Description

Summary and Investment Case

Ocean Wilson trades at a considerable discount to its sum-of-the-parts, which isn’t unusual for a holding company. However, we believe the announcement of a strategic review of its controlling stake in Brazilian listed Wilson, Sons (PORT3 BS we refer to as “WSON”) has the potential to unlock the discount and could lead to considerable upside. Furthermore, we believe the underlying fundamentals for its main asset are also improving. We see the potential for more than 100% upside in a liquidation scenario. Given the shareholder structure and recent events we believe the probability of a liquidation has increased.

Ocean Wilsons Holdings Limited is a Bermuda-based investment company with two principal subsidiaries, Ocean Wilsons Investments Limited (OWIL) and Wilson Sons Limited. The group wholly owns OWIL, which owns a collection of investment funds, and holds 56.58% of Wilson Sons, one of the largest providers of maritime services in Brazil.

On the 12^th of June 2023, Ocean Wilson issued a press release, responding to Brazilian media speculation that the company is negotiating the sale of its 56.58% stake in Wilson, Sons. The company confirmed it is undergoing a strategy review of the stake. We believe this is a clear catalyst to unlock the current 50%+ holding discount.

We believe the announcement in June may lead to the sale of Wilson, Sons, in which case we believe a liquidation of the vehicle makes the most sense. We also note that there has been significant M&A in the ports and tugboat industries in the past couple of years given the vertical integration pursued by shippers and their abundant cash piles after COVID.

There are, however, a few complicating factors. The first is the shareholder structure, which we address later.  Also important and directly related is the management fee paid to the controlling shareholder for the management of OWIL. There are also fund commitments going years into the future which would have to be addressed. We also note that the three listed vehicles have been around for quite some time so why they have decided now is the right time to address the issue, is also an open question.

This investment has been on our radar for a number of years, and we only chose to invest after this announcement. We think the downside risk is rather minimal given the excessive discount and see significant upside if the family chooses to close the valuation gap. WSON has appreciated on news of the announcement, but OCN has barely moved, widening the gap even further.

Company Background

Ocean Wilsons was established in 1907 through the merger of Wilson Sons and Ocean Coal. It is one of the oldest companies quoted on the LSE, having listed as Wilson Sons in 1877. Through Wilson Sons, the group has a 183-year history of trading in Brazil, shifting gradually from commodity trading and transportation to shipping agency, port terminals and towage. Wilson Sons is now the largest integrated provider of port and maritime logistics in Brazil, with a dominant nationwide footprint offering comprehensive solutions to support domestic and international trade, as well as the oil and gas industry. In 1959, Walter Salomon, father of Deputy Chairman William, increased his stake and took a controlling shareholding in Wilson Sons. Wilson Sons listed on the São Paulo Stock Exchange in 2007, raising $119 million of net primary proceeds, and Ocean Wilsons sold down from 100% to 58.25%, raising $183 million of net proceeds ($205.6 gross), which was invested in OWIL, the group’s investment arm.

In July 2018, the Wilson Sons Board initiated a strategic review involving its investment in container terminal and logistics assets. One year later, the Board concluded the strategic review deciding not to engage in any transactions at the time. IR said the situation is completely different today as at that time they were approached but they ended up not liking the valuation for only part of the assets. The market was much different then and the underlying business has improved substantially.

In 2021, Ocean Wilson demonstrated a valuation supportive move as it restructured Wilson, Sons moving it from being a Bermuda-based company with Brazilian depository receipts to being a company directly listed on the Novo Mercado segment in the Brazilian exchange. This improved the share liquidity, increased corporate governance and enabled them to join the main Brazilian and Latin American stock market indices and opened the shareholder base to more Brazilian pension and infrastructure funds.

These two things give some evidence that they would like to unlock value at the right price.

Wilson, Sons (PORTS3 BS)

Wilson Sons is one of the largest providers of maritime services in Brazil with activities including towage, container terminals, offshore oil and gas support services, small vessel construction, logistics and ship agency.

There is a great presentation just updated this week on the IR website. We suggest reading it. They also publish lots of monthly statistics so there is no lack of updated KPIs.

