Ossia International: trading at ~4x earnings, with hidden growth and a catalyst

I found this idea on the blog of Myles Kuah, who can also be found on X (Twitter).

I think Ossia International (ticker: O08.SI) is a very attractive special situation and growth investment. I won’t spend too much time rehashing the same information from Myles’ blog, but instead focus on two areas that I think are key points to the undervaluation of the shares today:

• the SGX watch-list issue, with the delisting threat that comes along with it
• and the somewhat hidden growth of their investment in an associated company

Let’s first summarize some basic financial data about the company to see where things stand today:

Share price: $0.166
Outstanding shares: 252.63m
Market cap: $41.9m
Pro-forma net-cash: $8.2m
Pro-forma book value: $50.4m

Ossia has an interest in two businesses: Great Alps Industries (100% owned) and a 19.8% stake in Pertama Holdings. Their stake in Pertama Holdings is by far their most valuable asset.

Taiwanese operations: Great Alps

Great Alps is active in the distribution of apparel, sporting goods and bags in Taiwan. It has exclusive distribution rights for the brands Kangol, True Religion, Tumi, Columbia and Sorel. This business seems to be very mediocre, but it is profitable. I went back through the annual reports and Ossia’s operations in Taiwan showed a profit at the segment level since fiscal 2014. This fluctuated between $0.2m and $4.1m. That last number comes from fiscal 2023 and it looks like profits were inflated, perhaps because of Covid-effects (re-opening, subsidies and inflation). So I think normalized profits for their Taiwanese operations should be substantially lower than last year’s. Maybe $1.0 – $2.0m at the segment level is a reasonable profit estimate for a typical year.

19.8% stake in Pertama Holdings

Ossia International holds a 40% stake in Harvey Norman Ossia (Asia), which holds a stake of 49.4% in Pertama Holdings. Effectively, Ossia International holds a 19.8% stake in Pertama Holdings. Pertama Holdings is a retailer of consumer electronics and home furnishings. It trades under the Harvey Norman brand name in Singapore and Malaysia. This business has shown strong growth in the last five years and this growth looks set to continue. I think this is not fully understood by many investors, because there is very limited disclosure about Pertama Holdings in Ossia’s annual report. Fortunately there is another way to find this information, but I’ll come back to this point later on in this post.

I’ll first discuss the SGX Watch-List history of Ossia and what the effects of this have been.

Ossia’s SGX watch-list issues

A SGX-listed company is placed on the watch-list when it records pre-tax losses for the 3 most recently completed consecutive financial years and it also falls below an average daily market capitalisation of less than S$40 million over the last 6 months. Why the Singapore Exchange has chosen to hold small caps to a much stricter standard than larger companies, I don’t know. A listing on the watch-list is pretty serious and a company must “take proactive steps” to exit the watch-list. This can be quite difficult however, as we will see with Ossia. The full rules about inclusion and removal from the watch-list are described in Chapter 13 of the SGX Rulebook. There is a 36-month “cure period” for companies to meet the exit criteria, but this period can be extended by SGX.

If a company on the watch-list does not make progress though, it will end up being delisted by the Singapore Exchange sooner or later. In that case, shareholders will be holding shares in a private company. This constant delisting threat is of course very scary for investors and I believe this has depressed Ossia’s share price for a long time.

Ossia was placed on the watch-list on December 5, 2017. It was the result of relatively large losses in prior years. The company had some unprofitable operations in Hong-Kong and also in Singapore, I believe. These loss-making businesses were discontinued and the company has shown a pre-tax profit since fiscal 2017.

To be removed from the SGX watch-list, a company must meet two criteria according to Rule 1314:

• record a consolidated pre-tax profit for the most recently completed financial year
• the company must have an average daily market capitalisation of S$40 million or more over the last 6 months

Ossia has met the first criterium, but until recently it had been unable to meet the daily average market cap hurdle of $40 million. With it’s latest set of results, Ossia has moved above the $40m limit for most days. So it now looks as though the company will be able to meet the second requirement soon. I calculated the average market cap since June 1 below:

So, I think it’s around $43.4m currently. Keep in mind that the company paid a large dividend on August 8, this has moved the market cap down around 10% since that date. Still it seems the company should be able to meet the average daily market requirement soon. In fact, in its August 25 filing of the minutes of the annual meeting, the company mentions on page 6 that is has: “already submitted an application to exit the watchlist and anticipate receiving a response from SGX shortly”.

I don’t know the exact details of the daily average market cap requirement. Is trading volume taken into account? Are weekends and holidays counted? This is all unclear to me. I assume the company needs six full months and that it would be around the end of November that they would be able to exit the watch-list, but it could be different.

