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Hello Seekingalpha readers. We are two students who study Economics at the University of Copenhagen in Denmark. When not busy preparing for our lectures or reading up for an exam, we use a substatial chunk of our time analysing various companies and business sectors, searching for bargain deals.... More
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  • Norwegian Bargain Deal Within The Shipping Industry

    In this article, we would like to present a small group of companies in a sub sector within the shipping industry. A while ago a Norwegian company caught our attention - Wilh. Wilhelmsen Holding (OTC:WLHSF), a Norwegian holding company, which is divided into three subsidiaries.

    Selection

    Wilh. Wilhelmsen ASA offers shipping transportation and logistics concerning cars, trains and other rolling cargo, and can be defined as a ro-ro shipping company, Wilhelmsen Maritime Services offers general maritime services while Wilh. Wilhelmsen Holding Invest is a subsidiary which focuses on investment and development primarily within the maritime industry.

    It is quite clear that this company operates on rather different markets and thus has several different competitors on each sub-market. To take this into account, we have looked into which part of the company that has made the greatest contribution to the whole group by looking at operating profit (or EBIT) in every quarter since the first quarter 2011.

    Inherently there are many ways to measure these things, and in general we attempt to avoid concluding thing above our league, such as a subsidiary's influence on its mother company in relation to its other subsidiaries. However we believe it is fair to state, that Wilh. Wilhelmsen ASA has a major influence on the performance of the whole group in general over the past years, and historically as well. One might add, that the revenues from the subsidiary Wilhelmsen Maritime Services, almost makes it out for two thirds of the total revenue of the group, however it only provides a small fraction of the earnings in the group, which indicates that currently Wilh. Wilhelmsen ASA is the most profitable part of the whole company.

    Based on this, we will focus our analysis on the subsidiary Wilh. Wilhelmsen ASA, and compare the company with other companies whose earnings rely mainly on ro-ro shipping, and we hope you will accept this premise during the rest of our article.

    From our own research and dialog with WWI's investor relations section, we have limited its primary competitors to the following three Japanese shipping companies:

    Naturally, there are many other companies who operate in the ro-ro shipping industry, and therefore compete with our four companies, but since the fleet of WWASA consist of almost 50 vessels of which only one is not specialized for ro-ro transportation, we have excluded companies where only a fraction of their operations lies within ro-ro shipping. We realize that this is also a subjective choice, and as a result some people will disagree on this selection. This is exactly why we have spent a few words to address our selections here in the beginning of the article, so you as a reader, can follow our perspective and basis for the following analysis.

    Performance

    Without further ado, we present selected fundamental key ratios of our four ro-ro shipping companies:

    It is clear from the table above, that WWI beats its three main competitors on nearly every parameter; highest yield, longest history of dividend payments, lowest payout ratio, highest growth in book value, highest return on equity, most years with record revenues, highest earnings- and revenue growth, highest EBIT-margin in the past two years. Moreover, to wrap it all up, it has the least debt of the four companies - Now that is outperformance!

    If you look at the EBIT-margin, you will see that WWASA outperforms the three other companies quite significantly. They lower their costs much more efficient than its competitors do, and thus they would seem to have a competitive advantage in the long-term prospects.

    To investigate the companies further, we would like to take a closer look at the development in the following central key ratios; ROE, EBIT- / profit-margin and debt/equity. We believe that a quality company will to outperform its peers every year over a longer period of time, which roughly represents a business cycle.

    WWI outperforms its peers by far on every parameter every year and in addition, if you look at the development in their EBIT-margin, you will find that WWASA has recovered from the crisis in a very spectacular way when compared to the three Japanese competitors concerning their EBIT-margin.

    Valuation

    With the supreme numbers above, one might assume, that WWI is somewhat expensive relative to its competitors, however WWI is currently selling at P/B = 0,6, just like the three other companies. We use P/B for valuation in this sector, since it is very dependent on business cycles, and therefore not always profitable, making P/E a potentially misleading valuation measure.

    WWI is by far better than its competitors and selling at the same valuation, P/B = 0,6. To put their price further into perspective, we look at their price in relation the book value over the past ten years.

    Source: Prices from finance.yahoo.com, book value from morningstar.com.

    The figure above tells us, that WWI has been selling under book value since the crisis; hence its valuation has yet fully recover, which leads to an attractive long term buying opportunity.

    In our opinion, WWI has roughly two possible future prospects:

    • The demand will rise and the overall earnings of the sector will grow, thus WWI is performing well and valuation should be at least a P/B > 1, and likely, it would trade with a premium compared to its peers.
    • Another scenario would be that the demand stalls (or perhaps falls), in which case WWI has the lowest D/E and highest current ratio, which makes WWI well prepared for harder times in the business sector.

    In either case, we believe that WWI has a bright future, and that it is a quality company traded at a reasonable price, which provides the investor with a high margin of safety.

    Conclusion

    To sum it up, WWI is doing far better than its competitors and its future opportunities are bright. It is selling at an all-time low valuation over the past ten years, at P/B = 0.6 and with no premium compared to peers, despite outperforming them on nearly every parameter. The future prospects for the sector look stable in the sense, that we do not think ro-ro shipping is going to disappear within the next 10 - 20 years.

    This appears to us as a bargain deal for the long-term value investor, where you get the best company within its sector for an all-time low valuation.

    We are both long WWI, buying at P/B < 0.65

    Please comment on the analysis and not the ideology, since we have no interest in discussing value investing in general in this article. Instead, we encourage any discussion on either the way we have selected and defined the business sector or our further analysis of the selected companies.

    Philip Rasmussen Woloszynski & Gustav Juhler Kjær

    Disclosure: I am long WLHSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: We both recently bought shares in WWI recently.This is not a buying recommendation, but is merely an expression of our own opinion. We recommend that each reader do their own research, before drawing any conclusions or perhaps buying one of the stocks mentioned in the article.

    Apr 22 9:31 AM | Link | 1 Comment
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