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Uranium – Has the Bull Arrived or Is This Yet Another False Start?

There has been a significant shift in the uranium market over the last couple of weeks that has led to a rapid rise in the spot price of uranium lifting it from $30 per pound to now almost $36 per pound, which is a 6-year high: https://tradingeconomics.com/commodity/uranium

The cause of this rise is the recent transformation of Uranium Participation into the Sprott Physical Uranium Trust (ticker U.UN). This is a “physical vehicle” that continually issues shares into the market to willing buyers whenever the trust trades above Net Asset Value, which since its inception has been every day. It then uses the proceeds to buy physical uranium to store it with seemingly no intention to sell it back into the market. It could, and one has to be wary of this possibility, but the stated intention from the company is not to.

Clearly this is an attempt to front run the actual end users, the nuclear power plants. There have been voices questioning if this is even ethical? Well, nuclear power plant owners have a clear way to protect their future needs: They can sign long-term contracts and thereby reduce their risk. And they have had many years in which to do this.

If this vehicle continues to attract capital and if the spot market continues to be tight then obviously the price will continue to rise in a cycle that feeds onto itself. If that happens the nuclear power plants will likely start sweating because they have witnessed a similar set-up back in the 2001-2007 period when the spot price went from below $10/lb to above $130/lb.

Whether something similar will happen again is anybody’s guess. The uranium market is not very transparent, even to insiders. Nobody has a clear picture of how much inventory is out there and whether enough of it is even “mobile”, ie. available for sale as prices rise.

But dealing with incomplete information is what we do as investors/speculators. If everything was visible there would be less opportunities. And so we resort to attempting to piece different signals together and weigh their relevance, which is more of an art than a science.

I personally suspect a further rise is in the cards and am long. This isn’t the first time I’ve thought the bull was here though.

Disclaimer: I am currently long several companies in the uranium sector. This is not a recommendation and I may change my mind at any moment.

Cash & Oil

In recent weeks I’ve opted for the contrarian position that is cash in significant size (40%+). Not calling a top or anything like that, just not smart enough for that, but I do think there is a lot of craziness going on in the markets that calls for at least some degree of caution.

Short interest is low:

Margin buying is high:

Insider selling is high:

On top of that you have rampant speculation in SPACs and stocks like Tesla that has 20x’ed in 18 months to a valuation exceeding $800 billion. If that story unravels how would it impact the general market? Is it possible to imagine there not being some sort of ripple effect?

It is said that valuation doesn’t matter anymore, to which the proper response throughout market history has always been: “Until it does”.

To me it seems like investors are loaded on one side of the boat and that the market is priced close to perfection. Ergo the market could be in a more fragile state than is generally perceived.

Since a dollar saved is more valuable to me than a dollar won I want outrageous value propositions, ie. absurdly low valuations. And I’m just not finding as many of those in the corners of the market that I spend my time. In many of those sectors the stocks have risen sharply while the fundamental picture is less clear. Which makes me err on the side of caution and trim positions where I think the risk/reward is still attractive but less so than a few months ago while exiting others.

Oil

In oil I am seeing a different picture. Fundamentals have recovered but the stocks much less so.

This is a supply story more so than a demand one – despite the media focus on the latter (“peak oil”, “electrification will eat the world tomorrow”, etc.).

The oil majors have been cutting their capital expenditure budgets since 2014 which has led to underinvestment and a drawdown of reserves and the virus has accelerated that trend. This could lead to a squeeze in a few years time.

A number of the oil majors are cleaning up their image by moving towards renewable energy. Strangely many investors see this as a sign to exit oil stocks. What I suspect some are failing to see is that when supply takes a hit you want to be a buyer of that commodity, not a seller.

You would think investment activity would pick up to make up for those lost years, especially as oil prices are increasing. However, so far that is not happening. On Q4 conference calls with US shale producers the mantra is “debt reduction and returning capital to shareholders”. What you don’t hear is the word “growth”. And even if US producers wanted to expand it is doubtful that they are even able to make such a decision after 10 years straight of negative free cash flow.

Both lenders and investors want to see cash returned rather than entering into new adventures. On top of that ESG comes more and more into the thinking of banks, putting yet more pressure on the idea of growth.

And I think one of the big changes that may have been missed by some parts of the market is the ramped up frequency of OPEC meetings that are now on a monthly basis. This can be seen as a veiled threat to US shale producers: “We are keeping a very close eye on what you are doing and if we see any sign of significant increase in your drilling activities and we may respond by dropping more oil on the market leading to lower prices making your capital investments very risky. So don’t do it! Keep doing what you are doing now (ie. hold back on your investments) so that we may all prosper.”

Naturally there are many ways to play the thesis depending on one’s tolerance for risk. Personally my largest exposure in the sector is with International Petroleum.

International Petroleum

Lundin Energy is a famous 200-bagger if you bought the stock in 2001 and include dividends. In fact, today’s quarterly dividend alone is higher than what you paid for the stock back then! A lot of luck involved in being on the right side of the commodity cycle of course but I imagine skill is part of the story as well.

In 2017 Lundin Energy spun-off their non-Norwegian assets into a new company called International Petroleum, ticker symbol IPCO. And with it some key management people. Among others the CFO, Mike Nicholson, who became IPCO’s CEO. And the former CEO for more than 13 years, Ashley Heppenstall, became Chairman of the board of the new company. Both have decent amounts of shares in IPCO and both have bought more at various points in time.

The intention was for the company to take Lundin Energy’s mature and declining assets in Malaysia and France and use the cash flow from those to expand opportunistically into new non-Norwegian areas and leave those for Lundin Energy. Since then the company has made three acquisitions of oil and gas assets in the Canadian oil sands. 75% of their assets are in Canada. And of those Canadian assets 25% is gas and the rest oil. This means that roughly 60% of their revenue depends on the price of Western Canadian Select, WCS, while Brent oil makes up 15%-20% of the revenue. Gas is doing very well currently and IPCO has hedged most of 2021 at decent prices compared to historical averages.

Because of sub-optimal pipeline infrastructure in Canada transporting oil from there to the US has historically been an issue, which is the main reason why WCS always trades at discounts compared to Brent and WTI oil. The discount has narrowed recently and pipeline expansions are expected to come online within a couple of years. (Note, the WTI/WCS differential is currently significantly lower than what IPCO has assumed in their price decks, leading to conservative estimates)

Oil prices are back but share prices are not

The virus led to a hard drop in oil prices, especially for WCS. But that has come back hard and is now above $50 per barrel, a level not seen since April 2019.