Towage & Ship Agency

Towage & Ship Agency represent 52% of sales and approximately 53% of EBITDA with sales and EBITDA growing at CAGR 16.6% and 18.3% respectively, over the last five years. Wilson Sons is the leader in towage services in Brazil controlling 29.6% of registered tugs. The company operates 82 tugboats and supports all major ports and terminals. The company offers special services such as salvage assistance, firefighting, ocean towage and offshore construction support. These command higher rates and margins and have on average contributed 14% of the division’s revenues since 2008. The company is also the largest independent agency in the country, operating 18 branches in all the main Brazilian ports with presence in Europe and China offering trade representation to shipowners, boarding documents and equipment logistics management among others.

Chile-based and listed Sociedad Matriz SAAM (SMSAAM CS), is the second biggest player which recently completed the acquisition of 21 tugboats (19 operating and 2 in final phase of construction) from the Brazilian company Starnav for $198 million[1] including debt. The market is fairly consolidated with the big two operators owning 55.4% of registered tugboats. The large container fleets tend to prefer having long-term master framework contracts with one or at most two operators with multiple ports.

Large ships are not equipped with bow thrusters because this reduces storage space and, hence, require tugboats to assist maneuvering within a harbour. The larger the ship, the larger the tugboat required, and more tugboats are needed for assistance. Hence the trend for bigger ships has increased the usage and size of the tugboats and thus their fees. Consolidation of shipping lines and the trend to larger ships have tended to slow the growth in the number of harbor maneuvers but increased the average deadweight towed at a compound annual growth rate of 4% between 2008 and 2018, supporting revenue growth.

All domestic Brazilian operators enjoy regulatory protection and long-term, low-cost state financing. Tugboats are generally built locally as extremely high import duties make it uneconomical to import (there are exceptions – if you start building a tugboat in Brazil you can bring one in without duty whilst it is being constructed as long as it leaves after the construction is finished). and they must operate under a Brazilian flag. Brazilian flagged vessels thus trade at a premium to newbuild construction costs. WSON also owns the shipyard that builds most of Brazil’s tugboats, so they have a good idea of what future supply looks like.

Port Terminals

Port Terminals represent 34% of sales and 39% of EBITDA with sales and EBITDA growing at CAGR 3.5% and 7.6% respectively, over the last five years. Wilson Sons has two container terminal concessions, which combined moved 916,000 TEUs in 2022. Rio Grande has a lease term until February 2047 and Salvador has a lease term until March 2050, so there are no immediate concession renewal needs.

Rio Grande is the only dedicated container terminal in the state of Rio Grande do Sul and it serves the main maritime lines that connect Brazil to all major markets worldwide with a total capacity of 1,400,000 TEU per year. The terminal is responsible for 59% of Wilson Sons traded volume (544,000 TEU), with volumes lower compared to pre-Covid years (700-750 Thousand TEU). Rio Grande's imbalance between export and import flows (70/30%) makes the port highly dependent on the repositioning of empty containers to meet the higher export demand. During Covid, a shortage of empty containers impaired the port’s ability to serve clients hence the lowered volumes.

Despite lower volumes, Rio Grande is well positioned to capture a relevant share of transshipment volume due to draft restrictions in the Plate region ports (Buenos Aires and Montevideo). It is believed that keeping the corridor to Buenos Aires port open for bigger-sized ships is economically unviable and that poses a big opportunity for Rio Grande port, which is equipped to handle bigger vessels.

Although no further investments are required under the terms of the concession agreement, there is potential to increase the paved area and to add another 300m of quayside with permission from the port authority. Such an option could increase capacity by 33% for an approximately $100 million investment. There is significant land around the terminal and the government is actively incentivizing companies to develop there. The state government of Rio Grande do Sul has been actively attracting investment for the region which could further support the growth story of the state’s dedicated container facility.

The nearby port of Navegantes will undergo extensive refurbishments and Rio Grande is set to benefit from some of the lost traffic.

Salvador is the only dedicated terminal in the state of Bahia, the largest economy in the north-east of Brazil with total capacity of 500,000 TEU per year. The terminal is responsible for 41% of Wilson Sons traded volume (372,000 TEU) with volumes growing at CAGR 3.6% over the last five years. Premium infrastructure with the most advanced operation among terminals in north-eastern Brazil allows the port to serve the largest ships currently calling the east coast of South America.

