Wilh. Wilhelmsen Companies – Part 2

Time now to examine Norway’s other Wilh. Wilhelmsen company, Wilh. Wilhelmsen Holding Group ASA. “WWHG” is the parent company of the company I profiled yesterday, Wilh. Wilhelmsen ASA.

WWHG owns 72.73% of Wilh. Wilhelmsen ASA, as well as significant other assets. These assets include investments in logistics and maritime services, as well as holdings in a publicly-traded  Australian logistics provider.

If anything, WWHG is even more complex than its subsidiary, Wilh. Wilhelmsen ASA. The parent company owns (in whole or via a controlling stake) many dozens of subsidiary companies, and has minority stakes in many more. The company provides a basic organization chart illustrating its major business lines. Tickers and ownership percentages are provided for subsidiaries and affiliates that are publicly-traded.

orgchart

 

WWHG’s value should be at least equal to the value of its publicly-traded holdings, but the market thinks otherwise. As of yesterday, WWHG’s market capitalization is $1.29 billion USD, while the combined market value of its stake in Wilh. Wilhelmsen ASA and Qube Holdings Ltd is $1.41 billion. WWHG is currently priced at a discount of 9% to the value of its publicly-traded holdings alone, disregarding the value of its other operations entirely.

discount to holdings

Remember, though, Wilh. Wilhelmsen ASA is itself considerably under-valued, based on the value of its own holding in Hyundai Glovis and its car carrier operations. In yesterday’s analysis, I conservatively estimated WWASA’s value at $2.556 billion. Using the adjusted value results in a 35% discount to the value of WWHG’s shareholdings.

discount to adjusted holdings

The company’s main division is the 72.73%-owned Wilh. Wilhelmsen ASA business. In yeseterday’s post, I estimated the company’s worth at $2,556 million, of which $1,859 million is attributable to WWHG.

WWHG’s second-largest line of business is Wilhelmsen Maritime Services AS. WMS produced operating profits of $68 million in 2012, and averaged $66.87 million in operating profit over three years. The WMS division operates many JVs, leading to some minority investors having a claim on its profits. Even though WMS recorded nearly no minority interest in 2012, I am assuming a 20% average reduction to operating income for minority interest. Valuing the division at 8x that conservative figure results in a valuation of $428 million.

WMS valuation

WWHG’s remaining operations are lumped together as the “Holdings and Investments” segment. This segment operates in an eclectic mix of business lines, not all of them profitable. The segment is the “forward-looking” part of the company, charged with advancing the industry. Profits for the division are lumpy, and largely related to the Qube Holdings investment. Backing out gains and losses related to Qube leaves operating losses of $14 million in 2012 and an average loss of $20.37 million over three years. The 2010 loss of $35.1 million was affected by expenses due to the IPO of Wilh. Wilhelmsen ASA and an office relocation.

Despite the ongoing losses at Holdings and Investments, I value the segment at book asset value, less the value of its stake in Qube. The Holdings and Investments segment’s operations benefit the remainder of the company through technological and managerial advancements, many of which will never be reflected in the division’s financial statements. In addition, the division purchased 35.4% of Norsea Group in 2012. This investment is performing well and delivering greater and greater profits to Holdings and Investments.

WHI valuation

My value estimates of WWHG’s shareholdings and operations sum to $2.64 billion.

WWHG Valuation

That’s the value of the firm. Determining the value of the firm’s equity requires adjusting for cash, other securities and debt.

WWHG carries $2,008 million in interest-bearing debt. However, $1,534 million is attributable to the WWASA subsidiary, leaving $472 million at the company’s other segments. WWHG has $576 million in cash. WWASA’s portion is $344 million, leaving $232 million at WWHG. Finally, WWHG holds $84 million in various Nordic stocks and bonds at the parent company level.

WWHG Valuation net of debt

Adjusting for WWHG’s net debt and securities yields an equity value of $2.42 billion, or $52.09 per share. This estimate of fair value is 88% above current prices.

WWHG appears to be even more under-valued than its subsidiary, WWASA. But why? Both companies appear to suffer from the classic holding company discount. The market abhors complexity, and firms that utilize extensive crossholdings and joint ventures are penalized by investors who can’t or won’t take the time to dig deep into the financial statements.

In addition to being a holding company, WWHG is a controlled company. Three Wilhelmsen siblings control 60% of voting power, giving them unassailable control. Some investors shy away from controlled companies, but I look at the situation differently. In my view, the Wilhelmsens could not be more highly incentivized to manage the company well. Their reputations and the fate of a 150 year family legacy depend on it, as does the lions share of their personal wealth.

The track record of both Wilhelmsen companies speaks in their favor. WWHG has returned over 15% annually for the last decade, while WWASA has more than doubled since its 2010 IPO. Both companies are well-positioned, reaping profits from the strong car carrier market and investing in logistics and maritime services that will help them weather the ups and downs of the deeply cyclical shipping market. Neither firm employs excessive leverage, and both firms pay regular dividends.

Investors in both companies will likely do extremely well as the world’s population and economy expand. The expansion of the global middle class will require more vehicles than ever before, and the Wilhelmsen companies will be there to ship them.

No positions, plan to buy shares in each company soon as I can transfer funds to a broker that allows trading on the Oslo Exchange.