Back then the IPCO share price was above 50 SEK and now it lingers around 27 SEK. USD/SEK has declined by 10% over that period making up for a small portion of that = 30 SEK by comparison.

So oil truly is in the dumps, sentiment wise. However, free cash flow generation is not:

IPCO Valuation

At 27 SEK IPCO market cap is: $510M (USD)

Net debt after Q4: $320M. (EV: $830M)

Based on their 2021 production guidance (42,000 barrels per day) and capex guidance ($37M) (https://www.international-petroleum.com/investors/presentations/) I calculate free cash flow of $185M for 2021 given WCS $50 and Brent $65.

Normalized capex in the coming five years looks to be around $80Mish and production $46,000ish barrels of oil per day = FCF of about $180M given today’s oil prices. That equates to an EV/FCF below 5. So less than five years of free cash flow to pay down all debt and buy back all shares.

Very handsome FCF yields that are difficult to find elsewhere in the market. And if my oil thesis turns out to be correct those free cash flows will be improving over the coming years.

So what will IPCO do will all this cash?

Resource companies have a tendency towards growth for the sake of growth, often at the expense of value per share. However, the Lundin companies have demonstrated again and again over the years that per share thinking permeates their culture.

IPCO has demonstrated a willingness to shrink the company via accretive buybacks when debt was manageable and the discount to net asset value was large. My sense from the recent Capital Markets Day from last week (https://edge.media-server.com/mmc/p/x8ykwcpj) is that this could be in the works again in about a year’s time when debt has come down to a more suitable level.

Caution now is the main focus after a tough 2020. As it is for pretty much everyone in the industry. Which is why supply is so constrained. And which again is why oil prices could meet little resistance on the way up even though Saudi and Russian oil will fill some of the gaps in the months to come. The larger question is whether they are able to further out in time, even 1-2 years from now.

IPCO has proven and probable reserves (2P) lasting 18 years. They also own a project (“Blackrod”) with potential for adding 3x of those reserves a few years down the road if oil prices stay elevated. That could potentially add 150% of production although it is doubtful IPCO can lift this project without a partner given the size of it. The valuation of this project is close to 0 currently among analysts. However, that could change in a big way in a higher price environment. Worth noting that the previous owners have already invested $180M into this project.

How about further acquisitions? Lots of struggling companies and majors that want to divest at cheap prices. Why not pick up the spoils on the side of the road? Frankly, I hope they don’t go down that route, even though it could potentially add more longer term value. I prefer to think that now is the time to harvest at as low risk as possible. Seems to me they have plenty of run way, especially with Blackrod in the pipeline, and a size that is adequate.

Conclusion

If my view that oil is heading towards Brent $70-$80 in the coming 2-3 years plays out and if we return to normalized valuation multiples the stock could easily 5x over that time frame.

At current oil prices I would expect at least a 2x over the coming year or two.

I would expect the truly long-term investors who are able to sit on their butt for 10-20 years to be collecting some fat dividends over that time period.

Supposing oil prices fall from here I think there is a lot of cushion built into the current share price. Also, the Saudis have demonstrated a willingness towards quick cuts (unilaterally even) in case demand wanes. That ought to keep a floor under the price. Given their own precarious economic situation I doubt they will be tempted to start yet another price war.

Disclaimer: I own shares in International Petroleum. If you become interested in the company based on this article please do your own due diligence before buying or selling shares in the company.

2021 Portfolio Positioning

A volatile year has come to an end. The gain to the portfolio has been surprisingly good, especially when considering the slaughter early in the year. In the red for tankers but everything else, uranium, oil, gold, containers, liquified petroleum gas, was in the green and the year ended with a 31% portfolio gain. The portfolio churn has been much higher than in previous years due to the many trading opportunities that presented themselves.

CAGR for the 7-year period since going full-time is at 24%. My approach has been highly concentrated towards few names so the element of chance is likely quite high, even over a 7-year period. On the other hand there has been no tail winds from high flyer tech companies in my portfolio and it has been almost exclusively restricted to deep value. The latter has had a tough decade, so significant outperformance versus the major indexes despite this headwind gives me some confidence that stock picking may have added value outweighing at least some of the potential luck factor.

2021 portfolio

After quite a bit of reshuffling late in the year my portfolio as of January 1st looks like this (biggest positions in each sector in paratheses):

Shipping, energy, commodities. Definitely not for the faint of heart. However, valuations are low for these sectors and if one can stand share price volatility I would argue that risk/reward is more a function of price versus value than anything else.

Diamond S Shipping – Revisiting a Disastrous Pick

$15.28 at the time of my article in mid November 2019 where I suggested this tanker stock stood a good chance of outperforming. Now, almost one year later, the price is $6.38 – a 58% decline.

So what the hell happened?

Three record quarters of fantastic earnings in a row for the tanker industry has rewarded shareholders with share prices that are more or less cut in half. Whether it is the ESG focus leading to investor flight or whether the market is accurately evaluating a high likelyhood of a multi-year prolonged downturn currently no one can say for sure. But the fact remains that almost all tanker companies have much stronger balance sheets compared to a couple of years ago so most ought to come out of the current low rate environment intact. How long it takes depends mainly on when oil inventories have been drawn down to more balanced levels.

According to Vessels Value, the valuation firm which is regarded as the go to shop in the industry, tanker vessel values have fallen 15-20% since the peak at the end of April and are still declining as of last week. At some point, and I suspect that moment can’t be too far off, values will stop falling and then the market might look at valuations and say, hey wait a minute, we threw the baby out with the bath water, this is nuts. But that is a subject for another article. Here I will look at the relative performance vs other tanker companies, which is usually my main focus, rather than the macro, which has many more factors of uncertainty. Getting the macro wrong is much more acceptable in my world than getting the micro wrong.

DSSI underperformance vs peers

And the fact remains that Diamond S has underperformed most peers, except Scorpio Tankers and Ardmore Shipping.

So what did I get wrong and what can be learned?

My current view is that I had a far too optimistic view of management based on history and significant share ownership.

