Wilhelm Wilhelmsen – Glovis Shares to be Spun Off

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…

The Cat is Out of the Bag – Part 1 (Wilhelmsen)

Wilhelm Wilhelmsen and Arise Windpower both presented investors with shocks in their Q3 reports. The underlying results were solid as expected but provisions and write-downs shaved off significant amounts of their equity from their balance sheets.

In the case of Wilhelmsen, WWASA made provisions of 200 million USD for the anti-trust case, and the holding company, WWI & WWIB, another 50 million USD in impairment. It was known the company would be fined, but based on the settlements in Japan and South Africa I had estimated the global fines to amount to approximately 100 million USD, so it is fair to say I was surprised by the amount. Even though it isn’t the final verdict, it must be in that neighborhood since the company has been silent on a specific amount until now. The cases surfaced about 4 years ago so it has been a long wait that has contributed to uncertainty among investors.

It is important to note that the fine does not threaten the survival of the company at all. Their cash position and their easily liquidated share position in Hyundai Glovis (worth about USD 800 million, WWI owns 73% of this) insures that the liquitidy position is very solid. The decision to keep paying the biannual dividend also indicates that the company views their financial position as solid. What the provision means is that 13% of their equity was shaved off, compared to the 5% that I had estimated.

No market reaction

The market reaction has been non-existent. In fact, the stock trades 5% higher compared to one month ago (it is down 5% today, but this is set off by the 5% increase yesterday ahead of the report). That begs the question if the market, unlike me, expected the size of the fine to be as large as the company made provisions for today. That could be the case. It could also be the case that the market judges the provisions to be overly pessimistic.

But there is also a third option, which is embodied in the following quote by Franklin D. Roosevelt:

”We have nothing to fear but fear itself”

He said this in a famous speech in 1933 following the crash in 1929 and the subsequent uptake in the economy which had started to play out. It was true then and it is also true as a general concept for investing. Whenever there is uncertainty about a specific outcome investors tend to overreact. And for private investors with no bosses to report to (and therefore no way to get fired!), this provides a road to overperformance in a ”low hanging fruit” sort of way – provided, of course, the survival of the ongoing business of the particular company is not in question.

Historically cheap valuation

The long term potential in the case is very much intact. In fact it seems to me almost mindblowingly cheap considering that the company’s earnings power is strong compared to the market cap (P/E 4-5, excluding today’s one-off provisions) and has been for many years in spite of tough conditions with increased competition and the fact that the high margin high & heavy market (agriculture, mining equipment) is experiencing hardships, evidenced by reports by Caterpillar and John Deere (25% downturn). One ought to ask oneself what happens to the already healthy profit margins once that segment turns around… The other major segment – transportation of cars by sea – is almost certainly bright considering the growing middle class in China and India (and Africe further down the line) as well as the future replacement of gasoline driven cars towards more electricity/hybrid driven ones.

On a price-to-book valuation WWIB is priced at 0,49 and WWASA at 0,60. There is no reason why a dividend paying healthy business is priced at these levels and I continue to believe the price is based on irrational fear. If you think otherwise, please give me a holler!

Reaction to Arise Windpower’s write-downs

On Friday I will take a look at another company, Arise Windpower, where an almost identical scenario has played out following their report on Nov. 6th. Since I am writing about this company to subscribers at inrater.com (I write about Swedish and Danish companies on there) I cannot go into too much detail, but I will lay out my general outlook.

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.

Wilhelm Wilhelmsen Holding – Quality at Bargain Prices?

Everyone and their neighbor has been participating in a mad rush to buy quality companies (earnings wise) for the past year or so. This has led to bloated, pumped up prices and I want no part in that race even though the participants have been rewarded nicely – so far. Value investors typically look a little dumb in the latter stages of bull markets, but Seth Klarman and the like often remain with their clothes on unlike many others investors a couple of years later. As I have said repeatedly in my blog: Quality is not a safe haven. Price is king when it comes to evaluating risk, not quality. But, if I can have it both ways, I am open to suggestions!

I might just have stumbled upon such a company: Wilhelm Wilhelmsen Holding, listed on the Oslo Stock Exchange, stock ticker WWI. It has in fact been on my radar for some time I just hadn’t gone down and dirty with analyzing it due to its complexity which meant it would be a time consuming exercise if nothing came up. Below is a diagram of its structure:

The 25% drop in share price since July has triggered my curiosity and I thought it would be an excellent time to take a closer look and dig into whether the drop was warranted or whether it has provided an opportunity for investors. Especially since the share prices of the three main competitors have gone up in the same period of time, indicating a low probability that it is the future prospects of the market they are in that is at fault.

Wilhelm Wilhelmsen Holding, WWI, has an immaculate value creation record since 1861. In the last 15 years WWI has returned 12% annually (semi-annual dividends + increase in share price) to their shareholders, which equates to 4,5x their money, beating the general market by a wide margin.

The company’s biggest asset is the daughter company WWASA (to the left in the diagram above), of which it owns 72,73%. The company’s primary market is transportation of cars and so called “high & heavy” equipment (mainly mining and agricultural machinery) by sea. They also have a lot of subsidiaries and joint ventures in related markets. In other words, it is a conglomerate, and investors typically crave discounts for those. However, unlike many other conglomerates WWI’s businesses intertwine creating synergies, so perhaps it would be more appropriate to award a premium to the share price instead. This probably won’t happen any time soon. However, it is my belief that the current discount will come down as it is rather large.

Key valuation figures, WWI (holding company)

	Today	2014	2013	2012
Price/Earnings	3,4	4,2	5,9	4,1
Price/Book	0,49	0,55	0,84	0,83
Solvency ratio	48%	48%	46%	42%

Key valuation figures, WWASA (daughter company)

	Today	2014	2013	2012
Price/Earnings	7,3	8,2	7,6	4,9
Price/Book	0,80	0,79	1,22	0,77
Solvency ratio	51%	51%	48%	45%

At the time of this analysis the price for WWI was NOK 149,50 (for the B share, the A share was slightly higher at 150,50 – if I was buying, I’d buy whichever is cheaper on the day). Price/Earnings is extremely low at 3,43 based on 2014 numbers and the company guides for 2015 to be similar to 2014. Price-to-Book is at 0,49, down considerably from 0,84 in 2013. Curiously, in the heyday year of 2007 Price/Book was at 2,2 (4,5 times higher than today).

These first two numbers generally don’t go together. Either you have excellent earnings and pay a high price-to-book for it, or you have poor or negative earnings prospects and are compensated by getting what is on the balance sheet at a discount.

What’s the catch?
Why both? What are the dangers lingering out there in the horizon? Well, according to my analysis there are a few but in my opinion they are relatively minor in proportion to the heavy discounts the market is providing.

• Antitrust investigations
• Uncertainty about contract renewal
• Fear of increase in local car production?
• Conglomerate discount
• Shipping market discount
• Norwegian market discount (following the current oil crash)
• The founding family controls more than 50%
• Dividend payout ratio is low (12%)
• No share buyback
• Cyclical, low liquidity, boring

Follow-up post
In my next post, I will take a closer look at each of those bear case arguments and following that I will then proceed to the bull case arguments: https://hammerinvesting.wordpress.com/2015/03/19/wilhelm-wilhelmsen-the-bear-case/