My Perfect Pitch

It’s always fascinated me to read stories of investors finding hidden gems like Dillards, GFP, HRBR, deeply undervalued securities that proceeded to generate ridiculous short term returns. Stories like these need to have a unique combination of characteristics to make it possible with traits like liquidity, awareness, sentiment and earnings growth often all working in concert… the perfect pitch. While I have a rule to avoid going above 15% concentration in any one position in my portfolio, I have recently thrown that rule out the window for what is by far my favourite idea I’ve had since I started investing. Unfortunately, much of the opportunity comes from how illiquid the stock is so this likely won’t be actionable for most readers (I have a very small capital base). However I wanted to document it for my own record and because I think it’s just an interesting idea. I hope you enjoy: my perfect pitch.

Ossia International (SGX:O08) is a small $30m Singaporean listed nanocap that describes itself as “a leading regional distributor and retailer of lifestyle, outdoors, luggage and accessories products”, which is only half true. With a broad range of low quality businesses, the company has spent the last 5 years discontinuing and divesting in order to streamline into its two remaining businesses and improve profitability. It’s core business is under the brand Great Alps Industries and is a distributor of sporting goods, bags and accessories in Taiwan. This business does around $2-3m of operating profit and is a generally low quality business that is not at all essential for this thesis. While I have no real view of the core business, I will add that this segment has significantly improved over the past 5 years from loss making to now consistently profitable. In the most recent half yearly Great Alps grew gross profit by 50% after 2 years of significant economic restrictions throughout Asia due to covid.

The essence of this thesis comes down to Ossia’s 40% ownership in Harvey Norman Asia. I believe this to be a high quality asset worth many multiples of the current market cap. Harvey Norman has a strong brand name combined with a proven operating model. Furthermore, Harvey Norman Australia owns a controlling stake in the business, putting it in safe hands and reducing the risk of mismanagement. Harvey Norman’s presence significantly derisks Ossia relative to other small, cheap Asian companies (notoriously dodgy) as their business plans and results can be transparently followed through Harvey Norman’s own reporting.

Trailing earnings for Ossia’s stake in Harvey Norman come in at $7.8m putting them at a p/e ratio (ignoring the core business and assuming an 17% tax rate) of a frankly ridiculous 4.5. This is a 4.5 p/e ratio for a company with a strong brand name and operating business that has doubled store count over the past 5 years and plans to double again over the next 5 years. Additionally, with the reopening of Malaysia after Covid (which hasn’t even flowed through to peak season yet), HN Asia doubled earnings in the most recent report and has been continuously profitable for over 5 years straight. While future growth will likely slow, the combination of increased store counts and a rapidly growing Malaysian economy provide it with tailwinds that should allow it to comfortably grow at double digits well into the future. Hell, just the dividend alone from the Harvey Norman segment are $4.3m, which it has been able to pay while continuing to grow rapidly. Adding the core operating business puts the entity at a ridiculous 3.5 p/e ratio for a profitable, growing business. Realistically, even factoring in an illiquidity and emerging markets discount I believe an 8 multiple to be totally reasonable and fairly conservative considering the quality and growth of the Harvey Norman business. Currently the company pays a 9% dividend however after cleaning up their balance sheet significantly over the past 5 years I believe they will likely increase their dividend. This dividend increase would be the most likely catalyst for a rerate in my opinion.

So why does this opportunity exist? Well firstly, it’s a tiny Singaporean microcap at a time when both small caps and emerging markets are at significant historical discounts to historical averages. Furthermore, Ossia currently has a delisting warning from the SGX which would likely scare off anyone who happened to be snooping around. In reality, this warning was given 5 years ago due to the company being unprofitable and having a market cap below $50m. Since then the company has significantly improved profitability with no change in the market cap, leading to multiple extensions. While this is certainly a risk, the SGX has shown a willingness to be flexible surrounding the market cap issue which is out of their control and I believe there to be medium term catalysts for a rerate such as the rebounding Asian economies and a dividend increase. Finally, even if someone did find themselves interested, the stock is so illiquid I struggled to build out a position even with my tiny capital base. Only about $1000 of stock trades per day on average, so the majority of investors are likely locked out. As is often said surrounding microcaps, liquidity follows price. As seen in situations such as HRBR and GFP; when illiquid, deep value opportunities become discovered and start running the earnings, multiple and liquidity increases can  turbocharge returns in a short space of time.

Around 80% of Ossia is owned by its founders the 3 Goh brothers. This is certainly one of the biggest risks here. The brothers seem to be lovely peoople, having grown up dirt poor and being heavily involved in both charity work and community involvement. They’ve got a long track record of entrepeneurship, having built many large, successful businesses from the ground up. However, their track record with publically listed businesses isn’t fantastic. Many of the companies they have taken public have mostly traded sideways or down with little wealth generated for shareholders, with many ending up being taken private. The saving grace here is that over the past 5 years they have gone about streamlining and closing the unprofitable segments of the business. This is important as it reduces what I believe to be the key risk in situations like this: empire building and silly acquisitions. Furthermore, their stake in HN Asia is only 40%, which means Harvey Norman has the final say regarding decision making within that segment. While Ossia doesn’t communicate a lot of strategy to shareholders, I think the capital allocation focus at least in the short term will likely focus on dividends and organic growth. While having such concentrated owners provides minority shareholder risk, at the very least they are significantly aligned with shareholders. At this sort of valuation and with such a high quality asset they could significantly misallocate capital and shareholders would still come out on top.

I believe Ossia to be an incredibly compelling opportunity. It’s a classic high quality asset inside a lower quality one, but with the added issue of being illiquid and in a deeply out of love location. With the safety of Harvey Norman running their most valuable asset along with a large, consistent dividend the downside of this idea is somewhat mitigated while still providing significant upside. I believe the fair value of the company to be upwards of $100m, providing me with a potential upside of over 3x.