Navigate around NAV

For one, the shares have traded at much larger discounts to net asset value than all other comparable peers and management could easily have taken steps to take advantage of that gap via share repurchases, which, when you trade a big discounts, increase the value per share. The steeper the discount, the more accretive it is to repurchase. This could in turn have led to a narrowing of the gap and the shares trading more reasonably over time.

A lot of talk and no action

Mangement talked about this constantly in conference calls and on panel discussion, even after the great contango trade had evaporated in May, but never did anything and now it is too late because they don’t have the earnings that will allow them to do so. Covenants state that only 50% of earnings from the prior quarter can be allocated towards repurchases/dividends and now that window has been closed for many quarters to come.

With vessel values falling hard that can now appear as a prudent action on their part conserving cash for this difficult period BUT they have always had the opportunity to sell a few of their vessels to secure a stronger balance sheet for tougher times ahead. They did not do that when times were great and they still haven’t done so. In my opinion this comes close to being abuse of us, the owners. It was such an easy course of action to take not requiring any brains at all. Currently the shares are trading at 65% discount to net asset value = P/NAV 0.35.

Bad luck on the operational front?

But that is not all. On the operational front they have drawn the shorter end of the stick quarter after quarter. My view of commodity driven businesses is that operational performance is not what you should be focusing on. This tends to converge over time. All ship owners pride themselves as being better than the next guy on that front but the reality is often there is very little difference. Bad luck in one quarter is usually evened out by good luck in another, or close to it.

But having followed them closely for four quarters now the extent of their bad luck is astounding. And this to an extent that I am no longer willing to ascribe only to bad luck. And perhaps I should have been a lot quicker coming to that assessment.

A few examples:

In Q4 two of their Suezmaxes were to have scrubbers installed (this is air pollution control devices) and they were supposed to arrive at the yard 30 days apart for maximum efficiency. Instead they arrived almost on the same day which meant unnecessary waaiting time. Could that happen easily or was it due to incompetence? I don’t know the answer to that but it is not something that I have heard in earnings calls from other companies so that was a clear warning sign.

In the first half of the year they missed out on super earnings for a few of their Suezmaxes due to being taken advantage of by charterers who had negotiated low demurage rates which meant that these vessels were sitting ducks with a lot of oil and nowhere to go when rates were great. Was this again simply bad luck? It might have been by why were other ship owners again more lucky on this front?

And in general they seemed to have missed out on more super trips in the March/April period than other tanker owners as well as having secured fewer now valuable longer time charters.

Their MR product tankers have been underperforming all along. Their ice class vessels consume more fuel but this is taken into consideration in the vessel valuations so putting them in the penalty box for that would be akin to double counting so no critique from me on that. However, given the Suezmax mishaps I am pleased they have decided to leave this side of the business to Danish ship management company Norden who have a strong and long lasting reputation. I hope they will do the same with the Suezmaxes.

Too cheap despite poor execution?

Having said all of the above I still regard the stock as too attractive to dump as I think there are still too many good outcomes relative to the share price but on the other hand until something changes such as vessel values rising again, or if they start selling some of their vessels, or if something good happens on the vaccine front, I’m not eager to have a big position either because the balance sheet is more strained than I would prefer in this uncertain environment with financial leverage around 45% currently. This is lower than most peers but I would still perfer a bit more safety.

For that reason I prefer a stock like International Seaways with a safer balance sheet (32% leverage), fine management excecution these past twelve months and at $14.15 an attractively priced share (50% discount to NAV) for bigger allocations even though it isn’t as dirt cheap as Diamond S. I might elaborate a bit more on this stock in a future article.

It is noteworthy that there are tanker stocks that are much more highly leveraged and dangerous in a prolonged downturn. Scorpio Tankers is close to 70% and Ardmore Shipping 60%. If values don’t improve soon those may have to dilute shareholders via equity raises and I find that scenario much less likely with Diamond S (and practically impossible for INSW and EURN).

For those following the space: Am I being overly harsh here and were the odds truly less favorable than what I thought back on November 20th? Did I miss something obvious? Also, have they truly been unlucky and was their decision to not go for share repurchases a wise decision?

5-Year Anniversary Today – Pros & Cons of Blogging

The blog turns 5 today and I thought I’d use the opportunity to reflect over the pros and cons of blogging as an investor.

Pros:

  • You learn a bunch. And by writing you crystalize your thoughts.
  • By being public about your stock picks you put maximum pressure on your process to be rigorous. Looking like a fool too often is no good.
  • You get feedback that allows you to rethink your ideas and possibly drop them completely. Immensely valuable when it happens however irritating it may be in the moment when you realize you need to drop an idea you have spent a lot of time on (a common bias).
  • Investment research is a solitary undertaking. Talking with managements and other investors take very little time in relation to all the hours of reading and thinking on your own so other outlets for social interaction about a subject you care about deeply takes on an increased importance.
  • I’ve increased my investing network many fold both on and offline as a result of blogging and the benefits of that cannot be understated.

Cons:

  • Make sure you stay agile and nimble! Don’t get tied to your picks as a result of going public with them. If a thesis changes on a fundamental level and the price doesn’t reflect it cut ties with it. Before blogging I was sure I wouldn’t run into this issue but it really is a lot harder than it sounds once you go public on a pick, as many other bloggers will attest to.
  • Realize that your blog is about idea generation and only that. A starting point for others to dig further if they think there might be something there. I have personally felt an obligation to update people on a quarterly basis in the past but have dropped the idea as it is just too time consuming when writing a blog in your free time. That time is better spent on researching new ideas.
  • Don’t write for the sake of adding content after a hiatus. Don’t be one of those. Wait until your heart is full. Wait until you are certain what you have to say adds value.
  • Realize not all picks will work out. I had a pick that went terribly wrong a few months after starting writing my blog (Polarcus, a seismic name) and it weighed heavily on me that others might have been affected to an extent that I considered quitting writing. But it is the nature of investing that sometimes you are the hammer and sometimes you are the nail. Some of our picks WILL fail.

Performance

On the performance side I’ve had a nice run these five years: 23.9% CAGR from Oct 9th 2014 when I started the blog till now. This is a somewhat deceiving number though because it is measured in SEK, a currency that has been on a downward spiral in recent years. Also, individual periods have been lumpy with massive drawdowns exceeding -30% twice. And if I exclude my two best years, 2016 & 2018, I land on 4.5% CAGR after significant underperformance in both 2014 and 2015, as well as slight underperformance in 2017. So it is a testament to the fact that the concentrated deep value approach exposes one to some wild storms along the way and it isn’t always easy to hold on when a protracted downswing is taking hold.

