These creatures
were a big hit back in the days and worked as a sort of internal capital market
– i.e. cash generated from unit A was used to invest in unit B or to buy a
whole new unit. There are magicians who made this structure work like a
well-oiled machine such as Warren Buffett or Li Ka-shing but of course there
are many other failed attempts as well. Holding companies are still alive and
well in emerging markets (to effect family control etc) but these structures
are often opaque and nowadays people tend to prefer cleaner and focused companies,
which can be better valued as well – hence the term “conglomerate discount”.
Moving on
from the theoretical overview to Symphony (SIHL:LN). Listed in 2007 and based in Singapore, the
company operates as a permanent capital vehicle (i.e. similar to a closed end
fund) investing mostly in Asian public equities. The graph gives an overview of
the NAV. I’ll not go into detail into the workings of the NAV, you can find
more info on the company’s website. Suffice to say
that SIHL owns companies operating in health care, hospitality, real estate and
lifestyle (consumer brands), essentially a play on the rise of affluence in
Asia.
Source: Annual Report 2013
The largest
investment is Minor International (around 1/3 of the NAV) and this is the
reason I got interested. For a while I’ve been searching for ways to invest in Minor
(MINT:TB), which is a Thai listed hospitality, restaurant and lifestyle co
controlled by Bill Heinecke on whom I posted a Bloomberg article a few weeks
back. I’ve a ton of respect for the guy and he has a tremendous track record. Ideally
I would have wanted to invest during the fall off in MINT’s share price earlier
this year but as luck would have it I found SIHL only recently when the
valuation is less attractive.
I compiled a
very brief NAV model on SIHL, of which the key items are below. Currently the
share is trading at a 35% discount to NAV (vs 43% average historically). A
better way to look at the holding discount is by taking into account a
conglomerate discount/tax consideration that would be required to be paid if
the company would be required to sell its investments to be wound up. Assuming
25% (you can pick your own number but it looks reasonable considering capital
gains tax on foreign investments), the
holding discount narrows to 14% (vs 24% average historically). While you are
still getting SIHL at a discount it is not as substantial as historically, so
we are kind of in uncharted territory here, and the majority of underlying
assets are fairly valued as well.
Source: Company filings
Few things I
like: to try and close this glaring discount the company initiated a few
shareholder friendly moves such as (i) distributing 80% of the NAV if by 2017
September the discount exceeds 35% in the preceding 3 months (ii) shareholder
approval for further share issuance under certain circumstances (how nice…) (iii)
a proposed buyback programme for max 15% of total shares.
Few things I
like a lot less: our discussion wouldn’t be complete without a discussion on
comp. The investment manager charges 2.25% on NAV ($15m last year; fees are
capped between $8m to $15m), which is fairly expensive given that you could buy
most of the holdings via a discount broker or another equity fund that would
likely charge you less. In addition, there are a lot of options and management
shares that lead to dilution (arguably though these are performance based to a
certain extent, but still dilutive).
If any of my
loyal readers (all 2 of them) have any views on SIHL or management do drop
me a line would be interested in hearing your thoughts. Thank you!
