Description

Summary

Wilh Wilhelmsen holding "WWI" is the holding company of market leading shipping company in the ro-ro niche Wallenius Wilhelmsen Logistics "WWL" that has been earning through-cycle ~10% ROIC. The merit of this investment is that the downside is well protected through virtue of the low multiple (WWI is trading around 20% look-through normalized earnings yield) and very consistent profitability (never failing to spew a profit in the last two severe down cycles).

Meanwhile, one enjoys upside from earnings and multiple expansion through:

• improved sales (mix) and margins: an anticipated turn materializing in mining sector capex after a protracted downcycle. High & Heavy equipment shipping is the most profitable segment in which Wilhelmsen is the most dominant leader.
• highlighting its value through simplification of the holding structure (examples from last year: spin-off of Treasure ASA, merger of Wallenius with WWASA into WWL boosting the absolute float by 100%).
• the company becoming increasingly a logistics player

Why the opportunity exists

- Shipping company label, although I don't know shipping companies this stable in profitability. It seems to me that this stock is priced to get the upside, but not much downside from sentiment in shipping.

- Conglomerate label and complexity, although simplifying and most holdings have synergistic / strategic rationale (e.g. WMS services the large WWL fleet)

- Norwegian stock market not being too popular at the moment

- Family shareholder (which has a decent track record, recent and over the long term)

Notes

- shares trade in NOK, reporting in USD.

- this write-up refers to the B share class (no voting rights). WWI.OL is the ticker of class A shares. WWI trades at a premium of 4% currently, and 3% historically (last 10 years). As for the voting right value: the Wilhelmsen family controls ~60% of voting rights. Share count is 11.9M for WWIB and 34.5M for WWI, so family economic interest is ~45%. Liquidity is low.

- the “net debt” in this write-up refers to holding level net debt, and excludes the debt that exists on the WWL level (D/E ratio of ~1)

History

Wilh. Wilhelmsen "WWI" is a holding company controlling the world's largest player in ro-ro shipping Wallenius Wilhelmsen Logistics (WWL, public, previously WWASA) with history going back to 1861. A second activity that WWL is increasingly engaged in is providing its customers integrated land-based logistics.

The second largest holding is 100% held Wilhelmsen Maritime services (WMS) providing a plethora of services to ships such as dry docking, maintenance, refrigeration, water, cleaning solutions. Note that a part of the client base is the less cyclical cruise industry.

Other stakes include a 12% stake in Hyundai Glovis through WWL's new spinoff Treasure ASA (see previous write-up),  a 5% stake in publicly listed Qube holdings (Australian logistics provider) and a 40% stake in Norsea Group, a provider of logistics services to the offshore industry in the [drumroll] North Sea.

Management

The Wilhelmsen family has a lot of skin in the game (large majority of net worth in the company, family legacy) and has prioritized prudent capital allocation in the past. Currently, it is investing increasingly in land-based logistics and overhauling its portfolio of services in WMS towards its "core business". While we suspect that payout will increase slightly, it is currently quite low with respect to earnings yield, so continued adequate capital allocation skills is a major risk factor.

Businesses

WWL

Merger of Wallenius lines with WWASA

WWL came into existence in Q1 after the merger of Wallenius lines and Wilhelmsen ASA (WWASA) completed. We believe guided cost synergies of 50 - 100M$ to be conservative (i.e. better fleet utilization, collapsed corporate structure, from 5 to 1 management team, IT systems). Activities of all previous WWASA and Wallenius subsidiaries will be consolidated in two business lines: shipping and logistics activities. Within the ro-ro shipping market, WWL will be the clear market leader with a market share of ~20% of CEU, or respectively 25%  and 35% more car equivalent unit capacity than the largest competitors NYK and MOL.

Also, pursuant to the merger agreement, Wallenius will sell their stake down to 38%. When this is finished, free  float will have increased almost 100% (although relative free float remains around 24%). By having one of the largest free floats in the shipping world, I suspect increased attention for WWL will have some spillover effect in terms of investor attention on WWI.

Total return for shareholders 2010 - 2016

The IPO of WWASA happened in 2010 when board decided  shipping & logistics to be carried in a separate vehicle from privately held maritime services. In summer 2016 the large 12% stake in Hyundai Glovis (see my previous post) was spun-off. Total return has been ~20% p.a. incl. dividends and spin-off value of Treasure ASA.

Shipping

Car shipping

We are neutral on auto volumes in the medium term, and slightly negative on the longer term.

The company does not provide a profit margin breakout for the segments H&H and car shipping. What we can derive from the combination of the below graphs is that profit margins seem well insulated against car volume declines. Revenue per car is fixed in contracts, and fixed costs are relatively small. Lastly, bunker fuel costs are largely hedged by the company.

Shipping outlook

While we have no view on the car market, note that the company primarily ships light vehicles, which are less cyclical and more levered to the positive secular trend of a growing global middle class.

In chronological order, the secular headwinds we see for car shipping volumes:

- local production: increased factory automation entails a decreasing importance for cheap labour country production*

- increased utilization of vehicles through mobile technology**

*One book I recommend on this trend is Too Different for Comfort by L-V Gave (freely available http://gavekal.com/CRM/attachment.cfm?src=BOK&id=22).