Five years is close to meaningless in the investing universe so it could very easily be the result of a large part of positive variance (luck). But still I’m glad that the results stack up well vs momentum/FANG strategies that have really had the wind at the back in this period. I suspect that in the coming years the tide will turn and the wind will be at the back of deep value. Personally I’ll be satisfied with returns in the 10%-15%-range in real terms and an outperformance of the general market of 5%+ (to justify making investing my job, otherwise indexing would be an alternative).

Before starting my blog I believed that market beating returns are very possible for investors who invest relatively small sums of money and who restrict themselves to looking at areas where smart money generally can’t go due to illiquidity concerns – and I obviously still believe that. From watching many in my network produce solid numbers when averaged out over a number of years I am absolutely certain that the efficient market hypothesis is BS and that you can as an individual investor beat the market over time if you are disciplined about it and stay away from what everyone else is looking at.

From Fuzzy Idea to Yes – Or How U3O8 Twisted my Arm into Submission

A couple of weeks ago I had the honor of being a guest on my current favorite investment podcast, The Mike Alkin Show. On it we discuss why the contrarian approach can be a profitable one and why so few investors are comfortable with it, how my 12-year poker career has affected my view on investing and we also touch on mistakes I have made in my investing career so far. I will dig deeper into this last part in a future post because I think there are some lessons to be learned – especially on what not to do!

Mike has done a ton of deep work on the uranium sector and is probably the person with the most knowledge on the current supply/demand & inventory situation in the space. And I am quite vocal on my findings on individual uranium companies on Twitter, on YouTube and on my blog. So that is how we connected on Twitter.

An example of how I generate investment ideas

As Mike has played a role in my uranium education and since many people have asked me how I generate investment ideas I thought this would be a great segue into how uranium initially caught my interest and perhaps an example of how one can go about turning a fuzzy idea into a possible investment. (Note that this post is only meant to be an example of the initial stages. It won’t cover the work on individual companies as that would be outside the scope of one article)

How Xi Jinping showed me the light in a roundabout way

In early January I was looking around for new investment ideas and thought Xi Jinping’s speech to the 19th Party Congress could be a starting point. Those are held every five years and they have all been fabulous at predicting what was to come. When Chinese leaders decide on a long-term idea they are able to follow through, unlike in a typical western democracy.

So who are these speeches aimed at? Probably first and foremost the leaders out in the municipalities throughout China. If they don’t listen to what the President wants and then implement his wishes they will be out of a job. So it gets done.

From GDP growth to blue skies again

What was interesting about this particular speech is that whereas previous five-year plans have focused on GDP growth at all costs this speech had a different focus in that the environment is mentioned again and again and a recurring theme is how China needs to ”make our skies blue again”. The Health Effects Institute estimates that more than 1.5 million die from air pollution in China.

Deciding on an investment theme

So I started thinking about how an investor can approach this shift. How can China make the transition from dirty coal to cleaner energy sources? Initially I thought liquefied natural gas, LNG, was the play. Recent activity certainly suggested this was a good idea as China had increased their imports from 2016 to 2017 by a whopping 50%!

On top of that, Japan, the largest importer of LNG in the world, had held the course while most analysts had expected Japan to decrease their imports.

But as I started looking deeper into it both of those factors turned out to be warning signs, at least that is how I viewed it. It turned out that China was experiencing bottle necks due to the sudden increase. Their infrastructure couldn’t keep up which might lead to a slowdown, I thought. So that was one risk.

From liquefied natural gas to nuclear power

Another issue came up when I started looking into why analysts expected Japan to decrease their imports and that was related to the Fukushima accident which brought down all of Japan’s 54 nuclear reactors. Most of those were expected to come on soon after but it wasn’t happening at the pace everyone thought it would due to constant court delays. But since it seemed to be a question of time the whole LNG idea started to seem more risky to me and it warmed me up to the idea of nuclear power. And one thing I didn’t initially understand was that LNG wasn’t THAT much cleaner than coal. On an index where coal is at 100, natural gas is at 45. On that same scale nuclear energy is somewhere between 0 and 1! Time for the left to wake up to this fact…

Introduction to uranium in late 2016

A fellow Swedish value investor, Kenny Granath, had alerted me and my investing network to the idea of uranium/nuclear power as an investment theme back in late 2016.

Kenny worked in the nuclear industry so his words obviously carried extra weight due to that fact alone. But not only that, he had shown an ability countless times via his blog to do deep sector analyses in a way I hadn’t seen before from individual investors and those posts were the initial inspiration behind my investment blog in 2014.

But he also said it was probably too early to enter the uranium space as production cuts and consolidation had been minimal at that time and for that reason I simply made a mental note of it but never took a closer look.

CO2 emission quotas explode

I started doing just that in January after having discarded LNG. The climate was increasingly on the agenda and the price chart for CO2 European emission allowances were making some big moves, which had increased the price of electricity in Sweden, and which in turn had renewed my interest for Swedish wind energy companies.

Swedish nuclear power had been on the retreat since 2014 when the owners decided to close down four of their ten remaining nuclear power plants due to the low price of electricity. I had been following the electricity space and the political discussions quite closely since then and my impression was that the owners unsuccessfully had tried asserting pressure on the Swedish politicians to give compensation for delivering baseload energy.

But things have been changing lately and the idea of building new power plants further out in the future has started entering the discussions, so while I knew nuclear was struggling I also knew that it was far from dead in the west. And so after LNG was dropped as an investment idea I started looking closer at uranium.

The uranium price chart from hell

Screenshot 2018-12-03 at 14.13.32

Being a deep value guy a price chart like the above is interesting. The first thing I usually do when a sector peeks my interest is to read the annual reports of the biggest companies in the industry, initially at least those parts give a sector overview. That meant I started with Cameco and what struck me immediately was their mentioning of the fact that the price of uranium was way below the marginal cost of production, as could perhaps be expected by looking at the graph.

Obviously that cannot continue indefinitely so the next step is to look into what has been the cause of it and what may trigger a change to a normal pricing environment where the price returns to equilibrium, ie slightly above the cost of production.

