Takeaways from the Wilhelmsen Capital Markets Day

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.

WMS:

• 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.

WWASA:

• 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…

Wilhelmsen: On Today’s Merger

A quick update on my opinion on today’s proposed merger. You can read the press release from the company here: http://www.newsweb.no/newsweb/search.do?messageId=408785

Expected gain for the holding company (WWIB): 30 MUSD per year (250 MNOK)

First the hard numbers. The synergies – a larger and more robust company will be able to achieve better financing terms, will need to employ fewer people as well as being able to direct their combined vessels more efficiently – are expected to result in a gain on the bottom line of between 50-100 MUSD for the new merged company, Wallenius Wilhelmsen Logistics.

Wilhelm Wilhelmsen Holding (WWIB) will own 40% of this company, which means the bottom line will improve by 75 MUSD (average estimate) * 40% = 30 MUSD per year = 250 MNOK per year. There are 46,5 million outstanding shares which means earnings will improve by 5 NOK per share. If we assign a conservative PE of 5-6 that would mean 25-30 NOK/per share. The market’s verdict today: 7 NOK.

Now that I got my scorn for the market’s ability to do simple math out of the way let’s focus on the broader picture because there is more to this merger than the gain from synergies.

The name itself indicates a gradual move which has been underway for the last couple of years away from shipping and towards inland logistics, where margins are better – and where stock valuations are much higher. WWASA is valued at a gigantic discount to book value, while inland players such as Hyundai Glovis (p/b 2) and Qube Holding (p/b 1,5) – both of which Wilhelmsen Holding hold a minority share in – are valued much higher.

There is also the fact that the Wilhelmsen’s have once again demonstrated a willingness to let go of majority control and instead focus more on releasing shareholder value. I think this trend is very clearly going to continue. Once a tightly controlled company starts to open up like this the odds of it reversing course are low. The selling off of the Hyundai Glovis shares may now have come closer and perhaps there is more streamlining to come from the Wilhelmsen Maritime Systems division in the near future as well.

Just my two cents on the meaning of today’s development. I’m curious about your view…

Video Post: Wilhelm Wilhelmsen Holding Analysis (Part 2)

Slides that were used in this video: Slides WWH 2

Link til Excel sheet used in Part 1: WWIB Presentation Excel

Video Post: Wilhelm Wilhelmsen Holding valuation + Peer Analysis (Part 1)

WWIB Presentation Excel

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.

Update on Wilhelm Wilhelmsen Holding

It’s been a long while since my last post, so I thought I’d give a short update on developments in Wilhelm Wilhelmsen Holding (listed in Norway) since my last post. Please excuse me if this post is a bit more hurried and less thorough than I normally aim for (fewer concrete numbers), but it is vacation time 😉

Wilhelm Wilhelmsen Holding

Bearish developments:

• The Big Negative: Their shares in Hyundai Glovis have come down by more than 30% since my first post on WWH on March 18th. As this is WWH’s most important asset, accounting for NOK 4,1 billion (NOK 5,8 billion on March 18). This is a significant portion of the market cap, which is currently NOK 8,1 billion. The share price in WWH has increased 16% in the same period.
• Hyundai and Kia have recorded declining car sales. I expect this to have a negative effect on Q2 as these two companies are major customers of the coowned company EUKOR. It is, by the way, the major reason why the Glovis shares have come down.

Bullish developments:

• The Big Positive: The dollar is has recently come back to its highs from March and the oil prices have gone down once again meaning revenue is worth more and operating cost are coming down. Clearly favorable for WWH.
• Much as I expected Q1 was a great quarter, primarily due to a strong dollar, a low oil price and cost cutting effects from 2014 that have started to have an impact.
• The ClarkSea index is up.

Conclusion:

In my opinion, the combo of Glovis being worth less while the WWH stock being priced higher makes WWH less of a no-brainer than it was four months ago. I still believe it to be a sound investment long term, but I think it is odd for the market not to react more negatively to such a sudden and heavy decline by their major asset and I fear that this could take place any time so I have decided to reduce my position by two thirds and put that money in more consumer related investments where I see more tailwind both short and long term. The discount to NAV is still favorable, which is why I am keeping one third and ready to increase again if circumstances dictate doing so.