The secular trend to increased containerization of the Brazilian economy remains an important driver of growth for WSON, with container volume growing at 4.1% since 2012. Container density in Brazil is still relatively low at 49 TEUs per 1,000 people versus 198 for OECD, 101 for world and 79 for Latin America.

There are plans to expand the port to 924k TEUS. Similar to Rio Grande, there are a number of projects in Bahia that will add significant volumes in the coming years in addition to more agricultural exports.

Logistics, Shipyard, Offshore Support Bases

Logistics represents 11% of Sales and 5% of EBITDA. Segment supports domestic and international trade flow through bonded warehousing, inventory management. distribution and transportation services. The logistic center is located in Santo André, near Brazil’s largest metropolitan area of São Paulo. The logistics center reported growth of 29% in 2022, strengthening its position as the largest bonded area of warehousing in São Paulo.

Shipyard and Offshore Support Bases combined represent 3% of Sales and 1% of EBITDA both loss making on the operating level. Located in the Port of Santos, shipyards were designed for the construction, maintenance and repair of small and mid-sized vessels used for maritime and port support. Shipyard has delivered 141 vessels in the last 30 years. Pioneer in the segment, Wilson Sons also support offshore energy exploration and production along the Brazilian cost through 3 berths in Niterói base, 5 berths in Rio de Janeiro base and one equipment storage site in Guaxindiba.

Offshore Support Vessels Joint-Venture

In October 2021, Wilson Sons acquired 50% of Atlantis Offshore Services SA due to the merger of the former parent company of Wilson Sons Limited by WSSA. The Joint Venture has faced some difficult years due to weak demand and strong competition, but looks very competitive in new calls for bids from Petrobras. Sales grew 58% in 2022 supported by the 21% increase in operating days and a 30% improvement in the fleet average daily rate. In the second quarter of 2023, management reported that all vessels are operational and contracted with two more vessels to operate by yearend. Tidewater, the largest offshore support vessel operator in the world, also reported 38-54% increase in day rates, multi-year low order book and positive outlook for the industry. We expect this to go from a cash consuming business in the past few years to a cash generative one.

Portfolio (OWIL)

As at the end of the second quarter the portfolio was valued at roughly $300 million dollars. The fund holds a diversified group of funds. They seem reasonable but not exciting. They have clearly not done very well over the past years. If you add the 1% management on top of the fees the funds charge it, helps explain part of the mediocre performance. Our only comment is that most of it is relatively liquid and probably a bit less volatile than the market. As shareholders, we could think of a lot of better uses for this money.

The major issue is the commitment to PE funds to the tune of $55 million. Investments in limited partnerships and other private equity funds may be subject to restrictions on redemptions such as lock up periods, redemption gates and side pockets. Such commitments could hinder a liquidation.

Shareholders

Ocean Wilsons’ largest shareholder is Hansa Investment Company Limited, which is also listed on the LSE under the tickers HAN LN and HANA LN with a 26.45% stake. The investment represents approximately 24% of the NAV of the trust with the remainder in many of the same funds as OWIL. The trust has two share classes, a voting share class with 40 million shares (HAN LN) and a non-voting share class with 80 million shares (HANA LN) with the same economic rights.

Hansa Investment Company traces its origins back to 1912 when the Alto Paranà Development Company was launched to develop forestry in Brazil. Having become an investment trust company in the late-1940s, the company became closely associated with the Salomon Family, initially through Sir Walter Salomon, whose family trusts became substantial shareholders. The late-1950s also saw the acquisition of a significant shareholding of Ocean Wilsons Holdings Limited through the issuance of the non-voting ordinary shares by the company's predecessor, Hansa Trust.

The wider Salomon family remain controlling investors in HAN. William Salomon, Sir Walter's son, a director of HICL and Senior Partner of the company's Portfolio Manager, has by our calculation 27.9% of the voting shares and 12.3% economic interest in HAN. Other members of the wider Salomon family, who are also descendants of Sir Walter, are interested in a further 30% of the voting shares. It is likely that this is Christopher Townsend via Nomolas, which has 25.9%. He is not a director and it’s not clear in the accounts but given his relationship and his ownership of Ocean Wilson, we think it is highly likely. Thus, the family not only control the management company but also control the voting shares of HAN.

