Description

Samsonite – 10.4.2024

Samsonite is an event-driven idea with the catalyst being re-listing to the US in the near future (management has committed to the plan, bankers have been hired).  Current valuation is very low with Samsonite trading for 10x this year’s earnings and 7x EBITDA (EBITDA has already been adjusted by management to correctly include IFRS lease expense) despite a medium-term outlook of MSD-HSD growth along with global travel.

Samsonite is listed in HK, which is a terrible market for global brands for all the reasons we’ve heard about (the recently rally notwithstanding, which hasn’t really benefitted Samsonite).  It’s associated with China, has usually low liquidity as a percent of float, and tends to discourage US-based investors due to factors like lack of major index inclusion.  Samsonite doesn’t seem to get any benefits from being listed in HK – it’s not in the flagship Hang Seng index, but rather in the broader Hang Seng Composite index which no one cares about.  The investor base it attracts tends to be Asia and Europe-based EM funds.  It’s entirely covered by sell-side analysts who focus on Chinese consumer, yet Chinese investors have little interest in the company.

Samsonite also just doesn’t belong in HK. Mainland China + HK combined are only 11% of Samsonite’s net sales.  The CEO and management team are American and the company is headquartered in Massachusetts.  With the exception of one Taiwanese director, the board is all non-Asian.  The original reason for listing in Hong Kong was to increase Samsonite’s brand visibility to the Asian consumer, which was a strange theory to begin with, doesn’t seem to have played out, and is no longer relevant.

Samsonite’s profile and situation seems to be exactly the type of situation that would benefit from listing in the US.

• Liquidity: despite a market cap of $4 billion and a float of $3 billion, which is meaningful (and should increase post-listing), Samsonite currently trades only $22 million per day, which makes it uninvestable for most funds.  The average daily volume to float ratio is 0.7%, which is unusually low and should increase 50-100% in a US listing to 1-1.4%.  Combined with an increase in valuation post-listing, this should move liquidity solidly into the investable range.
• Attracting US investors, index inclusion: because of the listing venue and time zone differences (including IR being based in Singapore), our understanding is that there are few non-EM US funds currently involved in the stock.  Samsonite is a global brand (sales are 39% Asia of which the vast majority is outside China, 34% North America, 21% Europe, 6% Latin America) that should not be classified as a EM company.  Samsonite already reports financials in US dollars.  It currently uses IFRS accounting, but our understanding is that management is already preparing US GAAP financials and will make the switch in the near future.
• Analyst coverage, comp set: As mentioned earlier, Samsonite is covered exclusively by China consumer analysts, whereas it should be covered by US consumer analysts and comped to US consumer brands.

Recent comparable situations where the company received a meaningful boost in multiple post-US listing include Ferguson, Flutter, and Kaspi (in Kaspi’s case, average daily volume increased 11x from $3 million to $34 million, though a portion of that came from increased float as management sold shares).  These were UK-to-US listings, which is one thing; the benefit from a HK-to-US listing, with HK being hated, should be even greater.

The mechanics of the listing seem straightforward.  From the start, the shares should be fungible and convertible between the US and HK, so arbs will keep the spread in check and prevent a divergence in the prices (this is a common structure utilized by all the US-listed Chinese ADRs who dual listed into HK).  At some point, the company will likely change its primary listing to the US.  The company has not yet confirmed that point, but it seems like a no brainer (why leave the primary listing in HK when you have no ties there?) and management seems to be clearly preparing for that situation (e.g., with the conversion of financials into US GAAP – which is legally only required when >50% of the shareholders are US investors; the company has also made comments about the goal being ultimately for the entire float to be tradeable in the US).  There will be some dilution (we don't know yet how much) as management will issue some primary shares, but currently the company is conducting a large buyback of $200 mm, 4% of market cap, that initiated in August and is scheduled to be completed before the end of this year.

In terms of timing, we don’t have a lot of visibility but our guess is 1H25 – i.e., sooner rather than later.  This has been in preparation for a long time – Bloomberg reported in August 2023 that Samsonite was exploring listing in the US, the official announcement on intention to pursue dual listing (but without mentioning a venue) was made in March 2024, and in August 2024 the company confirmed that it would list in the US.  Our understanding is that the main remaining workflows involve blocking-and-tackling in accounting and compliance, including preparing subsidiaries for US GAAP (though that may not happen on day 1 of listing).

Business

Samsonite has ~15% market share of global luggage sales.  Its brands include Tumi (high end), Samsonite (mid-high end), and American Tourister (mid-low end).  Wholesale is 61% of sales and DTC is 39%.

Samsonite used the covid period to rationalize its global store network (going from 1300 at end of 2019 to <1000, then now slowly building back up in select locations) and reduce costs, leading the company to exit covid with an improved cost structure vs. before.  Fixed SG&A as a % of net sales, for example, was reduced from 26.8% in Q2 2019 to 23.3% in Q2 2024, a 350 bps improvement that’s meaningful for a company that now has ~19% EBITDA margins.  Gross margins have improved as well, from 55.4% in 2019 to 59.3% in 2023.  The company has reinvested some of those savings into higher marketing spend, with marketing increasing 140 bps from 5.2% in 2019 to 6.6% in 2023.  Net debt has been reduced and now is only 1.5x EBITDA.

Pre-covid the company had a number of other problems that were fixed in the intervening period.  Blue Orca wrote a great short report in May 2018 that pointed out, among other things, the prior CEO’s reliance on acquisition-driven growth, aggressive accounting, related party transactions with his own family in India, and even resume fraud (saying he had a doctorate when he did not), which led to the CEO resigning and being replaced by the CFO, who has been CEO ever since and has dramatically improved the financials.  Cash flow is clean and in 2023 was 40% of Adj. EBITDA, which should improve further to close to 50% in the coming years.

After a great 2023 that benefitted from a travel rebound (revenue +28%), 2024 has been slower, with management in August revising down full-year expectations for revenue growth to around -1%.  This has mainly been driven by 1) heavy discounting in India, as Samsonite’s main competitor VIP Industries (listed company) has been aggressively discounting to liquidate inventory and win back share, which shouldn’t persist indefinitely; 2) weaker consumer sentiment in the US; and 3) to a lesser extent given its smaller contribution size, weaker trading in China due to steadily weakening consumer sentiment.  We think these are temporary issues not reflective of any brand weakness or structural problems, and as these are digested the company should return to MSD-HSD revenue growth alongside global travel.

Valuation

There are no other traded luggage brands, so it’s hard to pinpoint an exact prediction for where the shares might trade after being listed in the US.  We do know however that the current multiple of 10x P/E will be too low, for a US-listed global premium consumer brand with healthy EBITDA margins that should grow revenues normalized MSD-HSD.  Our best guess is that the shares should trade between 13-16x P/E, or 8.5x-10x EBITDA, which would represent 30-60% upside.  Just as a sanity check, as recently as this spring Samsonite was trading for 13x NTM P/E, and pre-covid it regularly traded at 15-20x P/E, so this doesn’t seem unreasonable.

Catalyst

Listing in the US