Retail Holdings NV - RHDGF

Retail Holdings NV is a holding company with a market capitalization of $119.9 million. The company owns stakes in publicly-traded subsidiaries and also holds debt securities and some excess cash. The total asset value of the company's underlying holdings is at least $142.2 million, 18.6% higher than the company's market capitalization.

Singer Asia Limited

Retail Holdings' primary asset is a 54.1% stake in Singer Asia Limited. Western investors may associate the "Singer" brand name with sewing machines. However, in Southeast Asia, Singer is an extremely well-known and successful retail chain that sells consumer durables like washing machines, televisions and kitchen appliances. Singer Asia owns hundreds of retail centers and also sells through thousands of wholesalers in India, Thailand, Bangladesh, Sri Lanka and Pakistan.

It should be noted that Retail Holdings once did own the Singer Sewing Machine Company, but sold it to a private equity firm for cash and promissory notes in 2004. (More on the promissory notes later.)

While Singer Asia itself is not publicly-traded, its subsidiary companies are.

While their values fluctuate with stock market movements, Singer Asia's ownership interest in its subsidiaries has a public market value of $232.96 million. Singer Thailand is the company's most valuable subsidiary, followed by Singer Sri Lanka. At December 31, 2011, Singer Asia had no debt and $2.6 million of corporate cash.

While some of the subsidiaries have appreciated in value recently, others have declined. On the whole, the value of these subsidiaries seems likely to grow in coming years as the Southeast Asian middle class grows in size and wealth. Singer Asia as a unit posted a 25.4% growth in revenues in 2011. Year over year revenues for the first six months of 2012 rose another 7.1%.

SVP Notes

In 2004, Retail Holdings sold its Singer Sewing Business and Singer Sewing trademark to KSIN Holdings for $134.6 million. Retail Holdings received $65.1 million in cash, transferred about $47 million in debt to KSIN Holdings and received the balance of the payment in unsecured, subordinated promissory notes with a principal value of $22.5 million, bearing interest at 10%. The notes were originally to be due one-third on September 30, 2010 and the balance one year later.

KSIN, subsequently renamed "SVP," paid the interest on these notes dutifully until 2009 when the financial crisis put stress on the Singer Sewing business. Retail Holdings agreed to restructure the notes, extending their maturity and increasing the interest rate. This process has been repeated multiple times. The notes are now due in February 2014. On June 29, 2012, Retail Holdings announced a pay down of $5.0 million on the promissory notes at a 15% discount to notional value. This action reduced the principal value of the remaining notes to $21.6 million. While SVP continues to pay interest on these notes, the repeated difficulties suggest that SVP's default risk is high and the notes should be treated as junk-level credits. If Retail Holdings were to sell the notes, receiving 100% of par value is not certain. Neither is final payment of the notes. Investors may be wise to assign a discount to par value when determining a valuation of Retail Holdings on the whole.

Retail Holdings NV Valuation

Retail Holdings owns 54.1% of Singer Asia Limited, yielding a market value of $126 million. Given the repeated extensions and restructurings afforded the SVP notes, a 25% discount seems warranted. The $126 million Singer Asia stake and the discounted SVP notes with par value of $16.2 million combined to equal $142.2 million. Retail Holdings and Singer Asia Limited each hold excess cash at the corporate level, but I have chosen to ignore these amounts for the sake of conservatism.

Retail Holding's current market capitalization of $119.9 million represents a significant discount to asset value. Still many investors will ask: what's the catalyst? What will cause Retail Holdings stock to appreciate to the value of its underlying assets? I believe fervently that value is its own catalyst. Retail Holdings has in fact appreciated from a low of around $13 in early 2011 to its current price of $22 and change. I have been lucky enough to participate in most of the rise. For investors who are not willing to wait around for convergence to intrinsic value, there are two factors that will accelerate Retail Holdings' returns.

1. Dividend policy - Retail Holdings has been exceptionally generous in paying out its earnings to shareholders. Annual dividends in recent years have been well in excess of 10% of the share price. As free cash flow from Singer Asia and interest and principal payments on the SVP notes flow in, Retail Holdings has not been reluctant to distribute the excess to shareholders. Here are recent years' dividend amounts per share:

2012 - $2.50

2011 - $2.50

2009 - $0.80

2008 - $0.75

2007 - $1.00

2. Long-Term Liquidation - CEO Stephen H. Goodman has repeatedly expressed his intention to liquidate the company over the medium term. Singer Asia has been gradually decreasing its stakes in its subsidiaries over the years. Singer Asia itself was rumored to be for sale in late 2011, but a transaction never transpired. Singer Bangladesh was under contract to be sold in 2010, but poor market conditions scuttled the sale. Mr. Goodman and his spouse together own 25.2% of shares outstanding, leaving him highly incentivized to maximize value.

Disclosure: Retail Holdings NV is my portfolio's largest holding