William Salomon controls directly a further 13.2% of Ocean Wilson for a total economic interest of 25.5%. We note that he has slightly more economic interest directly than through the trust. Christopher Townsend has a direct stake of 11.4% and we believe around a 20% see through economic interest, although this could be higher, as there is an unexplained 4.1% voting shares of the trust to account for and we do not know how many non-voting shares of the trust he controls. Again, we believe Salomon has a slightly higher direct economic exposure to Ocean Wilson than through HAN.

We note that both William Salomon and Christopher Townsend are directors of Ocean Wilson and Wilson, Sons whilst William Salomon also sits on the board of Hansa Investment Company Limited.

They also both work for the Invest Manager (Hanseatic Asset Management LBG) of both OWIL and Hansa Investment Company Limited. The investment manager is external, and they collect management fees. We will discuss this dynamic in more detail in the risk section. 

Risks and Debates

Management and the board of directors

Mr Salomon was appointed Deputy Chair in 1995. In addition, he is a Director of Wilson Sons Holdings Brasil S.A., Chair of Hanseatic Asset Management LBG, Senior Partner in Hansa Capital Partners LLP, as well as a Director of Hansa Investment Company Limited.

Ms Caroline Foulger was appointed Chair in 2020. Ms Foulger is also a member of the Company’s remuneration and Management Oversight Committee. She also serves as non-executive Director for Atlas Artemia International Ltd and Oakley Capital Investments Limited and is a retired partner of PwC Bermuda. Ms Foulger is also the Chair of Ocean Wilsons Investment Limited. We believe her to be independent.

According to the annual report, the company follows the UK corporate governance code and has a conflicts of interest policy to excuse the major shareholders from board deliberations on topics if they believe there to be a conflict of interest.

Of the five board members, three are considered to be independent. The chair as well as Mr Andrey Berzins and Ms Fiona Beck. We note that Fiona and Caroline are on many boards together so there could be some conflict there. Mr Berzins has also been a director since 2014.

Portfolio Management

The investment portfolio is managed by Hanseatic Asset Management LBG and is invested in a diversified range of asset classes and markets. There is general market risk but the fund is diversified and should probably do ok but there is always the risk they pick poorly performing funds.

Management fees and other conflicts of interest

Mr. W Salomon (Deputy Chair of OCN) is chairman and Mr. C Townsend (Director of OCN) is a director of Hanseatic Asset Management LBG, which is the investment manager. Fees were paid to Hanseatic Asset Management LBG for acting as Investment Manager of the Group's investment portfolio.

OWIL is an investment fund and is managed by Hanseatic Asset Management; a Guernsey-based investment management firm whose investment team also manage the portfolio for Hansa Investment

The investment manager received an investment management fee of 1% of the valuation of funds under management and an annual performance fee of 10% of the net investment return which exceeds the benchmark, provided that the high-water mark has been exceeded. The portfolio performance is measured against a benchmark calculated by reference to the US CPI Urban Consumers index not seasonally adjusted plus 3% per annum over rolling three-year periods. Payment of performance fees are subject to a high-water mark and are capped at a maximum of 2% of the portfolio net asset value.

The benchmark takes into consideration a three-year measurement period and is linked to economic factors. Hanseatic Asset Management LBS has received roughly $2.6 million in cumulative performance fee over the last six years.

We see no other conflicts and it appears to be run well and has treated minorities fairly. However, one never likes to see the major shareholders collecting fees like this.

Irrational competition and general macro/Brazil risks to Wilson, Sons

The location of a port is probably the most important differentiator among operators followed by loading/offloading rate and supporting rail infrastructure. It is not very likely that a port faces irrational competition.

The tugboat market is more competitive, but Wilson Sons operates only in Brazil, which is a regulated market, and is the biggest player in a consolidated market, controlling approximately 30%. SAAM is the second largest player, controlling 25%. After a discussion with SAAM’s management, we deem them to be a rational player and do not expect irrational pricing or any market disruption.

