Wilhelm Wilhelmsen Holding, the Bull Case

My last post on Wilhelm Wilhelmsen Holding, WWI, focused on the Bear Case, https://hammerinvesting.wordpress.com/2015/03/19/wilhelm-wilhelmsen-the-bear-case/. In this post I will present some bullish arguments. It will be shorter than my first two posts as some bullish arguments have already been discussed in those:

The Bull Case

  • Bottom of High & Heavy cycle?
  • High barriers to entry
  • Strong balance sheet
  • Strong dollar, cheap oil, opex cuts
  • Cheap share price, possibly based on irrational reasoning (see Bear Case)

As with the Bear Case, let’s look at each of the above.

Bottom of High & Heavy cycle?
For the last two years there has been a recurring theme in every quarterly report: ”Unfavorable cargo mix.” What that means is that the company would like a larger percentage of their cargo to be in the High & Heavy-segment, which is more profitable than the car carrier segment.

The reason for this unfavorable mix is that mining and agriculture companies have been holding back on capex spending, ie. upgrading old equipment or buying new due to depressed prices in those sectors. The good news is this cannot continue for much longer. At some point in the not to distant future they will have to make these investments. A good indicator of when this shift occurs is to keep track of reports of manufacturers of that type of equipment: Caterpillar and John Deere.

I list this as bullish since we want to be investing in cyclical companies when they are near the bottom of their cycle instead of near the top. When High & Heavy starts to improve we can expect better margins. Since the stock is already cheap based on current earnings, I expect this to have a strong impact on the share price once it kicks in.

The car carrier segment seems poised for continued growth as former poor countries lift a larger portion of their citizens into the middle class.

High barriers to entry
Investments into the car carrier sector is capital intensive and it takes years from purchasing a vessel till it is delivered. In other words, the economic moat around the sector is quite wide. This makes increased competition less likely in the foreseeable future and profitability more likely to be durable.

Strong balance sheet
When investing in depressed markets, a strong balance sheet is essential in making sure that companies can weather potential storms for longer than their competitors. An additional benefit of having cash on hand is potential opportunities to buy competitors in trouble or their assets. Having an equity ratio of 48% for the holding company, WWI, and 51% for the daughter company, WWASA, Wilhelm Wilhelmsen is in a strong position. Also noteworthy is the interest WWASA is paying on their bonds: 2-3,5%. In other words, they have access to cheap money and are not bogged down by large interest payments.

Strong dollar, cheap oil, opex cuts
In the near term there are a number of external factors that WWI will benefit from.

The strong dollar contributes to stronger earnings as revenue is mainly in dollars and only to a lesser extent on the expense side.

Cheap oil reduces transportation costs – although some of those savings are likely to land in the pockets of customers in the form of cheaper prices. At least that has been the case in some of the shipping and transportation companies that I follow.

During 2014 Wilhelm Wilhelmsen undertook operating expenditures cuts that will start to have a positive impact in 2015.

Cheap share price based on irrational reasoning (see Bear Case)
All of the above bull arguments mean very little if the share price is overly expensive. In my post on March 19th, the Bear Case, I noted some possible reasons for the cheap price, some of which are clearly irrational.

Future posts on WWI
My three posts on WWI have focused mainly on qualitative aspects. I will probably revisit the case and post one that is more numbers driven (free cash flow) in the coming months.

Let me know if you have any questions or additional thoughts that can shed more light on the case.

9 thoughts on “Wilhelm Wilhelmsen Holding, the Bull Case

  1. One thing on my mind is that the shipping market in general seems to be unprofitable and cramped with over capacity. Is it not strange that the “roro” market seems to be in good shape and so profitable? Or is WWASA an exception from other roro companies? (It’s a big market leader with low costs?)
    High economic entry barriers sure, but I imagine it should be the same for example the oil tanker market or other shipping markets. High margins should attract competition.
    But obviously they are doing good when The Baltic dry index is at a 20-30 year low and many shipping lines are bleeding.
    Good work as always!