The cause of the bear leading up to 2004

Historically uranium has had these extremely long bear markets that makes your stomach churn. The bear market that proceeded the current one was mainly due to downblending of atom bombs from the former USSR and the US creating the equivalence of a gigantic mine that simply destroyed the market.

The cause of the upwards explosion

Then in about 2004 China started getting interested in nuclear power and due to flooding in some large mines that were supposed to come online this created a squeeze on both the supply and the demand side. The long bear market had made exploration unattractive so when demand started showing up suddenly there was fear there wouldn’t be enough uranium available which along with financial players rushing in created the panic that can be seen in the chart in 2007 and so the price overshot by a large margin.

When financial players started liquidating their holdings, partly due to needing funds in the wake of the financial crisis, the price came back down do equilibrium like levels, which is to say slightly above the cost of production.

The cause of the bear from 2011: Fukushima, Kazakhstan &…???

Then in 2011 the Fukushima accident happened which made Japan decide to close down their reactors for review. At the same time the production from Kazakhstan had increased at a pace no one saw coming from 10% to 30% of global production in only 4 years.

In more normal liquid markets the price would be hurt by such a squeeze but it would also quickly correct after the marginal players had been knocked out. This wasn’t happening and in the first weeks of research I didn’t really get a firm grip as to why even though I had read the reason in Camecos annual report and had seen the graph that explained it. For some reason the significance just didn’t register.

It’s the long-term contracts, stupid!

So I started looking for other views on the sector and for that Real Vision is often top notch. This is a subscription-based financial media service where people who have dedicated large parts of their lives to understanding a particular field are being interviewed in long-form. I have spent countless hours as a fly on the wall during my daily long walks with my dog listening to world-class experts in different areas. And here I found two excellent presentations from Mike Alkin of Sachem Cove and from Adam Rodman of Segra Capital that really hit home the point that was right in front of my nose:

Long-term contracts fixed at high prices during the good years were the reason the miners weren’t dying and killing off supply!

Contracting Cycle

The above graph is the primary reason why uranium is in the state that it is in. And it is also the reason why I pulled the trigger and started investing in uranium now rather than wait.

Once one knows that annual demand is in the 170-180 Mlb range then it becomes only too clear what is going on. And as can be seen below where demand is included in the picture, it is a very constant thing in that business. It doesn’t jump up and down along with the general market cycle.

I would spend a few minutes studying the graph below, which is essentially the same as above but with demand added in. Note that the numbers on the right side, the price, is only applicable for the red line. For all other information, the volume in millions of pounds (Mlbs) is the reference. What the graph tells you is that from 2005-2012 the contracted volume was way above annual demand so the decline in price from 2012 should come as no surprise, especially when factoring in Kazakhstan and Fukushima as well. Those contracts are now rolling off and new ones will have to be signed in the coming years and it will be done at prices that are above the cost of production, which is at least north of $50/lb.

Screenshot 2018-12-03 at 14.06.13

A new Fukushima = a new bear?

And by the way, that graph is also the main reason why I, unlike most people who follow the space, am less concerned with a new Fukushima type-accident knocking down the price of uranium.

People have a tendency to equate Fukushima with the bear market and forget the Kazakhstan and the contracting situation. But we are in a completely different place now with regards to those last two factors so I don’t think you can simply point to the accident and say that the last time it happened can be a road map for how the price of uranium will develop. Unless the world decides to dismantle nuclear power once and for all following such an accident. But then what happens with the climate change push that is really taking a hold on the world now?

So in the unlikely event an accident happened tomorrow my money is on a scenario that says the price is higher two years from now, after an initial dip.

A shout-out to true environmentalists

As an aside, now that I am on the topic of safety: There are some so-called environmentalists out there that need to examine their real motives when speaking out against nuclear energy…

The question is: Are you concerned with saving lives in the real word, or are you more concerned with the idea of pressing on a topic that gets you a knee-jerk hug from do gooders who do no good? Because an anti-nucIear stance will certainly give you that quick gratification of the warmth of the crowd.

Let’s say you agree coal has to go but that nuclear is no option. Electricity from wind and solar tends to hit the grid all at once, or not at all. So what to do at those times when the weather doesn’t behave? Pray?

Wilhelm Wilhelmsen Holding Q1 Update

WWL & Maritime Services

The daughter company, Wallenius Wilhelmsen Logistics, or WWL, were hurt by lowering rates, higher bunker costs and currency headwinds. Surprisingly for me the improvements in the mining segment wasn’t significant enough to offset the negatives and the share price was hammered down 20%. The stock had climbed 200% in less than two years so even slightly deteriorating fundamentals got punished harshly.

For the maritime segment the EBIT-margin improved slightly from 4% to now 6%. Not enough improvement to warrant a rerating of this segment in my Excel valuation.

Discount to NAV has narrowed

The updated excel sheet for Wilhelm Wilhelmsen Holding, WWI, shows the discount to NAV at 35%, which is the lowest it has been for the past 24 months. As a result of that I have scaled down my position somewhat.

The Case for Uranium

Presentation slides: The Case for Uranium.pdf

Cliff notes:

  • Unsustainble gap between production costs and prices
  • The number of miners are down 90% since 2011
  • Both sides of the supply/demand balance is shifting in a favorable direction and the longer term outlook is fantastic
  • Adding new supply is a lengthier process than in other sectors
  • Game changing events are taking place in Kazakhstan – OPEC-like structure in the near future?
  • Investors hate uranium after a 7-year long bear market
  • Upside potential is explosive while downside is well-protected

 

Wilhelm Wilhelmsen Holding Q4 Update

Sorry for the delay in updating the excel sheet following Q4, which was released on the 15th, but here it is: wwhq4-2017.

I have the discount to NAV at 38,3% currently and the total NAV at 396 NOK. Nordea has the same NAV at 522 NOK… Not sure why we get such different numbers, as they don’t specify how they arrived at them but I suspect they value WMS more ”aggressively” than I do. I’d like to see a few more quarters of stable results before I revisit that valuation.

Either way, there seems to be plenty of room for the share price of Wilhelm Wilhelmsen Holding to grow just on the basis of the discount gap shrinking. On the business side there are promising signs as well. I expect mining related commodities to do well in the coming years and the group is well positioned to take advantage of that.

Q4 – Holding

As for the report, it was pretty much in line with expectations at the holding level. Wilhelmsen Maritime Services, WMS, improved both the topline and the EBIT-margin (after M&A costs) which is now at 10%, which is about where it should be longer term. Apart from that there was no big news.

