Description

Thesis

Netherlands based Koninklijke Vopak N.V. (“Vopak”) is the world’s largest independent tank storage operator.  Their tanks are buffers in the global supply chain, storing oils, chemicals, and gases. It’s a highly recurring business which produces a high-teens ROE.  The three-person executive management team is small, entrepreneurial, and tenured.  The Van der Vorm family (of HAL Holding), which hold 48% of the shares, has historically been an active owner.

Stock price is €41.91 per share, 128m shares, €5.36bn MC, €1.80bn net debt, €7.16bn EV.  Net debt to EBITDA is 2.5x.

Reported revenue growth and new capacity announcements have slowed in recent years which has lowered market expectations.  Management does not provide quantitative guidance regarding future earnings growth rates which, in my opinion, has dampened investors expectations.  There are no issues around demand shifts or competitive threats which would fundamentally change the economics of the business.  I assume the company will return to mid to high-single-digit earnings growth and market sentiment will brighten.

Historical Financial Overview

Although the company has leverage, I consider it to have ~€500m (~€4 per share) in distributable cash, attributable to 2015-2016 divestitures which were not done to de-lever the balance sheet, but to focus on their best assets.  The proceeds have not since been earmarked.  If large new projects are not announced in the next year, I expect a significant portion of this to be returned to shareholders via special dividend and / or buyback. Consensus 2017E net income is €320m, implying an earnings multiple of 16.8x.  I estimate FCF of €380m by adding back €280m in D&A and subtracting €220m in estimated maintenance investment.  This excludes expansion capex as well as improvement capex for which the company has defined return hurdles. 

Making these adjustments, I get a valuation of 12.7x ’17 E FCF (4840 / 380).

From another perspective, 45% of earnings are currently distributed to shareholders via dividend, providing a 2.7% yield.  Assuming 50% of earnings are reinvested at 16% return on equity, earnings would grow at 8.0% which, added to the 2.7%, would be a 10.7% total return, which I find interesting for a business with Vopak’s stability.

BUSINESS DESCRIPTION

Retkapital did a nice job describing the business in a February 2016 writeup.  I’ll give a short description and handle questions in the thread.

Three points in the global chemical supply chain where storage is needed are intercontinental interchanges (a.k.a. hubs), coastal import / export terminals, and outside refinery parks.  Simplifying, tanks are 100k cubic meters and seven stories tall - the volume equivalent of forty Olympic swimming pools.  Design requirements vary significantly, but they can cost $20m+ to build.  Vopak operates ~300 of these tanks worldwide, grouped into ~70 terminals.  They store, heat/cool, and blend variants of crude oil, chemicals, vegoil, and LNG on behalf of customers including BP, BASF, etc.

The value that customers receive falls into three buckets – support for intercontinental trade flows (hubs and distribution terminals), efficiency gains achieved by allowing a dedicated tank operator to manage storage on behalf of several adjacently located customers (industrial terminals), or optimization of customer cost of capital by leveraging this more predictable asset in the supply chain (dedicated industrial terminals).  Most of Vopak’s money is earned in the first bucket at one of the company’s four hub locations of Singapore, Rotterdam, Fujairah, and Houston.

In existing locations, the fixed cost nature of the business gives Vopak an incumbent advantage.  Moreover, their terminals typically have certain hard to replicate attributes which act as an additional a barrier to competition.  For example, in Fujairah, Vopak is the only provider which operates its own jetty.  Competitors rely on a state owned and operated jetty.  As the state has a shareholding in the Vopak subsidiary, they benefit from the setup and are unlikely to allow other operators to build competing jetties. 

For new investments, Vopak has an advantage in its reputation and capital structure.  States permitting new storage facilities want to partner with Vopak as they have confidence in Vopak’s ability to deliver the project, source demand, and operate safely.  Additionally, most independent tank storage operators are heavily leveraged and have committed to policies which return all FCF to shareholders.  In contrast, Vopak is underleveraged and retains its earnings.  This puts the company at a disadvantage in acquiring existing assets, but an advantage in funding development projects.

Risks to the business are marginal new supply depressing local pricing, fines and reputational damage associated with environmental and safety accidents, and delays in new assets reaching sufficient capacity utilization rates.

MANAGEMENT

I think highly of the three-member executive management team.  From the most recent results call: 

<Q - Thomas Adolff>: …is your aim to be a growth stock, a value stock or a yield stock? And on the call, you also talked very confidently about new projects that you're looking at to drive longer-term growth. Now, the question I have is, in your view of global GDP longer-term, taking to account the exposure to oil products, chemicals, vegetable oil and gas, how should I think about a target annual capacity growth rate longer term, if there is such a thing at Vopak? And if there's also a internal constraint once you reach a certain size, if there's such a thing in storage business?

<A - Jack P. de Kreij>: The question whether this strategy which is called capital disciplined value creation is, let's say, reconciled to the financial markets as a value stock, a growth stock, or a yield stock that is – it's a very good question because at this stage, I don't think you can easily label this disciplined value creation to any of those components. That will take some more time to see what will be the best possible label for this story, because the capital disciplined execution means that we are not aiming for a certain level of growth. We try to identify the best possible projects with an excellent risk return profile and we have not, let's say, a dogmatic or pre-defined growth perspective.

So, from that point of view, it's more a value story than maybe a growth story but it includes growth to achieve that value.

The yield, it's not that we are having a principal objective to maximize the yield, but we try to combine the value creation, maximize the cash flow generation and continuously increase the yields. So, it's a combination of both.

And at a certain point in time, and that's the third question, what would be the point that dependent on global GDP developments, global imbalances, that the world has sufficient infrastructure. I don't think you will easily achieve that point because there is a continuous development of new specifications of products, of new combination of markets whether it's gas products, whether it's biochemicals, whether it's a combination of chemicals, whether it's, let's say, new export flows out of the United States.

So, there will not be easily, in the short-term, a natural point where we have sufficient aligned infrastructure to accommodate the physical flows in the world on the most economic way.

Catalyst

 Earnings growth.