The exit from the watch-list could be a catalyst for the stock. The threat of a delisting will then finally be removed after almost six years. There must be many investors that don’t want to touch a stock that has the threat of delisting hanging over it. This has probably caused a lot of selling pressure from existing shareholders since Ossia was placed on the watch-list and kept many potential buyers away. These are not factors that help form a reasonable price for a stock in the market. A removal from the watch-list hopefully fixes this issue, allowing Ossia to get a more reasonable valuation.

Let’s now look at the company’s stake in Pertama Holdings and look at the value development there.

Hidden growth in Pertama Holdings

The company’s major source of value is it’s 19.8% effective stake in Pertama Holdings. As mentioned before, the company holds a 40% stake in Harvey Norman Ossia (Asia), which holds a stake of 49.4% in Pertama Holdings. The 40% stake in Harvey Norman Ossia (Asia) is referred to in the company’s annual reports as the “associated company”. Pertama Holdings operates retail stores that sell consumer electronics and home furnishings under the Harvey Norman brand in Singapore and Malaysia. They have been very successful and profits have increased.

The table below shows the development of the profits of the associated company, Harvey Norman Ossia (Asia), based on information I compiled from Ossia’s annual reports:

Fiscal year	Profit for the year	Group’s share of profit	Dividends received
Fisc. 2023:	$19.7m (AR fisc. 2023, page 96)	$7.9m (page 96)	$5.1m (page 69)
Fisc. 2022:	$13.8m	$5.5m	$4.3m
Fisc. 2021:	$10.5m	$4.2m	$1.5m
Fisc. 2020:	$10.0m	$4.0m	$3.0m
Fisc. 2019:	$11.9m	$4.8m	$2.7m
Fisc. 2018:	$7.4m	$3.0m	$1.0m
Fisc. 2017:	$5.5m	$2.2m	$0.6m
Fisc. 2016:	$1.5m	$0.6m	–
Fisc. 2015:	($3.5m) loss	($1.4m) loss	$0.4m
Fisc. 2014:	($2.0m) loss	($0.8m) loss	$0.4m
Fisc. 2013:	$3.4m	$1.4m	$1.2m

Disclosure of the actual business results of Harvey Norman Ossia (Asia) / Pertama Holdings in Ossia’s annual reports is extremely limited. The prospects and growth are not really discussed and the company basically just says “sales of the associated company have increased and this led to a greater share of profits”. So this is not very helpful to investors in Ossia. They don’t know how things are going in the actual Harvey Normal stores that are operating in Singapore and Malaysia.

A shareholder mentioned this point at the annual meeting and you can see the company’s response on page 6 of the minutes. The company said that shareholders can buy the financial results of Harvey Norman Ossia (Asia) at a special Singaporean website. I checked out a sample report from that site, and I don’t think it will give you a lot more information. Sure, you can probably see revenue and profits, but there is no discussion about those results and the prospects of that company. The company also suggests Googling the Harvey Norman Ossia (Asia) name to get more information. I don’t think all this is very useful.

Fortunately, I think there is a much better source of information: the annual reports of Harvey Norman Holdings (ASX:HVN). This ASX listed company is the majority joint-venture partner in Harvey Norman Ossia (Asia):

Source: Harvey Norman Holdings annual report fisc. 2022, page 148

So ASX listed Harvey Norman Holdings, through Harvey Norman Singapore, owns 60% of Harvey Norman Ossia (Asia) and 50.6% of Pertama Holdings. I don’t know if Harvey Norman Holdings owns 100% of Harvey Norman Singapore. In its annual reports, Harvey Norman Holdings provides good disclosure about the operations of its offshore stores, including those in Singapore and Malaysia. What emerges from those disclosures is an exciting growth story.

I compiled the development of the store counts in Singapore and Malaysia as disclosed in Harvey Norman Holdings’ annual reports:

Fiscal year:	Number of stores in Singapore	Number of stores in Malaysia
Fisc. 2022	14 (AR fisc. 2022, page 15)	27
Fisc. 2021	14 (AR fisc. 2021, page 17)	26
Fisc. 2020	12 (page 13)	23
Fisc. 2019	12 (page 12)	18
Fisc. 2018	13 (page 15)	16
Fisc. 2017	13 (page 15)	15
Fisc. 2016	13 (page 17)	14
Fisc. 2015	17 (page 23)	13
Fisc. 2014	14 (page 21)	13
Fisc. 2013	13 (page 13)	11
Fisc. 2012	13 (page 11)	10
Fisc. 2011	13 (page 13)	7
Fisc. 2010	14 (page 11)	6