Q4 – WWL

The daugther company WWL was hit by a 140 MUSD provision on top of the 300 MUSD that had already been set aside. This was a surprise to the downside that I had not seen coming and the market cap effect is -4%, which equates to 2% for Holding.

The operating results of the daugther company continued the postitive trend from Q3 and High & Heavy volumes have started to kick in, which is evident in the cargo mix when adjusting for seasonal effects. Volumes grew both quarter-on-quarter and year-on-year. The company has raised the expected synergies from the merger another 20 MUSD annually and they also benefit by 6 MUSD per year from the US tax cuts (which are absolutely madness if I am allowed to have an opinion on the subject!).

Coming up

I am currently digging into the energy space and I expect some of that research will find its way into this blog. So if this is an area that interests you please stay tuned for an update within the coming weeks 🙂

God Damnit, I Missed the Boat!

Every investor knows the feeling of having followed a stock for a while and having considered buying it when all of a sudden the thing takes off and you are left on the dock viewing the boat and its cheerful passengers from afar as it disappears into the sunny horizon while you are beating yourself over the head for missing out on yet another opportunity!

You know that feeling, right?

If so here is why you MUST silence that voice in your head and overcome what could otherwise end up eating away at your life savings:

  1.  That voice is a liar. You would have bought the stock if you had thought it sufficiently attractive. There always is a reason why you didn’t act – most often a very good one. Perhaps you hadn’t put in enough work to understand the company sufficiently, which again is a reason why you could not and should not buy it.
  2. Remember all the bombs and mines you avoided over time due to craving large enough margins of safety. Don’t give in – stay on the path!
  3. If the stock went up based on positive unexpected news flow then it isn’t the same stock any more and therefore it is irrational to have any attachment to what once was. It’s simply a different situation from the one you considered before the news broke. Analyze anew, carefully and deliberately and without haste. Mistrust any bodily reaction compelling you to jump onboard. Detach!
  4. Recognize the danger of hunting the next hot thing that has left people disconnected from their rational selves in a blind hunt for quick profits. One word: Refrain. Fundamentals are what drives prices over the long haul – and they usually come down after the time of exuberance is over. Remember Warren Buffett’s quote: “The market is a device for transferring money from the impatient to the patient.”
  5. You want to always be in a calm state of mind when considering financial actions. Fear of missing out (FOMO) takes you out of that state and into caveman territory where the amygdala and fear and greed rules. When fear or greed has become rampant in the market you want to be an observer as opposed to a participant – and generally opt for the opposite side.
  6. In the history of the markets FOMO is the single biggest contributing factor to bubbles. If you can manage to stay away from those you probably won’t get rich quick but you will live to fight another day when drowning is taking place all around you. In the markets not losing is more important than winning – unlike in life! You won’t die if your neighbour gets the prize and you don’t. Deal with it!
  7. Recognize FOMO as the biggest monster in the market and as a crusher of souls. It may not have devoured your savings yet – your gambles may even have paid off handsomely a few times and lured you into thinking it is a viable strategy – but if you don’t actively keep FOMO a bay, one day the odds are it will devour you cold-bloodedly. Therefore: A day without FOMO in our lives is a day worth celebrating!
  8. Finally, and most importantly: There are tons of boats in the ocean arriving at our shores every year (and by the way, having enough dry powder is also such a boat: the optionality of cash). The best counter to FOMO is to put in the work and dig up enough cases with enough margin of safety so that you can wave goodbye to all of those boats that you will miss with no feelings of regret – and to do so with a smile knowing that yet again you conquered the mighty enemy that is FOMO!

Much of this is easier said than done. And no, I don’t have it down completely myself. But in the words of JFK:

We choose to go to the moon. Not because it is easy but because it is hard!

 

Are You a Cowboy or Are You a Chicken?

Do you swing for the fences or is your main focus on not getting killed? And is your assessment of that question even accurate?

Say Hello to a Chicken (I Think)

Personally, I like to think I’m a chicken as my focus is almost always downside oriented first and foremost. However, when discussing position sizing with friends more often than not I get labeled a cowboy as few and large positions is usually my game.

Charlie and I disagree with that! (Hm, for some reason that line felt good. I wonder if Warren gets the same pleasure from it when he says it – which is often…).

A few bets are all you need, but when you find the few, act aggressively. Diversification is for people who don’t know anything. – Charlie Munger

The point of the above quote is that with knowledge comes risk protection. And in my world big bets are reserved for especially safe situations where as many angles as possible are covered through relentless investigation. For me that tends to be investment companies and conglomerates as these are already quite diversified through their holdings in multiple companies and where there is an added layer of safety through an unusually large discount. I rarely take super large positions outside of those types of companies. So in spite of having massive positions percentagewise I would argue that this is in fact a chicken approach to investing, one in which it is hard to get hurt in a big way.

A hypothetical example

Take an example. Which is more diversified: five promising growth stocks or one investment company with an unusually large discount to NAV? More often than not I’d bet on the latter, but a more accurate answer is, of course, that it depends. If you have deep expert knowledge and an intimate feel for the industries in which the five growth stocks operate, preferably through working or having worked in the field, then you may have yourself a near perfect match between diversification and a high expected value situation, supposing the fields are non-correlated. But few of us have this much expert knowledge and on top of that it would require a lot of work.

 Laziness can be riskier than big bets

So risk comes more from laziness than the sizing and the amount of companies in one’s portfolio. And risk can be materially decreased from understanding and being able to identify the type of situations where one can size up with a large degree of safety. More on that in a recent post: https://hammerinvesting.wordpress.com/2016/12/18/the-sizing-of-a-bet-the-art-of-not-blowing-up-while-getting-the-best-of-it/

Bonus: The title of this post was inspired by a recent Howard Marks interview on Bloomberg Radio : https://www.bloomberg.com/news/audio/2017-02-17/interview-with-howard-marks-masters-in-business-audio To Marks devotees, such as myself, it may not contain anything new in terms of substance but ohhh the pleasure of this man’s eloquence! Poetry blended with the sharpness of a Japanese knife…

The #1 Error I Committed in 2016

An interesting, a tumultuous and an utterly horrifying year for the developed world has come to an end and even though I am thankful the year was extremely kind to me personally I find it difficult to shake off the nasty feeling that something terrible could be about to unfold in the world. More on that in my follow-up post. In it I will outline an investment mistake that I will make in 2017 and there is nothing I can do to prevent it due to a flaw in my mental constitution…

For now though I’d like to focus on the one giant mistake that I know for sure that I committed in 2016 because I think it is one many of us make and I think it is very much avoidable. At the end of my post I will also get into my current top positions.

