Wednesday, 23 July 2014

Briefly on Symphony International

I’ve a problem that I’d like to share, some might even consider it an addiction. It’s to do with holding companies. You see, every time I find one I have obsessive needs to research it, a sort of occupational hazard. The right thing to do would be to say no outright but…I get weak in my knees, can’t help it.

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!