount. No awards have been made under this program.”

The liquidation, merger or sale of ReHo mentioned is the stated mid-term goal of management which i will talk more about in the quantitative part of this overview.

Additionally, the board of directors and executive officers of ReHo combined, hold approx. 21.2% of the total shares outstanding. By far the largest shareholder from this lot is the current CEO & Chairman of ReHo, Stephen H. Goodman who beneficially owns 19.7% of ReHo’s total shares.

Mr. Goodman was the former CEO of the old Singer Company from 1998 onwards and was also elected as a director and subsequently chairman of the company in Sept. 2000. It is a safe assumption that Mr. Goodman understands the business and its underlying economics well and his interests are also fully aligned with shareholders.

Quantitative Overview

Now that we understand how ReHo (through Singer Asia) makes money, lets see how much they make and learn more about the business’s underlying economics.

On a consolidated basis Singer Asia and its wholly owned subsidiaries generated $264.1 mil. in revenue in fiscal year 2010. A modest 2.9% increase over fiscal 2009. Revenue at the retail operating units in Sri Lanka,Bangladesh and Pakistan increased by a more impressive 36.9%, 9.1% and 3.2%, respectively, compared to the same period in 2009. The especially strong revenue growth in Sri Lanka reflects the boost in consumer sentiment and demand following cessation of the civil war.

This revenue includes $21.3 mil. of finance earnings on consumer credit sales, compared to $33.6 mil. for the same period in 2009. The slower growth in finance earnings than revenue reflects the higher growth in cash sales as compared to credit sales, a positive development indeed.

The gross margins from operations as a percentage of revenue for the fiscal year ended Dec. 31, 2010 was 32.3% compared to 39.2% for the year ended Dec. 31, 2009, and 37.4% at the beginning of the decade, meaning slightly fluctuating but stable margins overall. The slight drop in gross margin percentage is primarily due to the decrease in credit sales earnings as a proportion of consolidated revenue which are higher margin in nature.

Results from operating activities for the year ended Dec. 31, 2010, were also markedly better than in fiscal 2009 with profits of $49.9 mil., compared to a profit of $29.7 million for the same period in 2009, an increase of approximately 68% year over year and an increase of over 180% from the year 2000. A marked increase in business performance by any stretch.

The profit attributable to ReHo shareholders was $16.6 mil. for the year ended December 31, 2010, compared to $9.9 mil. last year, equivalent to $3.14 per diluted share compared to $1.78 the prior year.

This large increase came about mainly because management greatly improved operating efficiencies due to cost saving measures, principally undertaken in its SG&A (selling, general and administrative) expenses which represent only 22.3% of revenue now, compared to 30.% in 2009. Generally, anything under 30% is considered magnificent in the business world. When one takes into account the line of business Singer is in (consumer durables retailing) the number is even more impressive and one of the lowest I have ever seen for such an operation.

Liquidation Value

In this respect, we fortunately have some much needed assistance in the inherently difficult task of assigning a business's approximate intrinsic value. Singer Asia’s major subsidiaries are all publicly traded entities in the respective countries in which they conduct their business operations:

- Singer Bangladesh Limited: (SINGERBD) Dhaka Stock Exchange

- Singer India Limited: (SINGER) Bombay Stock Exchange

- Singer Pakistan Limited: (N/A) Karachi Stock Exchange

- Singer Sri Lanka PLC (including other public subsidiaries): (SINS) Colombo Stock Exchange

- Singer Thailand Public Co. Limited: (SET) The Stock Exchange of Thailand


Collectively, the present market value (as of Dec. 31, 2010) of these entities which is attributable to Singer Asia is approx. $303 mil. USD.

Combine this figure with the $7.6 mil. in cash which Singer Asia holds and we arrive at a figure of $310.6 mil. Now to be conservative, lets deduct all of Singer Asia’s outstanding debt from this figure which is $41.0 mil. (down from $46.3 mil. in 2009) and we get a present value of $269.6 mil. for a controlling 56.2% stake in Singer Asia. The amount from this that is in turn attributable to ReHo shareholders is $151.5 mil.

The arrived at figure also does not take into account whatsoever the average premium which is typically paid by acquirers around the globe to takeover a public company, or in this case multiple public companies.

According to Dealogic, who is an authority in the field the global one month premium average is presently 27% (as at July, 2011) This is down from last year’s 28% and the lowest level since early 2008, when global M&A grinded to a halt.

