Retail Holdings (RHDGF) enters endgame

Don’t miss it. Last chance for a good deal.  I apologize for the promotional sentence, but here is a special situation that has presented an opportunity for a quick trade with some excellent rate of investment.

Value investors have always been fond of companies that sell for a discount to an identifiable intrinsic value combined with a potential realization of such value.  Retail holdings Ticker symbol: RHDGF is a well-known stock among value investors for many years. It has been written up, dissected, analyzed on investing boards and FinTwit, starting from the first blog post that was written by one of my heroes in the OTC investing space here.  Many investors have traded on and off in this stock, buying multiple times when the discount of market price widened in comparison to its net asset value and sold off when the gap narrowed realizing value along the way.

The company has been in liquidation mode for a while now and we are almost at the end of life for the company and there is a chance for one last hurrah.

I won’t bore you with the details and it’s not necessary to know the entire past of the company, but here is a quick recap.

Retail holdings has 54.1% ownership in Singer Asia which used to have ownership stakes in Singer India, Singer  Pakistan, Singer Bangladesh, Singer Srilanka, and Singer Pakistan. The Singer brand is a popular brand for Kitchen appliances and Sewing machines, especially in the southeast Asian Markets. Each of these holdings are in individual publicly traded companies and traded in the local country stock exchange. Retail holdings embarked on its strategy in the previous decade to sell off its stake in all of these individual companies and distribute the cash to shareholders. Each year, management sold off stakes to private investors or in public markets, received cash, and declared dividends and distributed them.   They have returned about 38$ from the inception of its dividend program in 2007, larger dividends were dispersed in the later years (2016 onwards) when the liquidation program gained momentum and larger stakes were sold. 18$ in total dividends were distributed in the years 2018 and 2019. In 2020 Singer Asia the only stake remaining was ownership in Singer India other than cash at the corporate level.

On December 23rd, 2021, the last of the shares in Singer India was sold and the company after completing its sale now just holds the cash which is going to be distributed soon, in two installments, the first one with the bulk of the cash in about a month or so, the remaining as a final distribution after the company closes its books and doors. The details of the distribution should be announced in a couple of weeks based on the company’s latest press release.

So how much cash is there? And what could be the expected dividend distribution?

The corporate structure is a little bit complicated ( it was way complex before) and there is a little bit of math involved to figure out the value, but there is no need for fancy calculators, a simple calculator should suffice. As you will see most of the valuation can be done on a paper napkin. Let’s simplify the ownership first, picture some pies.

Retail holdings or REHO is 100% owned by shareholders, so the entire pie belongs to the shareholders.

Singer Asia

Singer Asia is 54% owned by Retail holdings. 54.1% is an important number to remember throughout this post, as this is what we get as a shareholder, any sale of a subsidiary in the past or any proceeds from selling stock,  only 54.1% is attributed to the shareholders.  As mentioned earlier Singer Asia used to own holdings in each of the South East Asian publicly traded stock exchange companies and were accounted as subsidiaries in the past due to majority ownership was by Singer Asia, recently most of the holdings were sold other than Singer India.

Now let’s talk about Singer India Pie

On December 15th, 2020, Retail holdings sold a major stake in Singer India. Prior to that day, 59% of Singer India (which is a publicly-traded Indian company) was owned by Singer Asia the rest 41% is Publicly owned. The company engaged in selling directly to public markets disposing of tiny pieces of ownership that changed however on December 15th, 2020, 42.4% of that 59% ownership stake by Singer Asia was sold to private investors for about 3.5 million in cash. Most of these proceeds were distributed as a dividend on February 10th 2021. We are interested in the remaining stake of 57.6% (100  – 42.4) that was unsold as of that day, the remaining 57.6%  was valued at 4.75 million based on this sale.

3.5/0.424 = 8.2547 (value of Singer India as seen by Singer Asia)

8.2547 * 0.576 = 4.7547 (the remaining value after the 42.4% sale)

Until that point, because they were a majority shareholder they were consolidating the Singer India financial reports on Reho corporate reports which complicated the corporate company’s financial statements because of the accounting as they were consolidated, this ended with the sale as now they just report a line item with Assets for Sale of 4.79 million in their balance sheet in their 2021 Semi-Annual report.

Now we come back to the present-day scenario of December 20th, 2021, where they disposed of their remaining stake (the 57.6% ) at about 5 million. A little bit more than the previous valuation or the line item on its balance sheet.

So to summarize, the previous stakes were sold off and distributed as dividends, the last of the ownership in Singer India has been liquidated for about 5 million of which 54.1% is attributed to shareholders which translates to 5  * 0.541 = 2.705

Then there is cash on the balance sheet to a tune of 2.429 million, of which again 54.1 % is attributed to ReHo Shareholders. Net income was negative about 250k in 6 months ending on June 2021. Even if we consider expenses of about 500k until the end of the company that translates to about (2.429 – 0.5) = 1.9  * 0.541 = 1.0279

Adding the two cash components as attributed to shareholders

2.705 + 1.0279 = 3.7329

There are 4.650244 million shares outstanding so on a per-share value basis

3.7329/4.650244 = 0.802732  compared to the current market price of about 54 cents. In this best-case scenario, the expected rate of return might be around

0.802732 – 0.55 = 0.252/0.55 = 45% return.

Even if the expenses are large of close to a million and assuming a worse situation, we still receive more than what we pay as 2.705/4.650244 = 0.58169   from the sale of the holdings + 1.4 * 0.541 = 0.7574 /4.650244 = 0.162873

Total dividend projected = 0.58169 + 0.162873 = 0.744563 -0.55 = 0.194563/0.55 = 0.353751

This is a cool 35% return likely to be realized within the first half of the year, so annualized is around 70% return.

Most of the dividend should be deposited in a couple of months so it may take some time to realize the remaining value, but I am positive that the company will finalize its liquidation within the next 6 months, regardless the stock should trade higher once the company informs in the next couple of weeks of the upcoming dividend and then there is a chance to further participate in the final dividend or the stub.

Furthermore, you can buy the stock in an IRA account and realize the return without the penalty of paying ordinary capital gain taxes.

The risk of course is that they could run into significant closing cost expenses that may eat into the return or there could be unforeseeable legal expenses. Another risk is that based on their previous dividend distribution press release they have indicated a 50 cent dividend payout will be distributed, however, management has always estimated conservatively and dampened investor expectations and future projections previously until the day of the actual dividend declaration and has acted historically to realize value for shareholders, but its a risk nonetheless.

TLDR: Retail holdings completed the sale of its holdings at 5 million and has cash on the balance sheet around 1.9 million net of projected expenses, so around 6.9 million in cash of which 54.1% is attributed to shareholders = 3.73 million with 4.650244 million shares outstanding which amounts to about 80 cents. The stock sells at 55 cents. In the absolute worst case can still make a profit of about 3 cents more than the market price just on the recent sale.

Disclaimer: I own 10000 shares of RHDGF at a cost of 5500 in an IRA account.