Acquisition of SAAM’s port business by Hapag-Lloyd confirmed the appetite from shipping companies to own onshore assets, particularly following the post-Covid stress of supply chains and port congestions. CMA CSM also recently purchased Bollore’s logistics assets. Whilst a potential deal regarding Wilson’s terminals with a shipping company is likely to have limited regulatory scrutiny, it could create friction with Wilson Sons’ largest client Maersk, which according to Jefferies accounts for around a one-third of the volumes handled through Wilson’s terminals in Brazil. We note the largest client according to the accounts is 11% of revenues.

There are always macro risks around the economy and trade flows as well as country specific risks around Brazil.

Shareholders and Liquidity

Historically, the lack of liquidity (OCN trades c. 100k a day) and the cascade structure of the group’s two classes of shares classes (HAN and HANA) and the further holding of Ocean Wilsons, were not appreciated by the market. Ocean Wilsons NAV historical discount average was 32% against the current discount in excess of 50%. Investors often apply a discount to holdco structures but there is nothing in our knowledge that could justify such a steep discount. On the contrary, the ongoing strategic review at OCN and the possibility of Wilson Sons divestment offer a full value potential.  

The fund of funds is relatively liquid but does have some long-term holdings and PE commitments in excess of 5 years and $55 million in value that could hinder a liquidation or change of strategy.

FX Risk

WSON reports in USD and earns c 55% of revenues in that currency, while 85% of its costs are in Brazilian reais. To offset its naturally long dollar business, its debt has been mainly in USD (74% is USD and 26% in BRL). The devaluation in Brazilian real explains part of the drop in reported USD revenues. However, it has been a margin contributor since the costs are mainly in the local currency.  

Investment Thesis

To quickly recap, we believe that Ocean Wilson is a compelling situation with a listed stake that is under strategic review ($723 million at mkt price or £16.6 per share) and a portfolio of funds worth $300 million (as at June 30^th or £6.9 per share). If we liquidated at today’s prices, we have in excess of 100% upside. We think Wilson, Sons is in an outstanding position to grow and is likely to increase dividends as we wait. The portfolio, while not great, is at least semi- liquid and well diversified.

While we can look at many different scenarios from a spin-off (would be positive for shareholders but not maximum value as we lose the potential control premium) to a partial sale (ports only or tugs only?). We think the most likely scenario is a full sale, as we get the control premium and lose the expenses of a listing and separate board. Large container fleets have been buyers of port assets recently and infrastructure funds are always looking for these sorts of assets.

The next question is what happens to the money. Will they reinvest into another business? We don’t think so as they have never done this before. They are also now pretty much asset managers and not operators. Will they put the money into OWIL? That could happen and that would likely result in a continued wide discount to underlying NAV.  However, then they would have two listed fund of funds and that just doesn’t seem to be very efficient on many levels. The independent board members, at some point would theoretically have to object as well. We think the most reasonable outcome is a full liquidation of Ocean Wilson. This would eliminate two of the listing/board costs.

As mentioned in the shareholder section, the main owners are also the outside investment manager. They are collecting a 1% fee on the NAV plus a performance fee. We clearly do not like this structure and in fact when we looked at Ocean Wilson a few years ago and this was the reason for not investing. We saw them earning fees from a fund of funds (so we as end investors paid them plus the funds they invested in – a rather large all-in expense for very mediocre performance).. Despite their large ownership they seemed content to earn these fees over actually creating value for shareholders. This changed with the announcement of the review of strategic stake in Wilson Sons.

Whilst the management fee seems rather small compared to the value that could be created by removing the discounts to this three-tiered listed structure, it has been the norm for the past several years, so we asked ourselves why this would change. Obviously, a liquidation of Ocean Wilson would create the most value for everyone, but the family has been content up to now running a very mediocre (to be polite) investment fund and without maximizing shareholder value. But perhaps things are slowly changing – we saw evidence of this with the prior strategic review and the relisting in Brazil. They seem to have picked decent outside board members as well.

