I’m back with what I believe is the best value idea I have dug up in some time, one I haven’t seen covered anywhere else. I submitted it to Value Investors Club, but they didn’t like it. (So no membership for me, at least for now.) Nonetheless, I believe this is an extremely compelling scenario, so I present it to you.
Wilh. Wilhelmsen ASA – WWASA:Oslo
Deeply Discounted Blue Ship Specialty Shipping Company With A Major Catalyst
Wilh. Wilhelmsen ASA is one of the world’s largest owners and operators of roll-on roll-off “roro” carriers, specialized ships designed to transport automobiles and other large equipment between continents. Broadly speaking, shipping is not an attractive business. The industry is capital-intensive, deeply cyclical, and heavily commoditized. Most shipowners and operators are price-takers. Wilhelmsen, on the other hand, has a knack for identifying and investing in specialized shipping niches that require differentiated vessels and deep operational expertise. As a result, Wilhelmsen is less exposed to the shipping cycle and earns healthy margins returns and returns on capital.
The company also operates an extensive global automotive shipping logistics network. Wilhselmsen’s activities are carried out through a series of joint ventures and associated companies. Wilhelmsen categorizes its business activities in two segments: shipping and logistics.
Shipping – Wilhelmsen owns 40% of EUKOR Car Carriers, 50% of Wallenius Wilhelmsen Logistics, and 50% of American Roll-On Roll-Off Carrier. Together, these companies account for 25% of the global roro market. EUKOR’s largest customers are Hyundai and Kia, while American Roll-On Roll-Off Carrier’s main customer is the US government.
Logistics – Wilhelmsen’s main logistics joint venture is Wallenius Wilhelmsen Logistics. Its other joint ventures are American Auto Logistics and American Logistics Network. These companies provide terminal services, technical services (repairs, quality control, etc.) and inland distribution, moving vehicles from port to final destination. Wilhelmsen’s logistics division also includes an extremely valuable ownership stake in a publicly-traded Korean auto shipping and logistics company, Hyundai Glovis Co. Ltd. Wilhelmsen was an early investor in Glovis and their 12% ownership stake is worth $720 million.
Shares of Wilh. Wilhelmsen trade at an extremely attractive price of 5.5x trailing earnings, adjusted for one-time gains, provisions, and excess corporate cash. Wilhelmsen shares also trade at just 57% of book value. However, Wilhelmsen shares will experience an extraordinary catalyst in the upcoming spin-off of their stake in Hyundai Glovis as a public entity to be named Treasure ASA. Assuming Treasure trades at any reasonable discount to the value of the Hyundai Glovis shares it will hold, buyers of Wilhelmsen shares today are creating the company at below 3x trailing normalized earnings and less than one-third of book value.
First, a look at Wilhelmsen’s earnings. Though shares trade in NOK, Wilhelmsen operates and reports in US Dollars. Because it operates through so many joint ventures and associates, Wilhelmsen’s income statement is reported via the proportional method. For 2015, Wilhelmsen reported $2.31 billion in revenues, $435 million in adjusted EBITDA and $278 million in adjusted EBIT. (EBITDA and EBIT are adjusted for a $200 million provision against possible anti-trust penalties, and a $29 million one-time gain related to the sale of Hyundai Glovis shares.) Interest expense is a little trickier, as Wilhelmsen does not report proportional interest expense. The company does provide proportional total debt: $2,026 million at year-end 2015. The average rate on Wilhelmsen’s debt was 4.4% in 2014 and was extremely similar in 2015, based on the minimal variation in interest expense reported for the full 2015 year in the company’s fourth quarter report. At a 4.4% rate, interest expense on the company’s $2,026 million in proportional debt is $89 million, yielding pre-tax income of $189 million. Finally, taxes. Norway’s corporate tax is 27%, which puts Wilhelmsen’s adjusted 2015 net income at $138 million.
