Samsonite International: Watch Capital Return, Deleveraging Plans

seekingalpha09-04

Samsonite has the intention of completing its $200 million share buyback program before the current year ends.The company's net leverage ratio decreased from 2.15 times a year ago to 1.39 times as of ...

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(OTCPK:SMSOF) (OTCPK:SMSEY) (1910:HK) stock. My view of SMSOF's capital return and debt reduction efforts is favorable. Samsonite could possibly complete its $200 million share repurchase plan by end-2024, and the company's net debt-to-EBITDA ratio might continue to trend downwards. The stock's potential 9.5% shareholder yield for FY2024 is appealing, and the company's shares are deserving of more demanding valuations with lower financial leverage. The current write-up evaluates Samsonite's shareholder capital return and deleveraging plans. My prior article, written on June 12, 2024, highlighted the company's proposed dual listing. Samsonite's shares can be traded on the Over-The-Counter Market and the Stock Exchange of Hong Kong. The three-month average daily trading values for the company's OTC shares and Hong Kong shares were $100,000 and $18 million, respectively, according to S&P Capital IQ data. Readers can buy Samsonite's relatively more liquid Hong Kong-listed shares with US brokerage firms such as Interactive Brokers or Hong Kong brokers like Boom Securities. Shareholder Capital Return Outlook Is Positive Samsonite hosted its Q2 analyst briefing (transcript sourced from S&P Capital IQ) in the middle of last month with relevant disclosures regarding its share buyback, dividend, and debt reduction initiatives. I will touch on SMSOF's capital return efforts in this section, while the company's deleveraging plans will be the subject for the next section. Samsonite noted at its second-quarter analyst call that \"doing $200 million (in buybacks) between now and probably by the end of the year\" is \"the right level\" and indicated that it \"can reassess\" future repurchases subsequently. Earlier, the company announced its $200 million buyback plan in June this year, which it stated will be in effect for a year until early June 2025. Samsonite's recent management commentary suggests that the company is targeting to complete this share repurchase program in a shorter period of time, or more specifically by end-2024. Moreover, it seems that Samsonite is considering the possibility of continuing with further buybacks once the current $200 million repurchase plan is concluded. Samsonite commenced buybacks on August 15, 2024, after the regulatory black-out period for its latest quarterly results. The company has already spent HK$227.2 million or close to $30 million on buybacks in just two weeks between August 15, 2024 and September 2, 2024. Assuming that Samsonite continues with its current pace of share repurchases (around $30 million every two weeks), the company will be able to complete the full $200 million of buybacks in 3-4 months or before December 31, 2024. This implies that Samsonite's potential buyback yield (repurchases divided by market capitalization) for fiscal 2024 is around 5.5%. Separately, Samsonite's consensus FY 2024 dividend yield is 4.0% based on a dividend per share estimate of $0.099 as per the consensus data taken from S&P Capital IQ. At the company's Q2 results briefing, SMSOF highlighted that \"a $150 million (or $0.1034 per share) of (dividend) distribution was paid out (in July 2024 for fiscal 2023) as we focus on making sure that we return cash to shareholders.\" It is fairly conservative to expect Samsonite to maintain a similar dividend of close to $0.10 per share for FY 2024. To sum things up, Samsonite could possibly deliver an FY 2024 shareholder yield of 9.5% (5.5%+4.0%), and this is very appealing. Deleveraging Is In Progress Samsonite's net debt-to-EBITDA metric was 1.39 times as of end-Q2 2024. As a comparison, the company's net leverage ratio was much higher at 3.68 times and 2.15 times at the end of Q2 2022 and Q2 2023, respectively. The company's net leverage metric is projected to decrease further to 0.98 times and 0.63 times as of December 31, 2025, and December 31, 2026, respectively, as per S&P Capital IQ data. Samsonite stressed at the company's Q2 earnings briefing that there is a \"continued focus on delevering the balance sheet\" as it stays disciplined in terms of \"working capital\" management. SMSOF's net working capital-to-revenue ratio was 14.6% for Q2 2024, which represented a meaningful improvement as compared to its 16.2% net working capital-to-revenue for the preceding quarter. As such, working capital optimization will be a key free cash flow enhancement driver for Samsonite. The market is currently anticipating that Samsonite will deliver free cash flow of $502 million and $556 million for FY 2025 and FY 2026, respectively. As a comparison, SMSOF's net debt as of June 30, 2024, was approximately $1 billion. It is reasonable to think that Samsonite can generate sufficient free cash flow to realize further debt reduction in the coming quarters and years. It is worth noting that Samsonite was trading at a forward P/E multiple in the high-teens range in FY 2015 when the company was in a net cash position. In contrast, the market currently values Samsonite at a consensus next twelve months' normalized P/E ratio of 9 times as per S&P Capital IQ. Therefore, it isn't far-fetched to think that Samsonite can command a higher P/E multiple with a further improvement in its financial position. Risks To Consider There are two risk factors worthy of consideration. The first key risk is that Samsonite cuts its dividend or takes a pause on buybacks, which means that its actual shareholder yield will be less compelling. The second major risk is that SMSOF's pace of deleveraging slows going forward. Conclusion Samsonite's valuations are undemanding, taking into account its forward P/E ratio of below 10 times. In my opinion, the stock is likely to witness a valuation multiple expansion in due course, when the market has a better appreciation of its shareholder return prospects and deleveraging plans.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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