Note: The price was 149,50 when I recommended the stock and it now sits at 171, an increase of 16% (when including 3 kr in dividend received in May).

Stay tuned for my next post on a subject I think is particularly important for investors having stocks in troubled industries, which is my favorite hunting grounds. The title is going to be Becoming Comfortable with Uncertainty.

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, the Bear Case

In my first post on W. Wilhelmsen Holding published yesterday, https://hammerinvesting.wordpress.com/2015/03/18/wilhelm-wilhelmsen-holding-quality-at-bargain-prices/, it was established that the stock is exceptionally cheap right now, based on both Price/Book and Price/Earnings.

Why is it cheap? The Bear Case
This question ought to be the main focus when we dig into the fundamentals of a company, which on the surface appears to be especially cheap. There is always the risk that it is a value trap and that the market knows about things that we don’t. As we slowly peel the onion that is the company and get closer to the core of it, reasons will start to appear. The main question is if those reasons are rational or not.

So far I have spotted the following possible reasons:

• 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

Let’s look at those one by one.

Antitrust investigations
WWASA and three Japanese competitors are all being investigated for price fixing from 2008-2012. The investigation started in the fall of 2013 and has already led to fines from Japanese authorities. Two Japanese competitors have also been fined by US authorities and it is expected that WWASA will be fined as well. It is also expected that the EU, Canada, Mexico and Chile will seek to fine the major of players in the industry. This creates uncertainty in the market. But it can also be a source of opportunity and lead to mispricings if that fear is irrationally overblown. WWASA expects a clearer overall picture on this issue during 2015.

Having spoken to analysts who have followed the process more closely, the expectation is that the total fines for WWASA will be in the USD 100-120 million range, and USD 200 million being a worst case scenario, in their opinion. Translating those numbers to the balance sheet of the holding company means a reduction of between USD 70-140 million in equity. If that turns out to be the case the effect will be in the 0,02-0,03 range in terms of Price/Book, ie. it will jump from 0,49 to 0,51/0,52 – still a far cry from P/B 0,84 of 2013 and 2012. In other words, while a serious matter, this alone cannot be the reason for the heavy discount – if we suppose investors are rational.

The liquidity position of WWASA is solid enough to counter fines of this size. On top of that WWASA has a 12,5% share in the logistics company Hyundai Glovis, and that share is currently worth approximately USD 1 billion. So if things get tough, they can sell a portion of that.

Uncertainty about contract renewal
Eukor, which is 40% owned by WWASA, has a contract renegotiation with Hyundai and Kia coming up in 2016. Eukor currently transports 60% of Hyundai’s and Kia’s exports and there is uncertainty whether this will continue or whether it will drop into the 50% or 40% range. WWASA has stated that they expect volumes to remain the same. Perhaps the market views this as overly optimistic.

Fear of increase in local car production?
I have not been able to find information on whether there is a trend in this direction currently. But if it is indeed the case, or if it happened in the future, it would result in a smaller market, so it is a potential threat to keep in mind and to look out for.

Conglomerate discount
There has always been a discount compared to a sum-of-parts valuation in WWI. As I wrote in the first part of this analysis, I don’t completely agree with it, but it will probably stay that way in the foreseeable future. Should the company decide to spin off some of their holdings, this will come down and the share price will go up.

Another reason for the discount might be a very simple one. Both WWI and WWASA consist of a myriad of companies and joint ventures, which makes it harder and more time consuming to analyze. Perhaps many potential investors stay away for that reason. However, none of those two reasons address the increasing discount gap.

The general shipping industry has been hit hard
The Baltic Dry index, which measures the transport activity of commodities by sea, is at an all time low – due to a combination of overcapacity and declining demand. As a result of that many players in the shipping industry are struggling. However, WWI’s main operations are in the car carrier and high & heavy markets, which are both unrelated to Baltic Dry. The revenues for the Ship Service part of the group has declined slightly – but profits are up and EBIT-margin a healthy 10%. However, these numbers are relatively small compared to the overall numbers for the group.