On a market-capitalization basis, net income of $138 million puts Wilhelmsen shares at 6.9x adjusted trailing earnings. However, Wilhelmsen holds substantial cash and short-term investments at the company level: $349 million. (The company’s proportional interest in its joint ventures provides another $263 million in cash, but the conservative approach is to ignore these assets.) Of this $349 million in corporate cash and equivalents, I estimate at least $200 million to be excess capital available for investment. Backing that $200 million out of the company’s market capitalization yields a trailing adjusted P/E ratio of 5.4. Of course, Wilhelmsen’s actual financial statements rarely show net income close to normalized levels. The company conducts a lot of bunker, interest rate and currency hedging, which creates a lot of noise in the statements. The complicated statements may be one reason why shares trade so cheaply.
Now: on to the spin-off! Wilhelmsen has announced it will spin-off its ownership of Hyundai Glovis in summer 2016. The new company will be named Treasure ASA, and its only assets will be the 12% stake in Hyundai Glovis, plus de minimus cash. The gross value of the Hyundai Glovis shares is currently $720 million, but Wilhelmsen’s $346 million cost basis in Hyundai Glovis does create a tax liability. At the 27% tax rate, Treasure ASA’s tax liability in a sale of all Hyundai Glovis shares would be $101 million. I expect shares of Treasure ASA to trade at a moderate discount to the value of the Hyundai Glovis shares, less tax. At a 15% discount, Treasure ASA would be worth $526 million. In their fourth quarter earnings call, the company said it would consider taking steps to narrow the gap if Treasure ASA traded at a meaningful discount, so I believe that 15% is a reasonable estimate.
Though the spin-off’s pro forma market value is more than half of Wilhelmsen’s market capitalization, the spin-off’s impact on Wilhelmsen’s earnings will be much smaller. In 2015, Hyundai Glovis contributed only $36 million in equity income to Wilhelmsen’s results, 26% of pro forma net income.
Assuming Treasure ASA trades with a market capitalization of $526 million when spun off this summer, Wilh. Wilhelmsen’s current implied market capitalization is $421 million. Net of $200 million in excess corporate cash, Wilhelmsen’s market capitalization is $221 million. Pro forma net income is $102 million after deducting Hyundai Glovis’ $36 million contribution. That leaves Wilhelmsen trading at a pro forma trailing cash-adjusted P/E ratio of 2.2, a price to book ratio of 32%.
I do not expect the market to allow a conservatively run, consistently profitable, well financed blue chip shipping company trading at 2.2x earnings for long.
Risks to this analysis include the possibility that Hyundai Glovis shares trade down significantly, perhaps on news of lower Hyundai and Kia sales in the US or a weakening appetite for imports. The company is exposed to the global auto market as well as the market for heavy mining and construction equipment, and slowdowns in those sectors have had an impact and will continue to do so. There is also the risk that Wilhelmsen’s liabilities for anti-trust penalties within the roro market exceed the company’s own estimates, or come due faster than anticipated. (I view the company’s $200 million provision as exceedingly conservative, as future penalties will arrive piecemeal and over the course of many years. Courts don’t move quickly. The value of potential anti-trust liabilities in both absolute and present value terms is likely far less than $200 million.) Regardless, potential penalties are adequately funded by cash within the company’s joint ventures.
The coming spin-off of Hyundai Glovis into a vehicle named Treasure ASA will force the market to recognize how extraordinarily cheap Wilh. Wilhelmsen ASA’s remaining operations are trading. Treasure ASA’s market value is over half of Wilhelmsen’s total market capitalization, yet Treasure ASA accounts for only 26% of Wilhelmsen’s pro forma net income. Wilh. Wilhelmsen’s pro forma valuation of 2.2x normalized ex-cash earnings and 32% of book valuable is untenable and the situation will be corrected by the market.
Alluvial Capital Management, LLC holds shares of Wilh. Wilhelmsen ASA for client accounts. Alluvial may buy or sell shares of Wilh. Wilhelmsen ASA at any time.
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