RHDGF - Retail Holdings

[Foreign Tuffett]

H,

 

Not sure how much can be attributed, I just know I was (on the IRA side) a large buyer under the assumption that artificial pricing for taxable selling was driving it down... I bought maybe 2-3% of that number at $10.1x.

 

I hope it's buybacks, that would be great.... and not shocking either.

 

I was a post announcement buyer as well. Buybacks would be the icing on the cake.

[fishwithwings]

Does anyone know if the "Valuation at market" calculation mentioned in the financials takes into account the special bonus program for the CEO?

[writser]

I think it does, at least when I compare those financials to my pro-forma adaptation of December 2018 financials. My best guess is they settled the old CEO payables and the ~$1.5m for the June distribution is included in the "closing expenses".

 

In total I get to a NAV of $3.40 - $3.70 / share. Maybe slightly more if they managed to buy back some shares. Though I'm not super confident about that. At this point residual value is so low that it could easily be $2 or $5. I guess we have to wait a few more weeks for H1 results to be sure.

[Foreign Tuffett]

My best estimate is that there was about $3 million in "leakage" between the 12/31/18 NAV and the 4/30/19 NAV.

 

What caused this leakage? Singer Bangladesh transaction costs? RHDGF and Sewko corporate costs? Payment of the $3.4 million bonus owed to the CEO at the end of last year? I'm not sure.

[writser]

My best guess is that, since the projected closing expenses of $3.5m in the May PR seem too small to include the $3.4m deferred compensation, this amount has been settled and that the closing expenses only include the ~$1.8m CEO compensation for future distributions (i.e. 3.5% over both the $8 dividend and the stub).

 

A more pessimistic take is that the $3.4m (or even worse, the $3.4m AND the $1.8m) have been ignored in the May press release and that you should subtract them yourself. But given that the cash balance in the May press release is indeed about $3m lower than I'd expect it was my assumption that the first chunk has been paid out. I've been too lazy to confirm this with IR (nor am I sure they will actually confirm it).

 

There should also be some receivables from the Singer Bangladesh sale, which is only vaguely mentioned in the AR page 77. How much? Are these payments contingent upon anything? And did they buy back shares? It's a bit of a fuzzy puzzle now and I have my doubts about how useful it is to try to get to the bottom of everything. Value seems to be ball-park $3.x with a lot of uncertainty. I'm fine with waiting a few weeks for the semi.

 

The "good" thing is that Singer India is now trading around the year-low, making it slightly more likely that Retail Holdings will sell their stake at a premium :P .

 

It will be a shame if this thing finally dissolves. This has been a fun (and profitable) puzzle over the years. A busted IPO, non-remittance shares, withholding taxes, royalty payments, notes written down to zero, deferred CEO compensation, there was always something to do! And despite a few setbacks I think this vehicle is actually managed somewhat shareholder friendly and has generated fine returns the last decade. On top of that it offered some nice trading opportunities along the way.

[Lupo Lupus]

Retail Holdings has published their half-yearly report.

 

One thing I did not like is this paragraph

 

“The Company’s challenge going forward is to either divest the remaining Singer India shares and/or to improve the scale and profitability of the ongoing Singer India business, while further reducing Corporate costs, so that the Company’s Continuing Operations can shift from a small loss in the first half of 2019 to a profit increasing over time. Management’s first preference is to divest the India shares assuming that this can be achieved at a reasonable valuation, but progress

also continues to be made in boosting Revenue, primarily through additional appliance sales, and reducing costs, both at Singer India and in the Corporate functions."

 

Sounds a bit like management wants to cling to the company and is happy to break even over time. So maybe no liquidation after all?

 

Also, the report mentions 8.2mln cash available for Retail shareholders. Can someone reconcile this figure? In their liquidation update they reported 10.2 mln  (accounting for the dividend), and since a 3 million post-sale has been received. So I was expecting a higher figure

[writser]

Yeah disclosure is a bit sparse. I think the difference is that the $3.4m bonus accrual for the CEO has been paid. 10.2m + 54% * 3m - 3.4m is about the $8.2m mentioned. Not 100% sure about that though.

 

Sounds a bit like management wants to cling to the company and is happy to break even over time. So maybe no liquidation after all?

 

I disagree. It clearly states that their 'first preference' is to sell their stake. Also, look at their past actions. They've been steadily liquidating. The bad thing is that it looks like there is no buyer yet and that there might not be one in the foreseeable future.

[fishwithwings]

What do you guys get for liquidation value?

[Lupo Lupus]

Yeah disclosure is a bit sparse. I think the difference is that the $3.4m bonus accrual for the CEO has been paid. 10.2m + 54% * 3m - 3.4m is about the $8.2m mentioned. Not 100% sure about that though.

 

Sounds a bit like management wants to cling to the company and is happy to break even over time. So maybe no liquidation after all?

 

I disagree. It clearly states that their 'first preference' is to sell their stake. Also, look at their past actions. They've been steadily liquidating. The bad thing is that it looks like there is no buyer yet and that there might not be one in the foreseeable future.

