Ocean Wilsons Holdings Limited — Confirmation of interest in Wilson Sons holding

Overall, the group performed well in H124 with positive performances from both the investment portfolio and Wilson Sons. The former generated a gross return of 3.9%, in line with its benchmark and well ahead of the 60:40 MSCI ACWI Equal Weighted benchmark. Wilson Sons benefited from solid underlying trading and also new trades in containers at its two terminals. The outlook for both elements of the group look encouraging as the interest rate environment appears set to become more accommodating over the foreseeable future.

Ocean Wilsons’ interim results were strong as both the investment portfolio and Wilson Sons performed positively. Group revenue increased 14.2% to US$262.4m driven by strong trading in Wilson Sons, and operating profit rose by 22.4% to US$68.4m. A positive return from the investment portfolio contributed to a good PBT performance.

However, despite the strong performance, profit after tax fell nearly 20% to US$38.4m as the tax charge taken rose dramatically due to deferred tax timing differences and net assets slipped 3.2% year to date to €789.8m due to a negative currency impact and dividends offsetting profit for the period. However, the FX movement had a positive impact on net debt, which fell 8.8% to US$436.7m. Finally, in the period the company paid dividends of 85c per share.

The investment portfolio delivered a 3.9% gross return and a 3.3% net return for the six-month period, in line with the absolute benchmark return, which is the US CPI Urban Consumers NSA +3%, and significantly ahead of the MSCI ACWI Equal Weighted 60:40 comparable benchmark. Headline equity market performance was strong in the period, up 11.3% driven mainly by the ‘Magnificent seven’ technology stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla). The positive performance of these stocks had a disproportionate impact on the index given their outsize weighting. By muting their impact by looking at the MSCI ACWI Equal Weighed Index, the return was only 0.9%, highlighting how imbalanced market returns were in the period.

The fund is deliberately designed to generate sustainable, less volatile returns over the long term by investing in a range of public and private funds. Although the fund has underperformed the performance benchmark over the last three years (1.5% pa versus 8.0% pa), its five-year performance has been much closer to the performance benchmark (6.0% pa versus 7.2% pa).

In the period, the best returns were driven by the public equity and directional hedge funds with exposure to the US market and especially the technology sector. Among the best performing funds were the Blackrock Strategic Equity Hedge Fund and Polar Capital Global Technology, which both benefited from this exposure. In the period they increased by 17.0% and 25.7% respectively. The Japanese holdings’ performance was more mixed, with esoteric fund Simplex Value Up gaining 10.5%, while the larger-cap holdings were mixed with Arcus Japan, Alma Eikoh Japan Large Cap and Indus Japan returning 2.6%, 1.9% and -2.7% respectively. Again, a ‘handful’ of mega-cap stocks drove the overall market and these stocks were largely avoided by these funds.

The performance of private funds tends to lag public markets, and activity was subdued as higher interest rates led to lower transactions and fund-raising. Two holdings performed well: financials specialist Reverence Capital Partners Opportunities Fund V and healthcare specialist OrbiMed Private Investment IX. No new commitments were made in the period.

Within the defensive section of the portfolio, the fixed income positions performed well, with Selwood AM – Liquid Credit Strategy, a specialist in trading investment-grade credit default swaps (CDXs), being the standout holding as demand for insurance against corporate default increased. This fund increased in value by 4.5%. Nephila Iron Catastrophe Fund, a specialist in investing in catastrophe bonds, gained 6% in the period in a very strong pricing environment. On the flipside, the Lazard Convertible Bond Fund, which lacked exposure to the ‘Magnificent 7’ stocks, dropped 2.7% and the holdings in Keynes Dynamic Beta Strategy and Brevan Howard Absolute Return Government Bond Fund were both sold for slightly differing reasons.

The 14.2% y-o-y increase in revenue was totally driven by strong trading in Wilson Sons, which in particular benefited from increased container volumes and towage activity. Towage volumes increased 6.7% due to a greater number of ships carrying grain, iron ore and breakbulk cargo, and this in turn implied a more advantageous mix, which pushed total towage revenue up 10.3% y-o-y to US$113.5m. This positive effect was offset to a degree by decreased special operations revenue, largely due to lower salvage assistance revenue.