Preparation, damn it!

Trump wins and I sit and sweat like an idiot researching military defense companies and pharmaceuticals after the fact instead of putting in the work ahead of time. This isn’t merely one of those excusable mistakes we all make during a year. Instead this is one that cannot be brushed off lightly because it is one of few areas where there is a significant edge to be had by individual investors who are free to ignore the day-to-day noise as opposed to many money managers who get measured on quarterly performance.

Frantic research leads to fuzzy thinking, which again tends to lead to rushed, subpar decisions. (I bought one company, Invisio Communications, after only a few hours of research only to sell it the next day after further research. Great company, stretched valuation in the near term.)

So the lesson is: Plan ahead or prepare for getting pushed around by the market and expect mediocre results.

Definitely easier said than done as many events will be of the ”thief in the dark”-variety, i.e. completely unknowable ahead of time. But there are others that are dimly available to our eyes out there in the distance.

Think ahead – examples

Suppose, for example, that China is forced to devalue their currency by a massive amount, say 25%. This would send violent shock waves through the global markets but it would probably also cause many Chinese stocks to become extremely attractive right after the devaluation (as opposed to before!). And I imagine in the first few hours of the panic one may be able to pick up some nice bargains while the markets are searching for their footings. This presupposes that one has done the work on the potential individual companies and that money can be moved to those markets quickly.

For individual companies there will often be ”trigger events” where one can calculate the value of each outcome ahead of time. This road is perhaps a better one to take, especially with regards to smaller companies, than trying to get ahead on the macro front.

Time is of the essence

You will notice that I am preoccupied by time and tactics here. The reason being that I have a lot of respect for the market’s ability to correct mispricings quite quickly and so often they will only appear for short periods of time before the gap is closed.

Many value investors will not bother with such tactical maneuverings preferring instead to search for compounders and worry less about hitting them at the point of maximum pessimism. This strategy relies on superior analytical ability and patience (the mother of all edges) and it is a fine one.

It isn’t one that is ideally suited to my personality though as I tend to look more in the deep value and ”special situations” space where mispricings are more temporary in nature and where my superior tolerance for pain (if I may say so myself!) can create potential edges in the market. A more opportunistic mindset.

For those wondering about my tolerance for pain… Yes, your suspicions are correct: This skill was carefully crafted over years as a slave in a sadomasochistic relationship giving in to the needs of the wife! That plus a side career playing cards characterized by violent volatility on a daily basis helped as well.

Strategic focus

If I had to put percentages on my general strategic focus I’d say somewhere in the range of 60% deep value, 25% tactical/special situations, 15% buy-and-hold compounding and 0% momentum. So compared to many buy-and-hold value investors I usually turn over my portfolio more than most, often in the 100-200% range.

Unusually low portfolio turnover for me in 2016

In 2016 my big positions in Wilhelmsen Holding and Arise Windpower (which at one point constituted 80% of my overall portfolio, unfortunately I sold off 1/3 in WWIB following Trump) called for lots of waiting, so I did almost no buying and selling until mid-September – 11% of my portfolio was turned over altogether, unusually low for me. By the end of the year that had climbed to 40% due to rearrangements in the portfolio following the US election, which I believe to be a game changer event.

My top 6 positions going into 2017

As of this moment my top 6 positions and their weightings are:

Wilhelm Wilhelmsen Holding (WWIB, NO) – 32% weighting

Cash and equivalents – 18% (including time arbitrage positions)

Mylan (MYL, US) – 13%

Arise Windpower (ARISE, SE) – 11%

Protector Forsikring (PROTCT, NO) – 8%

AO Johansen (AOJ, DK) – 7%

(Smaller positions – 11%)

Cash = optionality

The plan is to increase cash to about 30% in the following month or two as I am becoming more and more fearful of the mounting risks on multiple fronts and want the optionality that cash provides.

It won’t be fun to watch the market likely go higher while sitting on cash but there are meditative ego lessons to be learned in the process of sitting on one’s hands…

My next post

In my next post I will get into the risks that I see as well as go into the mistake I am inevitably going to make in 2017.If you are in the mood for some gloom and some doom stay tuned for For Those About to Trump – I Salute You!

The Sizing of a Bet – or the Art of Not Blowing Up While Getting the Best of It

In many areas of life size is overrated in my opinion. The wife thinks otherwise – which is always a cause for concern as evening approaches… Now, when it comes to investing you cannot afford to close your eyes to uncomfortable facts. And one such fact is that if your strategy to outperform the market relies on high concentration on a relatively small number of high conviction ideas you will blow up at some point in time if your understanding of the mechanics of bet sizing is flawed.

The better the odds, the bigger the sizing – then readjust for risk

The main idea is very intuitive to most. We size each bet according to the expected value of it. EV being the difference between the stock price and what we perceive to be fair value after careful calculation, which is the difficult part. Only then do we readjust for risk by scaling down when the risk is high and conversely scale up when it is not.

(Two notes: 1) EV in this context should not be confused with Enterprise Value, and 2) The time horizon is unimportant. A ”bet” could easily be a 20 year long position. I use the term ”bet” in the title for two reasons. The more important one is the wife thinks ”position” is better used in other contexts. And so being sensitive to risk I opted for ”bet”. The secondary and less important reason is that on a musical level ”bet” is more pleasing to the ear!)

Why the highest EV idea should not always be our biggest position

Assume that we are magically confronted with two bets that both have a 3x expectation and the outcome of both will be decided tomorrow. Bet both our own house and that of our grandma, right? You know the answer: Not so fast – it depends on the risk involved. So let’s quantify:

In example A there is a 30% chance the company gets bought tomorrow at 10x our investment and a 70% chance the deal fails and as a result that the company goes belly up and our investment is worth 0.

In example B the numbers are 4x 75% of the time, and the remaining 25% of the time it goes bust and we get 0.