 

I guess they have to write that their "first preference" is still liquidating. But between the lines there is a lot of noise that they have other things in mind. They talk about improving scale of the Singer business and boosting revenue, which kind of seems the opposite of liquidating. But may be I am reading too much into it ...

[Hielko]

Yeah disclosure is a bit sparse. I think the difference is that the $3.4m bonus accrual for the CEO has been paid. 10.2m + 54% * 3m - 3.4m is about the $8.2m mentioned. Not 100% sure about that though.

 

Sounds a bit like management wants to cling to the company and is happy to break even over time. So maybe no liquidation after all?

 

I disagree. It clearly states that their 'first preference' is to sell their stake. Also, look at their past actions. They've been steadily liquidating. The bad thing is that it looks like there is no buyer yet and that there might not be one in the foreseeable future.

 

I guess they have to write that their "first preference" is still liquidating. But between the lines there is a lot of noise that they have other things in mind. They talk about improving scale of the Singer business and boosting revenue, which kind of seems the opposite of liquidating. But may be I am reading too much into it ...

I think you are reading too much into it. They have sold basically 95% of the business now, if that isn't liquidating I don't know what is. But these assets aren't easily sold (at a good price) as the long liquidation timeline indicates, and if you have a small business left that might take time to sell you better try to make money in the meantime.

[benhacker]

Yeah disclosure is a bit sparse. I think the difference is that the $3.4m bonus accrual for the CEO has been paid. 10.2m + 54% * 3m - 3.4m is about the $8.2m mentioned. Not 100% sure about that though.

 

Sounds a bit like management wants to cling to the company and is happy to break even over time. So maybe no liquidation after all?

 

I disagree. It clearly states that their 'first preference' is to sell their stake. Also, look at their past actions. They've been steadily liquidating. The bad thing is that it looks like there is no buyer yet and that there might not be one in the foreseeable future.

 

I guess they have to write that their "first preference" is still liquidating. But between the lines there is a lot of noise that they have other things in mind. They talk about improving scale of the Singer business and boosting revenue, which kind of seems the opposite of liquidating. But may be I am reading too much into it ...

I think you are reading too much into it. They have sold basically 95% of the business now, if that isn't liquidating I don't know what is. But these assets aren't easily sold (at a good price) as the long liquidation timeline indicates, and if you have a small business left that might take time to sell you better try to make money in the meantime.

 

+1

[aryadhana]

Opened a position in this recently at about $1.09/share based on the fact that there seems to be about $1.15 cash/share attributable to ReHo shareholders, and another $1.24/share in Singer India stock at its most recent close.  Got this from information under `Valuation` in their Summary Annual Report for last year adjusting for the $0.50/share dividend recorded and paid sometime in April and decline in Singer India share price.  Singer India is pretty lightly traded and ReHo (through its partially-owned subsidiary) holds about 59.1% of the company, but I felt there was enough comfort from the available cash.  One risk is administrative operating costs (they seem to have 4-6 employees at the Singer Asia and ReHo levels) and any other windup costs, which can really dent cash ultimately available for shareholders. 

 

CEO recently reiterated his intention to liquidate by EOY. 

 

This is from the Summary Report.

 

The market value of the Singer India shares owned by Singer Asia was $12.1 million as at December 31, 2019. In addition, Singer Asia at that date had $10.3 million in cash. Of the $22.4 million amount, 54.1% or $12.1 million, is attributable to the ReHo shareholders. In addition, ReHo had $2.1 million in cash at December 31, 2019. There can be no assurance that the ReHo $14.2 million valuation, or any higher or lower amount, will be realized from a public or private market sale of Singer Asia and/or its subsidiaries, and ReHo’s subsequent liquidation. This is particularly true given the considerable uncertainties and likely diminution in value of the Singer India shares as a consequence of COVID-19 that emerged early in 2020. Each of ReHo and Singer Asia and their intermediate holding companies are free of third-party debt; all Company debt is owed by Singer India without any parent or affiliate guarantee or other support.

[writser]

Yeah, that seems about right. I see two potential pitfalls:

 

1) they have been trying to sell their subs for a long, long time. The most recent Bangladesh sub sale was, well, maybe not a disaster but quite disappointing. Consider me a bit skeptical about selling the India sub both quickly and at a nice price.

 

2) we're talking about a company with ~$10m in assets. Any costs will have a great impact on returns. As of April 2019 projected closing expenses were $3.5 (http://www.retailholdings.com/pressReleases/pressReleasesFile_177.pdf). As of the latest annual, at the very least there is still a $651k accrual for management bonuses due. Management compensation was $861k in 2019. Management also earns a 1.75% bonus over future distributions. It's not completely clear to me what costs have been incurred since April 2019 but one can easily imagine another $2m+ going down the drain.

 

Even then it's probably still cheapish. And the company has a long history of treating shareholders fairly. I own some shares too. Certainly not my best idea but not the worst either.