Container volumes increased 24.7% in total to a record volume, and total container terminal revenue increased 29.0% to US$99.6m, again benefiting from a better mix as the terminals saw robust growth in transshipment and gateway volumes, higher ancillary services and fixed cost dilution. In May, Rio Grande launched a new deep-sea route and feeder solution for cargo volumes from Argentina, Uruguay and southern Brazil, enhancing its east coast hub status, and in July, Salvador saw the first regular call of a new Panamax vessel on a direct link to Asian markets, enhancing the terminal’s attractiveness as a transshipment hub for volumes from north and north-eastern Brazil. Both of these services should contribute to growth in H224 and beyond.

Offshore support revenue rose 21.2% to US$10.8m, driven by better fleet utilisation and higher rates, while the number of operating days rose 6%, driven by new hires and contract renewals.

Following the strong H124 results, we have raised our FY24 and FY25 underlying operating profit estimates by c 6% in FY24 and FY25, which is the net effect of better-than-expected trading in Wilson Sons, offset by an FX headwind as the US dollar, Ocean Wilson’s reporting currency, has strengthened markedly versus the Brazilian real, Wilson Sons’ reporting currency.

In particular, there are positive contributions from a new direct container line calling at the Salvador terminal and transhipment volume growth in the Rio Grande terminal. In addition, there has been strong growth in harbour manoeuvres within the towage revenues as overall activity has grown. In our model, we have also increased net debt in FY25e by c $20m, reflecting planned increased investment in quay and crane equipment, which has been carried over into FY26 estimates, which have been introduced in this note for the first time. We estimate 4.7% revenue growth and 5.3% growth in underlying operating profit, which implies modest margin improvement.

The share price of OCN has performed strongly over the last year, rising more that 80% since June 2023. Despite this material move upwards, we believe the shares still trade at a c 40% discount to our revised valuation of 2,275p/share, down from 2,564p/share previously. The good collective underlying performances of PORT3 and OWIL have been offset by the weakness of the Brazilian real versus sterling and the US dollar in the former. A resolution to the strategic review currently being undertaken may crystalise the inherent discount in the share price versus its valuation. The timing is uncertain, but the company commented recently, post the confirmation that it was in discussions with I Squared Capital Advisers, that a resolution was expected by the end of this calendar year. We also understand that a disposal of OCN’s PORT3 holding would crystalise a Brazilian Capital Gains Tax liability charged at 22–25%. This is a complicated issue and is mentioned here as an additional consideration.

OCN is an investment company that has held a 57% strategic stake in the Brazilian-listed port services company Wilson Sons (PORT3) for many years. It also holds a portfolio of mainly listed, but some unlisted, investments.

In Exhibit 4 we attempt to value OCN. Firstly, we took the last published equity value (30 June 2024), excluding minorities, of OCN of US$587.2m or £448.2m. Secondly, we subtracted the equity value at the same date of OCN’s 57% stake in PORT3 of £198.6m, leaving an equity value of OCN (ex PORT3) of £249.6m. Finally, we added back the current market value (as at 11 October 2024) of OCN’s 57% stake in PORT3 and arrived at a market value of OCN of £804.5 (or 2,275/share) against a current market capitalisation of £514.5m (1,455p/share). This implies that OCN trades at a 36.0% discount to its market price value despite the bounce in the share price, from a low of 820p on 9 June 2023 to the current level. This calculation does not include any potential change in the value of the investment portfolio since the last published valuation date of 30 June 2024, nor any additional profit accrued from its holding in PORT3 since that date.

The PORT3 share price has also performed well following the announcement last year that OCN was considering its strategic options relating to the PORT3 position within the group. PORT3 is trading on a 2024 EV/EBITDA multiple of c 9.3x, which is a modest discount to the average multiple of a group of international peers (FY24 average of 10.8x) and so we consider this to be relatively conservative given the M&A upside of this particular asset at the moment and the significant growth that PORT3 has demonstrated in 2023 and so far in 2024. For reference, we estimate that each 1.0x of EV/EBITDA ratio added raises the total value of OCN by £85.4m or 242p/share.

Another way to highlight OCN’s value (based on the same figures) is to look at the current value of OCN’s 57% stake in PORT3 (£554.9m) and compare it to the current value of OCN (£514.5m). In effect, at the current market valuations, investors could purchase a controlling stake in PORT3 for an 8% discount and would receive the rest of OCN’s assets for free.

The increase in estimates for OCN, driven by better trading in Wilson Sons (PORT3) mentioned earlier in the note, has no direct impact on our valuation of OCN as within our valuation we value PORT3 at market value, rather than a multiple of estimated profit.