Description

Singer N.V., $5.10, $36M market cap (based on 7.1 million fully diluted shares)

Not your father’s (er, mother’s) sewing machine company anymore, Singer N.V. has sold the manufacturing business and its trademark to Kohlberg & Co., authorized a huge share repurchase, and has reduced itself to its retail operating business in selected emerging markets (mostly Asia). This business has significant market share in household appliances (tv’s, fridges, etc.), and a profitable consumer credit arm (3% writeoffs), and much of its business trades on international stock exchanges.

This is a story of a massively shrinking share base and liquidity manuevers. Coupled to this is a decent business that has been constrained in its growth by the turmoil of its parent company coming out of bankruptcy having survived an enormous debacle and being hamstrung with a ridiculously difficult combination of disparately performing operations and liquidity that in a word was tight.

Net tangible book value has gone from negative five quarters ago to approximately $9.74 today (fully diluted basis), which includes approximately $4.08 in cash alongside zero corporate level debt. On a sum-of-the-parts basis, Singer owns shares in other stocks that are currently worth close to $50 million (more on that later).

THE MASSIVELY SHRINKING SHARE COUNT

Singer last reported 7.78 million shares, 8.15M fully diluted shares), but has done two transactions this year that resulted in a significant increase in treasury shares. On June 30th, the company entered into a settlement agreement that has resulted in 312,631 shares formerly held by subsidiaries to now be classified as Treasury shares.

Subsequently, on October 29th, Singer retired a debt facility on behalf of a subsidiary which will result in a gain for Q4 and will result in annual interest savings. This transaction will also result in 1,346,701 common shares being reclassified as treasury shares, as the security interest in those shares has been released by the subsidiary. (This will result in a reported gain for Q4 of $6.5M, or approximately $0.83. Going forward, this will result in annual interest savings of approximately $1.3 million. But keep in mind that all of their numbers are on a consolidated basis, so please disregard quantifying that for now and keep in mind as just a kicker to the more significant aspect of the share reduction. One thing at a time!)

In last year’s annual report, it was stated that they had 2.4 million shares held by subsidiaries, and if similar treatment is possible for what seems to be 750k further shares, then there remains the possible retirement of these additional shares, which would of course also significantly increase shareholder value.

Taking just those 312k and 1.34 million shares out of the equation would bring the non-diluted market cap down to $29.8 via the reduction in share count from year-end 7.87 million shares to 6.21 million shares. Using a fully diluted basis of 7.1 million shares, the $5.10 current share price is equivalent to a market cap of $36.2M.

Whew, that’s a lot of info on share count coming way too early in the writeup! Should I add that they just announced authorization to buy back $10 million in shares—about 1/4th of their current adjusted market cap?

In sum, using the $5.10 current price, the fully diluted market cap of $36.2 million needs to be compared against these distinct segments in a sum-of-the-parts analysis:
• $29 million cash at the corporate level.
• No debt at the corporate level.
• $22.5 million in subordinated promissary notes yielding 10%, due in seven years, as part of its transaction with Kohlberg.
• Approximately $50 million market cap of publicly traded securities that are part of Springer Asia (reflecting Springer’s 57% interest in $85 million worth of securities).
• The look through income exposure from Springer Asia and the Jamaica retail operations.

The last bit is the tricky part. Singer reports its Retail Operations on a consolidated basis for most of its revenues. However, while it used to own and still does control a majority of those operations, it sold 43% of its operations to an investment company a year-and-a-half ago, and it doesn’t segregate balance sheet items to reflect what is owned by the parent and what is passed through to the balance sheet because of their controlling stakes. Furthermore, it isn’t easy to back into those numbers by examining the publicly traded holdings because of the paucity of reporting in those countries. (Although I did come across audited reports for some of these divisions).

A glance at Singer’s consolidated balance sheet and revenues reveals most of its operations being reported on a consolidated basis (with the exception of a few operating affiliaties for which it uses the equity method), and so looking at the annual report’s breakout for revenues of a quarter billion dollars and operating income of twenty million dollars doesn’t reflect the real look-through earnings that would be most applicable.

VALUING SINGER ASIA

So, getting back to the sum of the parts, Singer recently (mid-2003) sold a minority interest (43%) in its Retail operations for $30 million. While at first glance, that implies an equivalent for its retained share of $40 million, market cap for those interests is closer to $50 million. On the surface, this market cap appears reasonable, but I base that on the little data that came through Bloomberg, that for Singer Thailand, valued at 77% of book and 6.7x earnings. I could not find how conservative that book might be, and I’d guess that there is some hidden upside value for the real estate of its department stores and other assets, given how long Singer has been around in these markets.