You could argue that if the market is viewed to be in a slump now and the current P/E is at 3,4 what happens to the share price once profits start to really take off?

Norwegian market discount
Norway is to a very large extent synonymous with the oil and shipping industries. As both have witnessed brutal declines recently some investors in the region may have withdrawn funds from the overall stock market out of fear regardless of the industry that the individual companies are in. A lot of stocks on the Oslo stock Exchange are traded at historically cheap prices. For some the fear is warranted, for other much less so. I believe the latter to be the case for WWI.

The founding family controls more than 50%
Some investors don’t like to be at the mercy of one group controlling 50%+ of the outstanding shares. However, it is very well documented that founding families tend to be more focused on long term value creation than your average CEO. And generally speaking, you get rewarded handsomely for owning shares in family owned businesses. However, there is also another side to this story and that is that the company (Tallyman), which controls the majority of shares in WWI, is owned by about 15 family members, I am told (as a side note, many of those are on this list of Norway’s richest people, among them the group CEO, Thomas Wilhelmsen: http://www.dn.no/nyheter/naringsliv/2013/10/18/her-er-norges-1000-rikeste). What happens if there are disagreements with regards to the overall strategy within that group. Can it hamper decisive action?

Low dividend payout ratio
WWI is expected to pay out NOK 3 to shareholders in May and NOK 2 in November, this equates to only 12% of earnings (3,3% dividend yield). Compare that to the more normal 50% payout ratio of other companies. I think this is one reason why WWI is usually cheap compared to its earnings power. In the current low interest environment the market is hungry for dividend yield so I have no doubt the share price would explode if the company suddenly decided to payout 50% of its profits. Very unlikely to happen though. The company does not strike me as one that changes its strategies to satisfy the market.

No share buybacks
If the primary aim of a company is to increase shareholder value one expects that company to invest its profits in ways that maximizes the return. New capex investments might be expected to produce a return on investment in the 10-15% range. However, there is another low hanging fruit waiting to be grapped now that the company’s asset are for sale at only 49 cents on the dollar and that is to buy back its own stocks. If Price/Book were to increase to the more normal (but still cheap) levels of 2012 and 2013 the stock would increase by about 70% in value. That seems like a no brainer investment to make. And personally, I would much rather see this happen than increased dividends.

I don’t believe it will happen though. The company has no history of doing so and it may prefer an organic growth strategy. If that is the case, perhaps the stock market is punishing the company for preferring empire building rather than shareholder maximizing initiatives.

Cyclical, low liquidity, boring
I don’t care in what shape or form they present themselves but I like value propositions. Paying much less than the expected value of an asset is all that interests me. But many investor groups need an investment to fit into a certain box in order for them to invest and in many ways WWI doesn’t fit the bill.

Dividend investors tend to be defensive and shy away from businesses that are cyclical in nature, which WWI certainly is.

Institutional investors want a minimum of liquidity otherwise their very buying and selling will move the price too much to be worth it for them. On many days the volume in WWI is less NOK 1 million, which is surprising for a company of this size.

Gamblers want bigger day-to-day movement than WWI provides, being in a mature business segment and with a low gearing ratio and solid balance sheet. The later also scares away growth oriented investors.

Personally, I am indifferent to those reasons. I just want the gap between price and value to be huge. I also don’t mind volatility from year to year as long as value is created and compounded over time.

Bear Case conclusions
Of the above mentioned 10 possible reasons for the discount, I believe the first three are somewhat rational. I am the most uncomfortable with the second and third reasons as I find those the hardest to assess both in terms of the likelihood of them occurring as well as the possible impact they can have. The rest are not really rational in my book.

I hope there are skeptical investors out there  who would like to share their thoughts if they have found holes in my analysis or have additional information or questions/thoughts to bring to the table.

You can read the third and final part, the Bull Case, here: https://hammerinvesting.wordpress.com/2015/03/23/wilhelm-wilhelmsen-holding-the-bull-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/