Quarterly Letter and a Wilhelmsen Update

I’ve finally gotten around to posting Alluvial Capital Management’s first quarter 2016 letter to clients on my company site. Please go here if you are interested in reading it or any other letters.

Three months ago I wrote about Wilh. Wilhelmsen ASA, a deeply-discounted Norwegian specialty shipping company with an upcoming catalyst in the form of a spin-off. That spin-off has been accomplished, and Wilhelmsen ASA and Treasure now trade independently. The price of each is well, well below a conservative reckoning of fair value.

Treasure ASA

The newly independent Treasure ASA is easy to value. The company’s major asset is a 12.04% stake in a Korean logistics company, Hyundai Glovis. Treasure also holds USD 18 million in cash, contributed by Wilh. Wilhelmsen. On the liability side, Treasure remains a guarantor on Wilhelmsen’s corporate-level obligations, though this liability is minor. (Wilhelmsen has strong liquidity and all its corporate-level bonds will roll off within a few years.)

At current exchange rates, Treasure’s stake in Hyundai Glovis is worth USD 687 million. Adding Treasure’s cash holdings yields total value of USD 705 million. Translated to Norwegian Krone, Treasure’s value is NOK 5,839 million, or NOK 26.54 per share.

Treasure’s last trading price was NOK 15.50, a 42% discount to NAV. It’s normal for a holding company to trade at a discount to the value of its assets, but a discount of this magnitude is unusual and I do not expect it to last. Either Treasure will take advantage of this discount and repurchase shares, or Treasure’s majority owner (Wilh. Wilhelmsen Holding, with a 72% stake) will increase its ownership.

Needless to say, I think Treasure’s current price is driven by non-economic selling pressure and that buyers at the current price will be well-rewarded.

Wilh. Wilhelmsen ASA

While the newly-spun off Treasure ASA looks quite attractive, Wilh. Wilhelmsen may be even more so. Wilhelmsen’s goal in shedding its Korean assets was to highlight the value of its autmotive shipping and logistics operations, but the market has shown no inclination to cooperate thus far.

Wilhelmsen shares last traded at NOK 23.30 per share and a market capitalization of NOK 5,126 million. Meanwhile, Wilhelmsen’s tangible book value is north of NOK 11 billion. (This value will increase materially with next quarter’s results, due to an accounting gain from an acquisition.) So, Wilhelmsen’s price to tangible book value ratio is somewhere below 47%, a level usually reserved for the kind of distressed, unprofitable firm that Wilhelmsen most certainly is not.

For the twelve trailing months, Wilhelmsen’s remaining operations produced free cash flow of more than NOK 800 million, for a free cash flow yield in the mid teens.

I believe Wilhelmsen shares should be valued at a premium to book value. Company management has demonstrated ability to earn robust returns on capital through the cycle, no small accomplishment in a cyclical, capital-intensive, largely commoditized industry. All the same, I do understand the market’s more pessimistic point of view. As was plainly illustrated in Wilhelmsen’s first quarter results, the shipping market remains deeply unfavorable. Auto shipments have held up well, but shipments of mining and construction equipment have fallen markedly. I would not be surprised if the next few years were difficult for Wilhelmsen. Still, I expect the company to remain profitable and to use the downturn to set itself up well for the eventual return to happier times.

At less than half of tangible book value, the market is telling us that Wilhelmsen’s assets are severely impaired, that the firm will fail to earn its cost of capital over the next economic cycle, or that a long period of unprofitability will erode the equity base. I disagree with all of these scenarios, and I expect good things from Wilhelmsen stock.

Alluvial Capital Management, LLC holds shares of Wilh. Wilhelmsen ASA and Treasure ASA for client accounts. Alluvial may buy or sell shares of Wilh. Wilhelmsen ASA and/or Treasure ASA at any time. 

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

14 thoughts on “Quarterly Letter and a Wilhelmsen Update”

  1. Thanks for this. Did you make a positive return on the split event? As in, was it worth it holding shares beforehand?

    1. Sadly, there were no positive returns to be found yet. The combined entity is trading at roughly NOK 39.50, nearly the same as it was before the split. At least now the value of each part of the company is highlighted.

    1. Indeed. I’ll be watching the respective discounts on TRE and WWASA closely. I suspect there will be opportunities to take advantage of widening and narrowing discounts over the remainder of the year.

  2. Great look into a special situation here. Thank you for the post and insight. I read through some of Wilh. Wilhelmsen ASA’s annual report and was impressed with the company. As you noted, they are navigating a difficult market (it seems we all are) and seem to be diligent with their operations and forthright with their long-term goals. I’m more confident in the company after seeing just how strong their liquidity position is (~4.0x gross debt/EBITDA and ~2.5x net debt / EBITDA). I’m glad they have so much cash on hand, but also wish they had a little bit less debt. If low oil and commodity prices continue for 2-3 years, they will begin to burn through cash and continue to put pressure on the stock price (or have to lower dividend payments with a similar result), leaving for value investors a longer time horizon than we may want. It looks like the company is positioning itself well for the turnaround in the cycle with strong strategic acquisitions and allocating capital toward their high returning assets. At it’s current price you can’t complain with a discount to tangible book value as such to enter the company’s stock. Thanks again for the information, very insightful and interesting situation.

    1. In addition to what you said, the majority of the group’s debt is at the subsidiary level. Even if, say, Eukor Car Carriers ran into deep financial trouble, it would not threaten the existence of the business as a whole. The Wilhelmsen family are true long-term thinkers and planners. Like you said, they are using the current lean times to set to position the company to thrive when the cycle turns.

      1. OTC, I’m curios as to why you prefer WWASA as opposed to the mother company WWH (stockticker WWIB). It seems to me the mother is both cheaper and safer. I will be posting a fllow-up of my latest analysis in a few days, btw.

  3. Have you ever looked at ROFO? It’s another company in the Peter Kamin 3K portfolio. It might be something up your alley…

  4. Do you have clarity on what joint liability for the unsecured debt entails? – who pays the interest on it – Wilhelmsen or Treasure, and who is responsible for the payment of the principal?

  5. On Treasure ASA, do you have a view as to whether Hyundai Glovis is cheap or expensive @ market? Looks to be trading at 2x book? No doubt that Treasure ASA is cheap relative to Hyundai Glovis, but how does it look in absolute terms?

    Also, any corporate costs as Treasure ASA we need to capitalise?

  6. Big news out today and +19% share price move. Wilh. Wilhelmsen ASA and Wallenius Lines (private company) are planning a merger. WWASA will be used as the new listed entity. Wilh. Wilhelmsen Holding will own 40%, Wallenius will own 40% and the rest will be free float. They expect $50-100m in cost synergies.

    This is more or less everything we know at this point. The rest will be disclosed towards the end of the year and they plan to close the deal at 2017Q1.

    This will result in a bigger company and with the “asset-shuffle” we might se a reprising towards more sensible PE-levels. A lower valuation is almost impossible 🙂

  7. Hi David,

    I recently found your blog and enjoying reading through old posts. Can you please fix the link to the quarterly letter?

    Thanks!

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