Getting back to that privately-negotiated value from 18 months ago that might imply a value for the company retained controlling portion of at least $40M. Now, half of the $30M invested was reinvested back into Singer Asia, so I suppose that there are two ways to look at it. On the one hand, the investment group is looking for a return on capital, and to make a blanket generalization, it probably isn’t dissimilar to any other rational investor’s hurdle. On the other hand, could Singer get that implied $40M for the controlling stake? Since it appears that half the $30M was used to infuse cash, it’s not like the shareholders of Singer N.V. were able to pocket that money and move on. So, the case could be made for the implied value being perhaps a hybrid calculation. Taking the $30M, from Singer’s point-of-view, it received $15M to repay debt plus 57% of $15M in new equity capital in Springer Asia, or approximately $23.5M total for 43% of Springer Asia. This might imply a value of the remaining 57% of $31.1M.

In light of the discrepancy between that calculation and the market cap, I’d offer the defense that Singer was quite stuck at the time, with a negative book value and lots of difficult steps before they could strengthen the balance sheet. Those Singer Asia operations never went through bankruptcy (as independent businesses), but were hamstrung by all the constraints and devices of the controlling corporation going through it all.

But I digress. If this is all seeming a bit too much like the wall street intern training program’s capital structure arbitrage exam (is there such a thing?!?), then trust me, I empathize.

Obviously, it makes equal sense to value Springer Asia by examining the continuing operations, but a little background is necessary.

RECENT TRANSACTIONS

On September 30th, Singer sold its worldwide sewing business and the ownership of the SINGER trademark to Kohlberg. The company continues to have the right to use the trademark and to be the exclusive distributor for Singer branded sewing machines in connection with its Retail business.

As a result, the balance sheet became dramatically improved. Singer received total consideration of approximately $134.6M, of which $65.1M was cash and the rest was for unsecured promissary notes ($22.5M) and the assumption of debt ($47.0M). The company used $26.3M of the cash to repay a financing agreement—IMPORTANTLY—“The only corporate-level debt remaining…” (Press release on September 30th, 2004 announcing closing of sale of sewing business.)

The press release goes on to say:
A balance of approximately $36.9 million cash from the sale remains uncommitted after payment of expenses related to the sale. Plans for utilization of these funds have not been finalized, but possible uses may include investing in the Company’s Retail businesses in Asia and Jamaica, a partial buy-back of the shares of Singer N.V.’s Common Stock, cash dividends on the shares of the Common Stock and investing in one or more new businesses.

Furthermore, they have unsecured subordinated promissary notes related to the sale of their manufacturing operations that is an additional $22.5 million (which seems to be reflected in Other Assets, given the jump in that quarterly amount).

BUYBACK ANNOUNCEMENT AND CORPORATE LEVEL DEBT ELIMINATION:

On October 19th, Singer announced that their board has authorized a share repurchase of up to $10.0M worth of shares.

Following the October 29th retirement of the Omnibus debt (long story…), Singer N.V. was left with $29M in cash and zero debt at the corporate level. In the latest press release concerning third quarter results, a nice summary (buried on page six) sums it up. I’ll attach that as a message in the thread in order to conserve space in this writeup.

With all of the changes in the capital structure, which in addition to the above also includes a tender offer of the Brazilian subsidiary’s debt and the shifting of the Thailand operations from equity reporting to consolidated, stripping out the operating performance of the remaining business has its challenges.

BANKRUPTCY VIA SPECTACULAR HONG KONG SCANDAL:

First, a little background, which will be mercifully brief. Singer came out of Chapter 11 in September, 2000 as the parent of several operating companies formally owned by The Singer Company (“Old Singer”), in addition to ownership of the Singer brand name. For those who can’t resist examining the wreckage, Singer was part of the spectacular collapse of James Ting’s Akai Holdings (Hong Kong), which left $2 billion in unpaid debts, suspicious transactions involving $315 million in cash, etc. Ting put himself on the map (I believe he is now incognito and on the lam, but I’m not going to follow this story any further) by purchasing Singer in 1989 from a distressed seller who was fighting stock fraud charges. To save space, I’ll put the rest of the James Ting-Singer history in the thread.