The Expected Value of each is the same:

EV in example A: (10 x 0,3) + (0 x 0,7) = 3x

EV in example B: (4 x 0,75) + (0 x 0,25) = 3x

Let’s ignore the fact that both of these very hypothetical bets rank in the ”72 virgins in the sky”-sphere, ie. not gonna happen, but really, really nice to think about nonetheless and let’s instead agree that bet A is way riskier than bet B though the average expectation for each is the same. Neither proposition are in the ”bet grandma’s house”-range, but for some very risk tolerant dudes or gals bet B may actually be within the ”bet our own house”-range.

Size really is everything!

The EV is massive for both bets and therefore no-brainers that are criminal not to make. But since we ruled out betting grandmas house on the grounds it was too risky (though plenty of people had no problem taking risks at the expense of others in the years leading up to 2008!) the question then becomes one of sizing.

The Kelly criterion not suitable for everyone

How much then? Some use the so-called Kelly criterion, which is a mathmatical formula that provides the theoretically optimal way to size one’s bets to maximize long-term growth of capital. I would caution against it, however, since it does not take your own personal situation into account, such as cash flows from your job, risk preference, age, mental constitution and last but not least errors in judgement. To add a margin of safety some will use fractional Kelly (mentioned in the link above).

What I do

I don’t use Kelly myself but I do factor in both my personal cash flow situation, the number of opportunities I currently am aware of, my conviction level in each as well as the risk inherent in each – all to best of my ability.

The gold standard: many non-correlated high EV bets

The gold standard is to have a ton of non-correlated high conviction bets. For that to be the case one of two things need to happen.

One is you need to first narrow the field of ideas intelligently and then do a huge amount of work on all of the most promising ones. Only a rare few possess both the intelligence and the inclination for constant hard work such as a Warren Buffett, a Peter Lynch or a Mike Burry (think The Big Short), so many high EV ideas will be hard to come by for most.

Investment ideas from people you know to have the right process in place can be a source but remember you will need to have a thorough understanding of the drivers and the details of the business in order to know when to sell so work is always necessary unless you take to index investing, which is probably preferable for most people – though I will provide another solution that almost certainly will beat the market over time at the end of this post without too much work. It probably won’t be by a huge amount but it will beat indexing.

Absent that you may need to wait for the market to take a big dive and suddenly the waters may be ripe with opportunity.

A history of three 50%+ positions – and a gut wrenching loser

In the past five years I have had three 50%+ positions. Most people I know would never even consider this a possibility and it certainly isn’t the gold standard you want to aim for most of the time. However, I would argue there are times and situations when huge bets are very rational and not especially risky.

The first of those three times was in early 2012 in a Danish company called United International Enterprises, or UIE. This is a holding company where the discount to net asset value (NAV) had risen irrationally to 46% while the historical average was in the 20-30% range. The assets were stable in nature and on top of that the brothers who held the reins had recently bought shares for 1.5 million USD in the company. To me this seemed like a situation with both significant upside and a lot of safety on the downside attached to it, which is what you want out of a big bet. It worked out well and after 7-8 months the discount had narrowed to more normal levels and so I sold.

The second situation was a Swedish company called East Capital Explorer in late september 2013. The situation is similar in many respects, except the assets were more diversified and it required some work to ascertain the NAV as the holdings consisted of 40+ companies in 10 different countries listed on obscure exchanges. The company would issue a quarterly update of the NAV in 8 days time and due to heavy insider buying (8 million USD) I thought there was a good chance the NAV would increase significantly and that I could front run the update by doing the work myself and know the result ahead of time. I concluded it was at 42% while the historical average was at around 25% so I took a large position and sold it 2 months later when the discount went below 25% and received a 30% gain in exchange for a little effort.

The third case is Wilhelmsen Holding. I’ve written extensively about that so no need to go into detail here except to say that since it is also a conglomerate with a huge discount to NAV as the other two cases the risk is greatly reduced when comparing to a one trick pony type of company that sells products within one sector only. Leverage at the holding level is also very limited in this case.

Huge insider buying adds to safety as well. Also fraud becomes less of a concern in conglomerates and investment companies with many holdings, especially when insider buying has been prevalent.

Greed gave rise to this post 

Back in October 2014 I got greedy and loosened up on my bet sizing requirements (read: I screwed up on them). A Norwegian company in the oil service sector, Polarcus, had essentially been reduced to an option because of declining revenue coming from the big oil companies. The upside was huge but so was the downside risk due to high leverage. Still I thought the EV was attractive enough that it warranted a bet, especially since pension funds were selling out desperately in what seemed to me to be a forced fashion.

My thinking was that these are not the sharpest knives in the industry and that the reason for their selling might be due to institutional market cap constraints following the decline in price or managers simply trying to protect their job by not having a loser in their books. Seeing this I got greedy and violated my own rules and put 20% in it.

The oil price declined further in the weeks that followed after an OPEC meeting in which the Saudis decided they would go for market share rather than cut production. The oil companies cut their capital expenditures more and more as time passed and it started to seem likely that Polarcus would need a cash injection to stay afloat which would probably wipe out the existing shareholders given the size of the loan in comparison to the market cap.

I got out ahead of that, luckily, and took a tough 35% loss on the position. It turned out to be the right decision but still I was taught a painful lesson about sizing.

I don’t regret the bet which I still think was good in terms of risk/reward but hopefully I can control my greed the next time a similar one presents itself and size these option-like situations more appropriately.

Summary

The big bets should be reserved for cases where the downside is extremely well protected along with significant upside to protect the opportunity cost. The gold standard is to have many non-correlated high EV bets because then downside risk suddenly becomes much less relevant. This is difficult to obtain at any specific point in time due to both time restraints and due to the market seldom cooperating in providing you with tons of non-correlated high EV bets. And non-correlation is genereally hard to come by in the interconnected world we live in.

So how can someone who isn’t well versed in the markets use the above info and expect to outperform the market? By zooming in on investment companies in particular (and perhaps also conglomerates) and buy when the discount to NAV is above the historical average, preferably by a significant amount, and sell when it goes below. This is an easy way to buy a significant portion of the market while doing it at a discount, which ought to lead to outperformance. Seems almost too easy but it really does work.

Here is a list of Swedish investment companies you might want to look into so you can strike when the discount is out of whack.

Next post

Stay tuned for my next post around New Year. It will be about the mistakes I committed in 2016 as well as the composition of my portfolio going into 2017. Having made almost no changes all year I made some significant ones following the insane Trump victory.

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…