 

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14 Responses to Wilh. Wilhelmsen Companies – Part 2

  1. Matt Jones says:

    Thanks for the writeup. For things like this I sometimes think it’s useful to calculate the ratio of price to look through earnings of all the subs and investees, and back out any excess cash.

    By the way, what broker are you going with, or which ones are you considering?

  2. Fabian says:

    Thanks too for the writeup. “…weather the ups and downs of the deeply cyclical shipping market.” –> where are we in the cycle?

    • otcadventures says:

      The broad shipping market is still struggling with low rates and over-capacity. Sky-high chartering rates in the mid 2000s lead to the construction of many new ships. When global trade decreased during the financial crisis, charter rates plunged and many operators went out of business. Rates have moved up somewhat, but many shippers are still operating only at-breakeven or even lower.

      Fortunately, the car carrier niche that Wilh. Wilhelmsen operates in never experienced the boom in ship construction that sunk the dry bulk and tanker sectors. Rates fell during the financial crisis, but not nearly as much as for other types of ships. Global demand for autos has been growing, despite poor conditions in Western Europe. This has allowed Wilh. Wilhelmsen to earn strong profits.

      WWASA released earnings yesterday and operating profit for the quarter was up 22% over the previous quarter.

      • Western says:

        If anyone is interested in the stable earnings of wilhelmsen, I recommend reading my post on the market stability in the car carrier market below.

  3. pietje says:

    Great writeup again. One thing I couldn’t find during a quick exploration: what is the difference between class A and B holding shares? Probably voting rights, but couldn’t find this anywhere.

    • otcadventures says:

      Class B shares have no voting rights. That is how the Wilhelmsen siblings control 60% of voting power while owning slightly less than 50% of shares outstanding. The dividend rights are equal.

  4. RCRay says:

    The last five years earnings per share were US$ 1.94 (2008), 7.11, 1.29, 4.05 and 7.06, which average out to US$ 4.29/share. Not a very exciting record, especially as much of the earnings (as in 2012) were from sales of assets. On yearend book value of
    $ 45/share this is only about a 10 % return. Against the real value of assets it is even lower. The earnings for WWASA are much lower over this period. So it’s cheap on assets but not on earnings.
    Also note that cash interest payments are shown under Financing on the Cash Flow Report, not under Operating Cash Flows (per IFRS?-I’ve seen it elsewhere, as in Hong Kong).
    Thank you for your ideas. I’m happy with Chesapeake Bank and hope to buy some Logistec (but it’s not very liquid).

    • otcadventures says:

      Average earnings of $4.29 per share is still a fairly nice yield on a share price of $29. And yes, some of those earnings were from sales of assets, which probably cannot be repeated. On the other hand, the last five years were hardly a typical economic period. The fact that the company remained profitable at all (on average) during the worst financial crisis in decades speaks well of Wilh. Wilhelmsen’s management, especially compared to the many shippers who went bust due to extreme leverage. If the next five years are free of major economic turbulence, average earnings may be much higher.

      Interesting note on the treatment of interest expense. I am not sure why the company chooses to classify it in CFF, rather than in CFO. I like it, as it allows for easier calculation of unlevered cash flows, but it is unusual. This document indicates companies may choose where to classify interest and dividends paid/received, as long as they are consistent in their application. http://mcgladrey.com/pdf/us_gaap_ifrs_cash_flows.pdf

      Glad you have benefited from some of my writeups.

  5. Mtornq says:

    Great write-up as always. If you’re already poking around my native country take a look at Domstein, a fish food producer/distributor that seems to be unreasonably cheap. Less than 60% of book value, significantly below the market value of its subsidiaries, etc. Earnings record is spotty despite a good 2012, but crucially, they are currently restructuring, closing or selling off unprofitable divisions. No position as I don’t feel comfortable enough with my own valuation skills, but I’m keeping an eye on it.

    • otcadventures says:

      Thanks, I will check it out. As the US market has hit new highs, I have been been finding a lot of promising ventures in Norway and the surrounding region. Besides Wilhelmsen, Awilco Drilling is still trading far below my estimate of fair value.

      • Mtornq says:

        Awilco is one I’ve held for a while as well. It gets a bit more attention here in the media, which makes the low price all the more surprising. What’s your estimate? I couldn’t seem to find a range in your posts on it.

        It seems to me that value investing is a rather foreign concept in Scandinavia in general, which may be why some bargains can be found. I’ve been completely unable to find any domestic value literature, or even message boards or the like! At any rate a few other companies on my watchlist are Bonheur, Jinhui Shipping, North Media AS and Selvaag Bolig. I freely admit I’m rather new to this, which is why I’m not investing anything yet based solely on my own research. Your blog has been a great resource in learning!

  6. Anonymous says:

    Hi Dave.

    Did you buy WWI/WWIB following this post? Do you still own some?

    WWASA recently announced that Glovis will be spun off to shareholders and that might make the values more visible for shareholders. A step in the right direction but more importantly it could be a sign of what might happen in the future. A change into a more shareholder oriented management. There are huge values “hiding” in the holding companies and if they used 50% earnings to buy back shares shareholders would get +100% within few years.

    Do you still have an opinion on the case? I know its a lot to ask; almost 2½ since your post 🙂

    I own WWI and WWIB.

    Regards, Jakob

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