ONGOING OPERATIONS:

Singer’s Retail operations are quite significant. Everything is reported on a consolidated business, and the look-through-adjusted numbers will be smaller of course, but to glance at the forest before examing the trees, Singer’s Retail Operations had revenues of $267M in 2003 and $241M in 2002, with operating income of $20.3M and $20.2M, respectively.

Singer has been around for 150 years, and has significant experience with the extension of consumer credit. Consumer credit is a key element of operations in the emerging markets, and in addition to providing a strong impetus for sales, is a profitable element of the Retail business, representing approximately 7% of the company’s revenues in 2003. Given that half of the revenues have been sold with the manufacturing transaction to Kohlberg since that report, I’d approximate that 14% of ongoing revenues will be from consumer credit operations.

Credit-financed sales generate installment accounts receivables which range from 3 to 36 months and are based upon local prevailing consumer interest rates. Historically, the Retail businesss has experienced an overall write-off rate on installment sales of approximately 3%.

Singer’s principal operating companies, in order of revenue, are:

• THAILAND: Singer Thailand is publicly traded on the Bangkok Stock Exchange (SINGER TB) and is 53% owned by Singer, giving a current market value for the company’s stake equal to $23.6M, which appears conservative enough given that it is at 77% of book value, and 7.4x earnings (6.7x est. PE). Singer Thailand operates 13 retail stores and has an addition 7,300 canvassers selling out of 241 direct selling bases. They have an 18% market share in consumer sewing machines, 13% share in washing machines, 7% of televisions, 7% of refrigerators, and 2% of the motorcycle market.

• SRI LANKA: Singer Sri Lanka Ltd is publicly traded (SINS SL) and 81% owned by Singer, giving a current market value of approximately $20M. They operate more than 126 retail stores, including 5 mega stores, one of which is the largest department store in the country, in addition to having more than 400 independent dealers. In Sri Lanka, they are a major retailer of consumer durable products for the home—45% share in refrigerators, 33% share in deep freezers, 23% share in washing machines, 30% share in televisions, and 74% share in consumer sewing machines.

• INDIA: Singer India Ltd is publicly traded (SING IN) and 63% owned by Singer, giving a current market value of approximately $3M. 1,800 canvassers operate out of 189 bases, while the company also sells products through more than 500 independent merchants. Unlike Thailand and Sri Lanaka, the India business is mostly (64%) consumer sewing products.

• BANGLADESH: Singer Bangladesh Ltd (SINGER BD on the Dhaka stock exchange) is 80% owned by Singer, worth approximately $39M. Sales of non-sewing consumer durables are 96% of total sales, and the operation has 177 stores that account for a 16% market share in televisions, 18% share in washing machines, and 13% consumer market share of sewing machines.

• JAMAICA: 100% owned operating company, which operates 17 retail stores with 97% of the revenues being non-sewing consumer durables.

• OTHER—Pakistan, Philippines, Vietnam, Indonesia: Not separately reported.

In July, 2003, Singer concluded the placement with a private investment fund of a 43.2% minority equity interest in the company’s Asia Retail operations. The fund paid $30.0M, implying a value for Singer’s remaining 56.8% of $39.5M.

On a sum of the parts basis, using the above values for the Thailand, Sri Lanaka, India, and Bangladesh holdings which sum to $85.6M, the 56.8% owned by the company is worth $48.6M.

The sale of the minority interest in the Asia Retail operations was justified at the time with a statement noting the importance of supplemental funding to fuel growth. Also in 2003, Singer exited their Mexico operations at a significant loss. Operationally, the result was that a $19.6 million Mexico loss largely offset the $20.4 million in 2003 income. Looking at management’s efforts as a whole, well before the sale of the manufacturing operations, they were focused on eliminating problem businesses and strengthening the balance sheet.

With the restructuring now further catalyzed by the sale of its manufacturing operations, Singer’s liquidity has gone from very tight to fully flexible. Although they had showed 2003 year-end utilization of short-term lines of credit as using $78M out of $117M, much of that credit availability was specific to countries and not available for general liquidity. Simply put, the combination of the credit constraints and the turmoil of the bankruptcy process have not been helpful to the Retail operations.

I have decent hopes for the retail operations going forward, as Singer N.V. has closed down many of the problem areas (Mexico), and as management has eliminated the financial resource constraints that undoubtedly dominated many operational decisions.

LOOK THROUGH OPERATING EARNINGS:

I’m admittedly more comfortable by my balance sheet sum-of-the-parts valuation than I am with calculating look through operating earnings.