We note that the latest annual report for the Hansa Investment Company Limited had some strange thoughts in it. The discount on the trust is at a rather excessive >40% and thus the board has to rationalize why that is the case, as well as what they are doing about it. The chairman ruled out a share buyback. He seemed to think they shouldn’t increase their exposure to Brazil (which would happen if they sold their liquid funds to buy back shares and not sell any Ocean Wilson shares) but makes little sense given the family's long-time holding. He also thought the best way to close the gap was to show the world how great they were by hosting a retail call. Sure. Sounds great. Furthermore, his idea was to add private equity exposure to their already overdiversified pick of funds. Clearly no buyback and adding PE doesn’t seem that smartest way to close said excessive discount.

However, upon a bit of reflection, this makes some sense, if they were planning to liquidate Ocean Wilson. One problem with liquidating Ocean Wilson is that it owns hedge funds and private equity (with commitments of $55 million over several years). How would they exit? Well, if Hansa Trust thought it was a great idea to increase their exposure to hedge funds and private equity, they could take these stakes in lieu of cash in the liquidation. They also just happened to change the wording and add this idea about a month after initiating the strategic review. Why do a share buyback now when they plan on liquidating the Ocean Wilson stake and receive substantial cash, and thus avoid having to sell the funds they are currently invested in?  Furthermore, given the 26.45% ownership of the Hansa Trust in Ocean Wilson, they would increase their AuM significantly, which would increase their management fee (currently the Hansa Trust does not charge a management fee on the portion that is in Ocean Wilson). We think closing the discount on Ocean Wilson and liquidating it at current prices would add as much AuM to the trust as that lost by not collecting the management fee from managing OWIL. Hence it would be close to management fee neutral for them and unlock significant value for all.

Valuation

Our base case valuation is based on OCN investment portfolio reported figure at 30th June 2023 plus the market value of WSON stake. Based on the latest reported value, the investment portfolio is worth approximately $300 million, on which we apply a 25% haircut to adjust for illiquidity and a possible market correction. On top of that, the market values WSON stake at $723 million (at BRL 13.85 per share). Hence Ocean Wilson appears to trade at a 56% discount to NAV on a Sum-Of-Parts value of £21,9 per share. There is no significant debt at the holdco level but there are $55 million of PE commitments.

WSON currently trades at 8.2x EBITDA (exc Leases), which seems reasonable compared to peers and recent transactions. We think it is fairly valued to perhaps 20% undervalued currently.

WSON share price has increased a fair bit since the announcement (unlike OCN) and currently trades at 8.2x EBITDA (Exc Leases). Santos Brasil Participaçōes (STBP3), the biggest port facility in Brazil, has traded at 10-12x EBITDA over the last five years and 8x EBITDA over the last two years. WSON has half of its EBITDA from the tugboats though so not a perfect comparison.

In October 2021, Hapag-Lloyd AG acquired SAAM’s ports and logistics business for c. $1.13 billion EV[2]. SAAM’s port business comprises 10 terminals in six North, Central and South American countries with combined container throughput of 3.5 million TEU in 2021. Logistics facilities compliment the terminal business at five locations in Chile. Based on reported numbers, SAAM’s Ports and Logistics business combined was generating c. $110-120 million EBITDA, hence the business was sold for 9-10x EBITDA (Exc Leases). The current EV for SAAM is not correct in Factset/Bloomberg, in our view, since there are multiple moving parts adjusted for the deal.

We also value the WSON stake based on FCFs which at 17x FY24-25 figure gives a BRL 13-14 per share, more like fairly valued on current share price (Sep-23). Hence owners of OCN get the portfolio value for free, which adds £5-6 per share value for a combined value of £18-20 per share.

According to the management, maintenance capex is approximately BRL 230 million ($50 million). Salvador Port expansion and tugboat acquisitions could make capex looks lumpy, but the management confirmed that there are no significant investment needs for the next four to five years.

However, we slice and dice it, OCN appears to trade at a significant discount to its fair value. At this price level, investors buy a dominant and well-run towage and port facility business in Brazil and a well-diversified portfolio at >50% discount. In the meantime, OCN provides a growing 6% dividend yield to compensate investors while waiting for the market to recognise or the management to unlock the full value.

Catalyst

• Strategic review ends in sale or spin of PORT3
• Liquidation / Return of Capital
• Any sign the major shareholder wants to realize full value
• Continued strong results from PORT3