    1. Since they state their earnings in USDmy guess is that the strong USD is bad for them, seing as they need to translate foreign currencies into USD


      1. I don’t see how, Steffen. Most of their revenues are in USD while some of their expenses (staff etc) are in other currencies. If you ask Investor Relations I am pretty sure they will confirm that a strong USD is good for the income statement and will translate to better earnings per share, the share being in NOK.

        The balance sheet might be another story. The bonds are denoted in NOK, which is positive for the overall equity number, but the vessels they own might also be in NOK, which would decrease equity. I will have to check up on that.

        Thanks for your comments 🙂


    2. Thanks for the comments, Fredrik. You bring up some great points. My guess as to why the RoRo market is more profitable than other shipping markets right now is mainly because of the difference on the demand side. The Baltic Dry suffers from low demand for commodities. Apparently the China slowdown has caught some of those companies by surprise meaning they haven’t adjusted their vessel counts in time. I noticed that Jinhui Shipping has repeatedly blasted the industry for lack of discipline when it comes to newbuilds and retiring older vessels.

      The sale of cars on the other hand is doing very well globally. So why hasn’t that attracted additional competition? I’m not entirely sure, but apart from the high barriers to entry and the time it takes from ordering of new vessels to their arrival, perhaps the market isn’t big enough to be attractive to another large player. I also don’t think car RoRo is insanely profitable, just a lot better than other segments in the shipping market. I think times will be a lot better once High & Heavy turns around.


      1. Actually recently bought a very minor position in Jinhui, hoping I can muster the patience to wait for the freight market to turn. Valuation has been very volatile and now it is looow.

        Wilhelmsen holding looks to cheap to be true, makes me a bit cautios..for me Bonheur comes to mind, also looked dirt cheap and it hasn’t been going to good so far. Stupid comparison, but I will only hold a modest position for now, even though I am tempted to load up. Gut feeling still says something is over looked.


      2. I can’t quite escape that thought either. On the other hand, I had the same feeling with Protector at 12 two years ago (P/E around 5-6, growth rate near 20) and Per Aarsleff at 350 (P/E at 6 and lots of infrastructure having been delayed for a long time) and I passed on both of those due to the faulty argument “it cannot be right”. Sometimes it just is. And it might not be. But cheapness provides a lot of downside protection if our analysis turns out to be wrong.

        Jinhui certainly is cheap on p/b but judging from supramax rates Q1 will be one of the toughest they have ever faced. Curiously the stock price was more depressed when rates were at 10,000 just a few months ago than now at around 6,000. Strong balance sheet though so perhaps one of those stocks that you put into the drawer and forget about for 10 years and get rewarded handsomely for doing so. They are among the best in the industry at operating their company. My only concern when it comes to Jinhui is whether management is sufficiently aligned with shareholders’ interests. Are they honest, in other words… What are your thoughts on Jinhui, Fredrik?


  2. In investing I guess the gut feeling don’t always do you any favours.., I limited my position in Protector on the same thesis, to good to be true…and also I thought I was late in at 19 nok 🙂
    But in Vardia my gut told me go for it, what can go wrong. I will try not to consult my stomach in the future.
    100% agree that cheapness=protection
    My usual strategi is to look at past profits in companies that been around for long time and buy when it’s cheap.

    I see Jinhui as a pure value play. Dirt cheap, P/B. And market is super depressed. They have the balance sheet to weather this market for a long time. And I simply assume that shipping can’t stay unprofitable for ever. Past profits look very tempting at this price.
    But I’m no expert on Jinhui at all. It’s a 1% position, I see it as a net-net.
    Thorleif Jackson (at Nordnet)has done some writing on Jinhui.


    1. 😀 With regards to stocks I’m starting to trust my gut as my contrarian indicator. If my gut is hurting, it’s a buy 😀 And when it is urging me to, refrain from doing so. I’m half joking of course but I think there is some truth to treating the gut as an indicator of crowd sentiment (and of course in investing you want to avoid being on the same side as the crowd at all costs).

      Wherever gut-wrenching is involved so are cheap prices! And wherever there are happy stomachs, that is the land of expensive stocks, usually.

      It is only when it comes to judging the character of management that I treat my gut as king…


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