Figuring out look through operating earnings requires a bit more guesswork. With a country like Thailand, where Singer N.V. owns 53% of Singer Thailand, but really owns just 57% of that given the sale of the 43% minority interest, look through would be approximately 30%. Similarly, for Sri Lanka and Bangladesh, it would be approximately 46%. India would be 36%.

For other countries in Asia that it wholly owns, it would be 57%. For operating affiliates for which it owns a minority, look through earnings are unnecessary as their portion of earnings should get reported straight through via the equity method. Finally, Jamaica would be 100% to Singer N.V.

To put a rough estimate on it, I’ll use 45%.

The 2003 annual report breaks out Operating Income by three divisions: retail operations, sewing marketing, and sewing manufacturing.

Taking 100% of Americas operating income and 45% of Asia operating income (total consolidated income was $20.4M and $20.3M in 2003 and 2002, respectively, but one needs to allow for the fact that Thailand was then an operating affiliate, which combined with all operating affiliates, reduces those numbers), I get to a very rough and I believe conservative $6.8M “look through” operating income last year ($7.4M for 2002). These numbers are before any adjustments for ‘corporate and eliminations’. On the other hand, they completely eliminate operating affiliates, including Thailand, so using that same 45% adjustment across those non-Americas revenues gets me to $10 million each year. I’d be more comfortable with that as my look-through number.

In addition, as the CEO stated: “Going forward, Singer will also benefit from a shift from interest as an expense to interest earnings, reflecting the Company’s now significant cash holdings and the interest on the KSIN unsecured subordinated promissory notes.”

Now, I have issues with how they break out their operating income and what goes above and below the line. It’ll take at least another quarter to sort it all out and the reports are more clean. There are a few difficulties—the taxes are paid on a regional basis, so if Thailand is making money and India is not, they still have to pay taxes in the country where they are profitable.

The interest expense is also frustrating, as it is not broken down between what has been paid at the corporate level and what is at the subsidiary level. So to get a handle on the calculation of the benefit that the CEO alluded to, one needs to separate out corporate level interest. In 2003, Corporate interest expense was $3.3 million.

So, here’s where it gets rough. We really only have numbers for continuing operations for the most recent nine month period, where I feel any degree of confidence about how things are broken out. Assuming the corporate interest expense has so far been running at the same level as last year, there is $5.4M in operating income against ($6.2M minus $2.5M) in interest expense, leaving earnings before taxes at $1.7M. Taxes are higher than this, but I think this is a decent number to get some handle on operating income. Because they extend consumer finance, I’m not sure the typical EBIT number makes sense to appraise this business.

For what it’s worth, the company reports EBITDA for continuing operations as $5.3 million for the first nine months of 2004.

Undoubtedly, I’m running out of room here, but that’s okay because I don’t think anyone needs another adjusted calculation to get at the valuation.

Singer N.V. is trading at approximately half of tangible book, and any sum-of-the-parts valuation gets one pretty close to $10. Another way to look at it, the current fully diluted market cap is equal to the cash on its books plus approximately one times EBITDA. That still excludes the $22.5 million in 10% notes from the Kohlberg sale and ignores the various ways (market cap, minority interest sale) to value the continuing operations. There’s room for error in my rough estimates, not to mention possible difficulties in producing that income, but there’s room enough here with share buybacks and an awesome balance sheet to wrap this one up.

By the way, Singer N.V. is obligated to change its corporate name to a name not including the word “Singer” on or prior to September 29, 2005. This won’t have any operational effect, since they can continue to use the name in their operations, so it’s probably not a catalyst either. However, it feels like they are just getting started on having the company they wanted all along. I’m impressed enough by how management has worked their way through to this point that I’m quite confident of them going forward. They had previously mentioned relisting, but that was a long time ago (details in thread), and may not be their strategy now, but I wouldn’t count it out.

In a recent announcement, the company stated:

“Singer will be considering over the next several months alternative uses for the funds that have been generated. Among other alternatives, we will consider returning cash to the shareholders through a share buy-back program and/or through cash dividends. The Company also will be evaluating alternative legal and administrative structures and arrangements that may better reflect the Company’s enhanced liquidity, more
concentrated business and smaller aggregate size.”

Catalyst

Trading at 52% of tangible book.
No debt, cash equal to 80% of market cap.
$5 stock with $4 cash + $3 notes + $7 valued securities.
Recent share buyback announcement equal to 25% of outstanding shares.