**Mitigating factor: One can argue that better utilization and in turn lower driving costs will lead to more demand for cars. One interesting case study is how energy efficiency made society consume way more energy in the last century (e.g. efficiency of light bulbs). This is perhaps an unfair comparison as unlike lighting, it seems to us that demand for personal transport seems to be more bounded on the upside.

Going forward, the strategy is to own the current base of ships and add capacity by chartering additional ships if needed. Ro-ro shipping capex will thus remain limited. Another policy that the company holds (and only shows up as a cost on the balance sheet) are an amount of "put options" or redeliveries on its chartered ships. This increases the company's flexibility in a downturn.

Note: operational leases (and therefore off balance sheet liabilities) are limited to ~1.5% of the fleet. The liability of financial leases is capitalized on the balance sheet.

High & Heavy (H&H)

Although 78% of shipped volume is from (primarily light) auto vehicles, the balance is from a more profitable segment High & Heavy and Breakbulk (mining equipment, bulldozers, yachts, large machinery, power generation & equipment). Clients are primarily from mining and construction.

These large impractical products are shipped using adjustable decks on ro-ro ships. WWL is dominant in this segment with a ~25% market share.

As discussed in all the last past five annual reports, the business' profit margin has suffered "unfavourable revenue mix". In other words, the mining industry has been left for dead for years. Commodity prices rebounded last year and consensus is that mining capex has bottomed (this is supported by slight upward Capex guidance of major mining companies), and an uptick in the H&H segment in Q1 (just reported yesterday).

While we don't expect a quick rebound in Capex, we believe delayed replacement demand will start kicking in and provide robust downside protection.

In an upside scenario, we think that the combination of low absolute multiple and rising profit margins later on will create significant multiple expansion.

Logistics

The company aims to provide all its global customers integrated door-to-door services (from factory to dealer) through further growth, organic and via further acquisitions. The company wants to redirect more capital to the logistics activities as its a diversifying activity and strengthens customer relationships. By conversion from cubic meters to cars I derive that the company currently transports roughly 40% of its ocean cars over land through the logistics segment. Judging from this number it looks like the company has room left to convert more clients to its integrated services.

WWL New dividend policy

Subsidiary WWL's last presentation had strong hints of a dividend increase on the last slide:

"Dividend is high on the agenda for management and majority owners. New dividend will be decided by board following completion of merger." (note that the merger completed 4th of April)

Yesterday the new policy was presented: 30-50% of earnings will be paid going forward. This represents a large increase versus previous payout of around 15%. I expect management redirecting this capital toward non-shipping investments.

WMS

Wilhelmsen Maritime Services is a global provider of ships service (a plethora of marine products) and management (manning, technical services) to many maritime industries such as the cruise industry, dry bulk and tankers. To provide an order of magnitude, when measured against the global merchant fleet, WSS (services segment) had 2016 revenues of ~32 USD per day per vessel on the globe.

Some less cyclical and countercyclical elements in the WMS portfolio:

- the cruise industry as a client

- provides ship lay up services which are naturally in demand in a downturn. In 2009, overall WMS revenue was flat yoy, thanks to growth in this segment.

Treasure ASA

A discussion on Treasure ASA and its holding in Hyundai Glovis can be found in my previous write-up.  Hyundai Glovis is currently trading below its historical range of 10-18x fwd earnings as the majority family is pressured to sell more shares (the ownership premium disappeared, and then some). Glovis’ earnings consist primarily of long-term contracts with stable margins.

Other holdings

NorSea Group (40% owned) is an integrated logistics company for the Norwegian/Danish/UK offshore industry. I value this investment at book value (2012 investment, before oil dipped), this is approx. 7x FY16 net income.

Qube is Australia's largest integrated provider of import and export logistics services with national operations that provide a broad range of services.

Valuation

We use an SOTP with market valuations for the public holdings, to arrive at a NAV of 335 NOK per share. We believe the market valuations of Treasure ASA, WWL to be undervalued themselves: WWL is trading around 10X depressed earnings (low sales and bad sales mix: 8% EBIT margin versus an historical range of 10-15%), or 4-6x normalized earnings after cost synergies.

As a check, we estimated the normalized look-through earnings and found a multiple of 5.6x or, 5.2 excl. net cash. We gave credit to the 100 M cost synergies at WWL, and additional small sales and margin expansion. We used two years of consensus growth at Hyundai Glovis and Qube. We used the WMS’ average net income since 2012.

*I used the market valuation of Hyundai Glovis shares held through Treasure ASA (by doing that I collapsed the discount at the TRE level).

Catalyst

• an eventual increase mining (replacement) capex, the most profitable niche, and therefore higher sales volume x higher margins (from 9% to ~13%)

• WWL 100M$ cost synergies materializing by 2019, improving margins another 3 p.p.

• already, 50% of profits are from maritime services and logistics. Management increasing its land-based logistics operations

• the margin increase from the above two sources, and the increasing non-shipping profits driving a higher valuation multiple

• the recent increase of +100% in absolute float in WWL might lead the increased investor attention for WWL towards WWI later

• last legacy anti-trust case closes (EU)

• scrapping of the Norwegian wealth tax, removing the disincentive for the family manager to be market friendly (the current government stated its intention to scrap it but I haven’t seen any news last years, any news from people with boots on the ground is much appreciated)

• Increased shareholder returns (management used to do buybacks before wealth tax <’07, WWL sub just increased its dividend ~x3)