[aryadhana]

Cash attributable to shareholders on 6/30/19 was $8.2M (source) and $7.7M on 12/31/2019 (source), for about $527,700 in other charges to corporate cash over that six-month period.  The disclosures aren't very specific, so I can't tell whether the $651,000 is included in their non-GAAP discussion of corporate cash position (I wouldn't, plainly speaking, represent that $651,000 as cash available for ReHo shareholders). 

 

This confusion aside, if we look at their proforma valuation (source) after the $8 dividend and entirely zero-out the value of Singer India shares (which were 60% higher then) and subtract $0.50/share for the recent dividend, still left with per share value of $1.47, and that includes their anticipated closing costs.  That strikes me as a pretty comfortable safety margin, since I'm guessing they are fairly good at estimating closing costs in a straightforward way.

 

They didn't discuss cash or proforma valuation in their most recent earnings press release, as they've done in previous years.

[writser]

That calculation seems incorrect to me. I think you forgot something. They only own 54.1% of Singer Asia. If you back out Singer India shares you are left with 54.1% * 8.2 equals a $4.4m stake in Singer Asia and $2.4m in net assets in Retail Holdings.  ~$1.47 / share or $0.97 after the second dividend. I think the management bonuses are included in the projected closing expenses. A few years ago I asked management whether the accrued liability was included in the non-GAAP cash position and they told me it wasn't.

[aryadhana]

You're right.  I can't replicate my earlier calculation anymore but I think I replaced closing expenses with twice their corporate cash charges from June-Dec 2019 plus the $661k bonus accrual. 

 

Cash at Sewko/Singer Asia	8.2	8.2
Shares of Singer India (59.1% of total equity)	21.2	0
	29.4	8.2
at 54.1%	15.9	4.4
Cash at Retail Holdings	43.1	43.1
Dividend	(37.2)	(37.2)
Projected closing expenses	(3.5)	(1.7)
Proforma valuation ex dividend	18.3	8.6
(per share ex April dividend)	3.43	1.37

 

Come to think of it though, the margin of safety may actually be in the Singer India shares more than the cash, unless they gradually sell a partial stake to fund themselves at a loss or borrow (and the current Singer India value per ReHo share is about $1.29). 

[writser]

I'd say the margin of safety is just in the whole package being worth more than you pay. Selling Singer India gradually is difficult, shares are illiquid. I think they managed to reduce their position from ~75% to ~59% in the open market the past few years. Also, if they sell too much they lose their controlling stake, which you could argue is worth a premium to a buyer. Then again, a buyer never materialized the past decade ..

[aryadhana]

I've tried asking for more information about their plans...  at what price would they immediately sell their India stake?  why not repurchase shares with cash they have?  what are their operating expenses?  do they have any obligations that prevent them from completely abandoning their share of the India stake and returning attributable cash to shareholders?  is the cost of further operation actively weighed against liquidating immediately, or do they have a more thematic goal of selling their stake to an appropriate buyer?  can they just distribute the underlying Singer India stock to shareholders? 

 

They have not been too helpful, citing selective disclosure rules.  Does anyone here have advice on how to proceed?  I'm sure they aren't obligated to answer, but I'm also pretty sure that they're not obligated not to answer and there must be some way to proceed here -- since their financial statements are not at all helpful in speaking to their strategy.  All I'm really looking for is an active acknowledgement that the value of marketing the Singer India stake to the appropriate buyer justifies further administrative costs, and possibly an explanation of their attitude towards buybacks.  Their Q2 cash position came in better than I expected, and Singer India is up ~25% on the BSE over the last few weeks on several days of very unusually high volume (like 2-3 days of 10x average) -- so I'm happy owning RHDGF at current prices so long as I hear their goal is still maximizing shareholder value and there are no abstract liabilities "off balance sheet" so to speak (like needing to sell Singer to a proper buyer and not being able to just liquidate immediately even if they learned their proceeds from a Singer sale would be less than the administrative burn incurred by the time the sale is made). 

[Guest Value2021]

There is around a $1 left in value.  Could be more not sure about additional royalties, reserves, possible collectable receivables, etc.  Should know soon, I expect an announcement in the next 60 days.

[aryadhana]

1 hour ago, Guest Value2021 said:

There is around a $1 left in value.  Could be more not sure about additional royalties, reserves, possible collectable receivables, etc.  Should know soon, I expect an announcement in the next 60 days.

Why do you think what's left is so much more than what management expects?

 

Quote

By year end 2021, or more likely early in 2022, Retail Holdings is expected to have resolved a number of current risks and uncertainties including reducing the potential negative impact of the substantial unclaimed dividend payable to certain foreign shareholders. It should then be in position to make a further distribution to Shareholders. Management estimates that this second Shareholder distribution will be approximately $0.50 per Share; it is unlikely that the distribution will be a meaningfully greater amount per Share, and, in the worst case, the distribution could be nil.