On page 16 of Harvey Norman Holdings’ fisc. 2018 annual report I found some more disclosure about the relationship with Pertama Holdings:

The consolidated entity owns an 80.2% controlling interest in Pertama Holdings Pte Limited (Pertama), a company incorporated in Singapore. A subsidiary of Harvey Norman Holdings Limited has granted to Pertama a licence to use the Harvey Norman® trademarks in Singapore and Malaysia. Pertama intends to expand its retail footprint in Singapore and Malaysia through the planned opening of 12 new retail sites. The expansion opportunities will be funded by Pertama through the utilisation of existing cash reserves in the Asian business or from external borrowings to be sourced locally in Singapore. The growth in South East Asia will predominantly be in Malaysia where there is an expectation to open up to 9 new stores by the end of 2020. This will grow the brand in Malaysia from the 16 stores today to 25 Harvey Norman® stores within a 2-year period. 3 new sites have been identified for growth in Singapore.

As you can see from the table above, they have been able to grow their store count in Malaysia strongly. Ossia International has shared in the succes of this expansion through its 19.8% stake in Pertama Holdings, leading to their increasing share of profits and a growing stream of dividends.

I think this stake in Pertama Holdings is a bit of a black box to some investors in Singapore. As we just saw, the fact that a Ossia shareholder pointed out at the meeting that there is “no information” to be found about these operations is telling. As I have shown above, I think there is information to be found about Pertama Holdings and it is publicly accessible. If investors in Singapore were made more aware of these operations, it might lead to a better understanding of the prospects of the Harvey Norman retail operations, particularly in Malaysia.

Malaysian expansion: from 28 stores to 80 stores

So Malaysia has been a succes story for Harvey Norman. What is exciting is that this growth looks to continue in the coming five years. Harvey Norman Holdings filed a presentation on November 24, 2022 (.pdf) that details its Malaysian expansion plans. They want to expand from 28 stores currently, to 80 stores by the end of 2028. So that would almost triple the store count.

If they can repeat the succes from the past five years, the result should be very nice for both Harvey Norman Holdings and Ossia International through its stake in Pertama holdings.

How many investors in Ossia International are aware that they are holding such a valuable and rapidly growing asset? I think that there are many shareholders who are not aware and who have instead been very worried about the delisting threat due to the watch-list issue.

This is at least my conclusion. I could be wrong about some or all of the things I wrote above. From what I’ve been able to tell, Harvey Norman Holdings’ Malaysian activities are carried out through Pertama Holdings and as such, Ossia International should share along with the results of Pertama Holdings.

Risks

This post is getting too long, but I will briefly discuss some of the main risks I see.

Delisting risk: as long as the company remains on the SGX watch-list this is a concern. It looks like the company is on track to exit from the watch-list, but as long as SGX has not made the formal decision, the delisting risk remains. A shareholder could end up with a holding in a private company in Singapore if Ossia is delisted by SGX.

Inflated profits: I think Ossia’s results for fisc. 2023 were very good, but the results from their Taiwanese operations look exceptionally strong to me and I would expect those to decline to something more in line with previous years’ results. Also, the Harvey Norman stores probably profited from pent-up demand after the Covid re-openings. So maybe that weakens in the coming year as well. Still, I think the long term growth trend of Harvey Norman in Malaysia is quite clear.

Management and capital allocation: George Goh is the Chairman and CEO of Ossia International. He and his two brothers own a combined 190.3m shares, or 75.3% of the outstanding shares. So minority shareholders are just along for the ride here, as is very often the case in Singapore. What’s interesting is that Mr. Goh ran for president of Singapore this year, but he was ultimately disqualified for the position.

I do wonder why the management took so much effort to keep Ossia International listed. The inclusion of Ossia on the watch-list could have provided an opportunity for them to take the company private at a bargain price. Why didn’t they do so? And what are their plans for the company? If the growth at Harvey Norman in Malaysia continues, the company will probably receive an even larger dividend stream in the future (although over the next five years there might be more capital needed for expansion). What is the company going to do with that cash? In recent years, they have paid fairly large dividends. Will that continue after they have exited the watch-list? Or will they start hoarding the cash, or perhaps “diversify” by investing in real estate projects once the objective of the watch-list exit has been achieved?

These are some of my concerns at the moment. I do think Ossia’s valuation today is very attractive and more than prices in these risks.

Disclosure: long Ossia International (O08.SI)