I attended the Wilhelmsen Capital Markets Day in Oslo last week and it turned out to be fruitful in many respects. More than 100 people showed up and it was great to have the chance to exchange ideas with other investors and to meet management for the first time in a format that allowed plenty of time.
While there weren’t any ”breaking news” (plenty of those leading up to the event) Wilhelmsen’s investor day turned out to be a smörgåsbord of relevant information, and not exactly of the blue sky scenario garbage variety that is often dumped on investors at similar events. Those following the Wilhelmsen companies may have already seen the slide presentations but I will just add my 2 cents in a note-to-self format as things were said that weren’t in the slides.
Notes from Wilhelmsen CMD
The holding company, WWH (stock ticker WWIB):
- The merger will add ”at least” 50-100 MUSD to the bottom line of WWL, primarily due to the utilization rate of the vessels improving. “At least” was new information to me.
- Major reasons for the merger: Quicker decisions, less stalling = more manuverability in a market where margins are under pressure.
- Share buybacks is not on the table currently. The overarching goal is ensuring long term value creation and survival by keeping the holding company net debt free as it is now (no bond debt to use for share buybacks in other words). Subsiduairies can potentially assume more risk in the form of debt – all at an arm’s length away from the mother.
- Aquisitions targets need to be close to debt free (I like the sound of that!), dominant in their field and have an underlying positive cash flow. No experimentation that will endanger equity in WWH.
- Margin pressure. Outlook in the near term is cloudy.
- Low customer credit default risk despite shipping customers hurting perhaps more than ever. Partly due to WMS being able to withhold vessels until payment has been obtained, meaning bills from WMS are not the ones you want to stall.
- Interesting Survitec deal. 20% in a company that is a dominant market leader in all segments they enter into. High margins and nice pricing power. IPO potential in 2-3 years.
- Margin pressure going forward. Merger to offset some of that.
- Supply/demand under pressure as there is very little scrapping potential for the next 10 years world wide and the world fleet is younger than ever (Chinese boom 5-10 years ago to blame for that). Scrapping/new building-ratio does not look favorable many years out unless new building cancellations start to take place.
- WWASA best in class? Utilization rate of 85-90% is above industry average of 80% and EBIT-margins seem to be better than their biggest competitors, though it is difficult to measure as the competitors are not pure RoRo players only and do not specify their margins by segments in their financial reports.
- Mining is finally showing signs of improvement (Rio Tinto capex expanding again) and big opportunity for growth particularly in Australia where WWL has a strong inland logistics network.
- WWL’s land based logistics business is asset light and has grown rapidly. Revenue now about the same as ocean transportation (although most of it comes from the low-margin distribution business). Margins from Terminals and Tech Services, which currently accounts for 40% of inland logistics revenue) are handsome in the 10-15% range. Long term contracts and cash flow is stable. In my opinion this change in revenue stream will lead to a repricing of WWASA further down the road.
- The inland and ocean based businesses are separate financially, meaning should one experience difficulties it will not drag down the other.
Conclusion – what has changed?
Wilhelmsen Holding’s prudent capital allocation strategy means one can view an investment in the company as a storage of value with almost bond like safety while also getting the benefit of a lot of upside potential due to the generous discount-on-discount effect, which I find to be counterintuitive. A simple sum of the parts-valuation (based on mark-to-market pricing of WWASA, Treasure and Qube, book value of NorSea and EBITDA*6 for WMS) gives an upside of about 100% from the current market price. Added to that both the holdings in WWASA and Treasure appear undervalued (hence the discount-on-discount). Both of those companies probably have sharper upside potential in the near term but at greater risk, in my opinion, particularly WWASA.
Adding monetary experimentation and mindboggling politics into the equation
The current non-tested central bank experimentation, the weird political scenes around the world and high valuations in general leads me to believe that one ought to focus on safety rather than going for that extra percentage point here and there while exposing oneself to the enormous risks lurking out there. So in general I think defense is the play right now. In life the mindset of not losing is often equal to losing. But in investing there are times when not losing is a way to set the stage for winning…