H64.SI - HTL International

[LongHaul]

The Business

 

HTL started in 1976 in Singapore and has grown to be one of the largest leather sofa manufacturer’s in the world.  HTL also has a leather tanning business and a retail operation – I value both of these at basically zero as they are very low or negative margins.  The real value and profitability is in the leather sofa segment.

 

The 3 founding Phua brothers are entrepreneurs and still run the company.  They have been gaining market share for about 30+ years and will probably grow to over take Natuzzi to be the largest leather sofa producers in the next 5 years or so.  I believe they have done this by offering lower prices, good quality products and service.  The impression I get is that management has passion and integrity and actually listens.  Interesting accomplishment, given that they basically started with nothing.

 

 

Valuation

 

Market Cap is ~ $104m USD.

 

Price: 0.31 Singapore Cents = 0.254 US Cents (all Financial statements are now in USD)

Tangible Book Per share:    = 0.395 USD

Price to Book:  64.3%

 

Normalized EPS:  .068 USD (I use 40m USD in EBIT and a 23% tax rate)

2013: P/E: 3.7x on normalized EPS

 

Debt is moderate at ~ 1.5x EBIT

 

I think HTL is worth about 10.3x earnings or .70 USD which equals .85 Singapore cents.

 

Bull Case:

HTL did really well financially from 1999 to 2006.  2007 and on has been choppy due to leather hide cost increases, the financial crisis, a money losing retail operation, high tax rate and FX derivative issues. 

 

I think HTL can get back to doing a decent EBIT margin on their sofa sales ~6% because:

 

1. The retail operation (Domicil) was a disaster and they are now shutting down almost all wholly owned locations and just keeping the franchise operation which should be slightly profitable.

 

2. The tax rate should come down to a much lower number over time (it was 61% in 2011).  I assume 23%. 

 

3. Their Australian operation has been losing money as they invested to gain share and are now adjusting their supply chain to be profitable.

 

4. As the US operation grows it will gain scale for increased profitability and HTL will adjust to dedicated US manufacturing plants.

 

5. Leather hide prices are now moderating and will be passed on to customers over time. 

 

Bottom line is that I think over time HTL’s EBIT margins will normalize as management is generally very capable and conditions improve.

 

Risks:

 

1. Leather hide prices.

2. China manufacturing. 

3. Cyclical business.

4. Execution.