In my search for investment ideas, I read extensively on investment website, blogs and publications. I recently come across an investment thesis for Popular Holdings from beyondproxy that I would like to share with readers. Most readers of this blog will be familiar with Popular. Popular has 64 stores in Singapore and is well known among Singaporean as a bookstore that sells storybooks and assessment books. Retailing and distribution of books, stationery and magazine is considered a boring and non-growth business. Besides books business, it is also involved in property business and publishing business. In the investment thesis outline, Popular Holdings is trading at below estimated book value of $0.29 and is estimated to be worth at least 35 cents
Below is the investment thesis for Popular Holdings from beyondproxy.com
Popular Group started in 1924 as World Book Company which was engaged in distribution & publishing of Chinese books in Singapore. In 1936 Group started retailing Books & Stationery in Singapore. Group started expanding regionally by setting up a bookstore in Malaysia. In 1949 Group established Publishing Business in Hong Kong to publish magazines & books in region. The company got listed on Singapore Exchange in 1997. In 2007 Group decided to diversify into Property Development Business. The reason for them to diversify into Property Development Business was that they wanted to mitigate risk in their portfolio by moving away from the sunset industry of Book Selling/Publishing to a Business where they can recycle their capital & generate cash flows. Over the last 6 years the Property Development Business launched 3 Projects : One of them is completely sold, 90% of another project has been sold & the 3rd project is recently launched. On retail front, Popular has 156 stores : 75 in Malaysia, 64 in Singapore & 17 in Hong Kong. It also has Publishing Business in Singapore, Malaysia, Hong Kong , Taiwan, China & Canada.
To sum up Popular Business can be divided into the following 3 categories:
- Retailing & Distribution : ( Books, Stationery, Magazines etc.)
- Publishing ( Publishing Books, Magazines etc.)
- Property Development ( Residential Property Developer)
Valuation
Concerns
- Selling Assessment & School Books: These are the books which are required by school children ( Singaporean have to study in local schools) & assessment books are the one which students read to complement their existing school material. This to me is stable ex-growth business in Singapore & Hong Kong while growing in Malaysia as Popular expands its presence across smaller towns in Malaysia.
- Selling Stationery: Again this is a stable business & on SSS basis revenue seems to be flat. Last year Popular has started getting into Office Stationery Business (which has bigger potential than Stationery Retailing).
- Selling Books : This business faces the greatest risk from Digitalisation as people move towards e-books. It set up stand alone book stores under brand name of Harris, Prologue etc. ( following concept of Kinokuniya, Borders). This business has not been successful & though company does not disclose it; these stores are loosing money. As a strategy Popular has been reducing the number of these stores & has been using existing book stores ( where it sells school books & stationery) to sell the books. Popular does not have a wide range of selection which e.g. Kinokuniya has but what it has is reasonable collection of best seller – so when the customers will visit shops for stationery, printer inks, assessment books etc. – they buy the books which are best sellers, children book etc. To attract customers to Buy books & stationery – the company has Popular Loyalty Card where membership is priced very attractive S$ 12 for 1 year & S$ 30 for 3 year. This card enables the customer 10% discount on all Popular Bookstores. This way if I have a Popular Card – I am able to Buy books at price lower than Kinokuniya – though I get less choice At Popular Bookstore.
Catalysts
Popular’s outstanding shares adjusted for Treasury shares are 819.25 mn shares. This means that the Market Cap is S$222 mn, long term debt S$16 mn (loan against property development), Cash S$125 mn; giving it EV of S$ 113 mn. Against this, it has Development Properties & Properties held for sale worth S$ 79 mn & S$ 12 mn. This means one is paying S$ 22 mn for its core Book Selling & Publishing Business. Please note that these properties are valued at lower of cost or realisable value. These properties realizable value according to our estimates is above Popular’s costs so value of property shown in Balance Sheet is on lower side than their market value. As a prudent approach, we assume that these Properties should be valued at cost.Though a lot of cash is required to run the Retail & Publishing business this cash still belongs to the company. So essentially we are buying Retail & Publishing for S$ 22mn.
Lets look into the so called sunset industry: Retail & Publishing. If you live in Singapore you can see Popular shops in all the malls. One has to look essentially at the kind of books sold in these stores which are books prescribed by school, assessment books and other such books with mainly academic content, popular titles for children’s literature at prices less than other leading stores and stationery. with emphasis on academics being an upward rather than downward trend the demand for such material is steady. It is a stable business with low margins, retail revenues being flat in FY09 (year of Global Financial Crisis) with profitability down in retail, while revenues & profitability being stable in Publishing business. These businesses generate both operating & free cash flow. These businesses have generated on an average S$ 23.8 mn PBT in the last 6 years & worse year being FY09 when they generated PBT of S$ 9.5 mn (Exhibit 1). Assuming tax rate of 22% in a worse year they would have made PAT of S$ 7.4 mn or on over 6 year average PAT of S$18.5 mn. We value it at 5x multiple to average 6 year Profits & fair Value for stock comes to S$ .355 cents. This gives investors upside of 35%. Please note at current prices market is valuing its Retailing & Publishing Business at less than 1x Cash Flows which consistently makes both Operating & Free Cash Flows. Digitalisation has been happening for sometime & this business has survived – so we believe it will last at least more than one year.
Popular Holdings — Segment Profit and Loss
The key question which potential investor may have is whether the profits are sustainable in the above two businesses. Digitalisation/e-book means that these businesses will have low growth & always raise concerns whether these businesses will survive. The company does not disclose the exact numbers product wise & following are my analysis. I reckon Publishing Business is already an ex-growth business & it complements Retailing Business. I assume revenues & profit will be flat from this business. The key debate in my mind is Retailing & Distribution which is a bigger business. This business can be divided into 3 parts which my understanding are almost equal revenue & profit-wise :
If Popular starts selling its Property (which are launched) then Cash further increases on its books & fair value goes up as company will be able to book profit. In addition Popular has never revalued its retail shops. If we start revaluing its 3 owned stores in Singapore ( Book Value will go up by 1.5 cents).
Stock trades at S$ 27 cents & on our numbers its Book Value as of April end, 2013 is 28 cents. The company has been Buying Back shares after it got approval to do Share Buy Back in August 2012. Till today the company has bought back 21.8 mn shares (2.6% of issued capital) & its last purchase was 1.1 mn share as of 27th May 2013 @ 28 cents. In addition Mr. Chou – controlling Shareholder of the company has been Buying shares nearly for year. He has bought 14 mn shares since publication of last Annual Report & his Holding has now increased from 58% to 60% of the issued capital. Mr. Chou last purchase was on 8th April 2013 for 489000 shares @ 29 cents.