If we apply this 27% premium above the market price to ReHo we get a figure of $192.4 mil. This figure does not include the $25.7 mil. in KSIN Promissory Notes which the company holds, that came about as a result of the Singer trademark sale to Kohlberg & Co. and mature in Feb. 2014 as well as the $39.4 mil. in cash which ReHo presently has with no outstanding debts at the holding company. When these are added to the total, shareholders would receive $257.5 mil. in a liquidation or approx. $45 per diluted share in contrast with the current (August 1, 2011) market price of $18.50 per share (RHDGF) and $95.5 mil. market cap.

However, since management’s stated mid-term goal is to liquidate the company. There can be no assurance of receiving the above stated amount as management itself likes to remind shareholders in its recent annual report since a liquidation will likely come in parts rather than a full sale of all aggregated Singer Asia assets.

Nevertheless, despite this fact and the uncertainties that abound in the markets in which the company operates both from an economic and political standpoint. Singer’s outstanding business and underlying economics will command a premium when a sale does occur either in whole or in part.

About the author:

ttonca
Theodor Tonca's entry into the business world came at the age of 15 when he co-founded his first business, which was subsequently sold when he was 17. Mr. Tonca has managed his own investment portfolio as well as those of private clients via separate accounts since the age of 18.

Theodor is currently a Co-Founder & Principal in the private merchant banking firm of Graham Theodor & Co.



Visit ttonca's Website


Rating: 3.5/5 (13 votes)

Comments

ndl11
Ndl11 - 3 years ago
what is the present liquidation value?

Also the big question is the effect of taxes should the companies be liquidated!
ttonca
Ttonca - 3 years ago
To answer your questions Ndl,

1. The present liquidation value for ReHo is approx. $216.2 mil. (This figure represents the estimated value of ReHo's 56.2% stake in Singer Asia as well as the $25.7 Mil. in notes which the company holds as well as the $39.4 mil. currently on the balance sheet)

2. In terms of taxes, the effective income tax rate for ReHo for the fiscal year ended on Dec. 31, 2010 was 21.8%. But i believe that a more realistic tax rate in the case of a liquidation would be 32.5% as this is the tax rate applicable to dividends from capital gains on the sale of "substantial share interests" in Curacao where ReHo is incorporated.

If we use this 32.5% tax rate and deduct it from our liquidation value figure then the proceeds distributed to shareholders would be $145.9 mil. substantially less, but still a much higher figure than the present market value of $82.6 mil. (as at Aug. 11)
ndl11
Ndl11 - 3 years ago
Thought on the latest earnings release and any updated calculations?
ttonca
Ttonca - 3 years ago
Regarding ReHo's first half results, very positive all around and exceeding even my expectations. Anytime top line revenue grows by 24.4% and net profit by 59.4% one must be impressed.

The quality of the earnings is also good as while top line revenue grew by the fore mentioned 24.4% revenue at the company's retail operations (its primary business segment) grew by an almost identical 24.2% indicating that the growth indeed came from regular business operations rather than one time items or growth in investing or financing operations.

SG&A expenses grew by a modest 2.1% compared to the first half of 2010. But this was due to a one time increase in advertising expenses to take advantage of the Cricket World Cup event which is held once every four years and drive sales from the event.

The one development which will permanently improve the economics of the company's Sri Lankan wholly owned subsidiary is the decrease in the country's corporate tax rate from 35% to 28% This will improve income from operations for this subsidiary going forward, thereby improving income for the company as a whole.

While operating performance was good, we must keep it in perspective and remember that it was only for the first six months of the year. Since i do not place much weight upon quarterly results, i will re-visit the intrinsic value calculation once the full year results are disclosed.
batbeer2
Batbeer2 premium member - 3 years ago
Good stuff, thanks !
fredmonty
Fredmonty - 3 years ago


What is your feel on an IPO of RHDGF and when would it happen? I do not know if they can sell each business on its own.
ttonca
Ttonca - 3 years ago
Hi Fred,

Judging by everything i have read i do not believe an upgrade from the Pink Sheets for ReHo is in the cards.

As far as a liquidation is concerned, i share your feelings and believe that a full divestiture of their 56.2% interest in Singer Asia would be the most rewarding scenario. Since management's stated goal is a mid-term liquidation of the business, i am hoping they achieve this by 2014-15.
ndl11
Ndl11 - 3 years ago
Singer Asia -#50 Million?

see link below for article

http://www.dailynews.lk/2011/09/08/bus01.asp
ndl11
Ndl11 - 3 years ago
thats 350 million
ttonca
Ttonca - 3 years ago
Thanks for the article link Nd, much appreciated.

Wow, looks like the current sale price trumps even my estimation of an approximate value of $250-260 Mil. for the entire company.

I must admit that looking at things now, i underestimated the value of Singer Bangladesh. Largely because of its lackluster results over the past two years and lack of recognition of the company's true earnings power due to the wide moat it enjoys in its business.

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