Just a very brief update on Wilhelm Wilhelmsen ASA & Holding after restructuring announcement and Q4 results yesterday. I will go into more detail on my estimates of normalized earnings when I come back from a two month vacation to the beautiful country of New Zealand.
The market price of Wilhelm Wilhelmsen Holding’s main asset, WWASA, has been very suppressed in relation to current earnings for quite some time – and even more so in relation to my estimate of normalized earnings. When I checked last week it has gone from very underpriced to comically underpriced considering the following simple math:
Market value of WWASA: 6900 MNOK.
Market value of share in Hyundai Glovis: 6600 MNOK
Market value of WWASA excluding Glovis: 6900-6600 = 300 MNOK
WWASA profits after tax for the last two challenging years: around 1000 MNOK per year excluding contributions from Glovis and after one-off provision for the antitrust case.
A first step toward a more market friendly direction?
Yesterday management took a step that surprised both the market and myself – namely to prioritize transparency in relation to the company structure by spinning off the shares in Hyundai Glovis in a different listing. The company has for many years been more focused on creating long term real shareholder value (as can be seen by the constant increase in shareholder equity over the years) than caressing the market with cosmetics moves such as simplifying the company structure but apparently the mispricing became too much even for them (being a publicly traded company and all) and the market has reacted with long overdue hoorays, especially for WWASA. I personally think this move is mainly a cosmetic one as no real value was added equity wise by today’s announcement but still important in that it could signal a first step in a more market friendly direction which could lead to repricing faster than otherwise might have been the case.
2016 will most likely be another challenging year for High & Heavy
Q4 saw an expected decline on the top line while profit margins improved. Considering that major customers such as Caterpillar and John Deere are having the fourth straight down year for the first time in their history I believe better times are to come in the years ahead for the High & Heavy (mining & agriculture) segment, which is the most profitable segment and one that WWASA is particularly exposed to. Business has always proven cyclical in nature while many analysts tend to extrapolate recent trends into the future leading to faulty expectations. It may still take some time for the segment to turn around – most industry players (WWASA, Caterpillar & John Deere among others) expect 2016 to be another tough year – but profitability is still good for WWASA currently and investments into new vessels by competitors have been at stable levels so no reason to suspect a substantially tougher playing field in the years to come, in my view.
Disclaimer: I am heavily exposed to WWIB and may unconciously be biased in my views. Always advisable to do one’s own research…
hammerinvesting 
To value the remaining part of WWASA will be fairly easy for the market, whats interesting to for me is how will the market value for the 12% glovis share in an anonymous treasure company holding a Korean stock on the Norwegian exchange? Glovis pays a small dividend, will this be passed on the to shareholders of the holding company?, will WWI take action and buy up shares if the discount to NAV gets ridiculous? I expect the treasury shares to be trading at 50-75% of NAV, Anything lower and I will be buying. The hardest part is to choose which share to buy, WWI or WWASA? Im aldready invested in WWI and I think value might be unlocked and realized quicker by the market in WWASA so think I will take a stake there as well. Why not merge WWI and WWASA once the spin-off is don, any tax reasons or legal reason holding them back?
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Interesting points, Henrik.
Although there probably will be some selling off of Treasure shares immediately after the listing by those not wating to own shares in Glovis exclusively I will be surprised if Treasure shares will trade at the discount levels you expect. After all Hyundai Glovis is a USD 5 billion company and I would expect Korean owners to chase those shares rather than the parent if the discount becomes absurd. I just listened to the webcast and it seems WWI will not rule out buying if discount becomes large. On the other hand if they had such a policy why have they not bought back their own shares which are also heavily discounted?
I probably would buy them if discount gets to the 20%-range as I think there is a good chance Wilhemsen with this move may now be planning to sell them in the years to come.
WWI or WWASA? I view WWI/WWIB as far the better buy – especially now as the increase following the announcement was way higher in WWASA. And you still own 73% in WWASA indirectly by owning WWI/WWIB and get additional discount on the other companies. WMS is performing very well in spite of bad market conditions.
Merger between WWI and WWASA? Could happen I guess but WWASA was spun off from WWI in 2010 and I’m not sure the reasons have changed. This is the reason they gave back then:
“The reason for the Restructuring is to position the group for future growth. The Restructuring facilitates independent business developments of the shipping segment and the logistics segment on the one hand and the maritime services
segment on the other. Size and capital intensity of the segments make it
beneficial to operate the shipping and logistics segments with access to
financing through a parallel listing. The Restructuring is conducted to
facilitate a separate listing of the shipping and logistics activities of WWI.”
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If a merger were to happen I think you are right that the discount would fall. Historically WWI often traded at a premium instead of a discount before the spin off in 2010.
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I´m surprised the market reaction was so small. In regards to future capex, did you note that in the presentation she said that wwasa were at the end of at program of acquiring new ships? Perhaps free cash flow will increase as a result, and we may see some additional shareholder-friendly moves.
Also, Norway has a tax on fortunes above a certain level. That has driven some of the family controlled companies to “hide” values in an attempt to lower the market valuation and in turn, the tax on the owners. Wilhelmsen board member Bettina Banoun, who´s a well respected lawyer, has represented some of these company owners in a lawsuit against the Norwegian government. I believe the case was that the tax was a crime against human rights 🙂 Not sure how it turned out, it may still be pending.
Anyway, there now seems to be a political majority in favour of changing the tax and exempting working capital. That would remove the motive of “hiding” value, and may lead to additional shareholder friendliness 🙂
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Thanks for this info, Richard! I did not know about the tax situation – perhaps that is the real motivation behind this move… And if so, perhaps more is to come.
When it comes to capex, good thing they are done for now. Free cash flow will in all likelyhood look impressive in the next 1-3 years. Or perhaps investments will turn away from vessels and more towards logistics which seems to be a new focus for WWASA.
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