Ocean Wilsons Holdings — Operations and markets drive good H121

The good operating trends already seen in WSON’s Q121 numbers carried over into Q221, with a positive impact on OCN’s H121 figures. OCN’s EBITDA (which is essentially WSON’s EBITDA with some relatively small holding company operating expenses) rose by 13% yoy to $79.6m in H121 and EBIT (also driven by WSON) rose 22.9% y-o-y.

The bull run in equity markets has helped OWIL deliver another six months of significant gains following a very good H220. OWIL contributed $29.5m in portfolio returns plus $1.3m in investment income. This compares with a $13.8m loss and $0.9m investment income in H120.

The recovery in BRL against the US dollar in H121 led to FX translation gains on the US dollar debt while in H120 there had been translation losses of $11.7m and this also distorts the comparison with a year ago.

These factors contributed to OCN’s PBT of $66.2m in H121 looking very different from the loss of $1.8m of a year ago.

Container Terminals (39% of EBITDA in H121) benefited from higher container volumes in both of its ports. Total container volume handled rose by 11%, and full containers (which have a wider margin) rose by 9%. The divisional EBITDA rose by 17% also supported by the stronger BRL.

Towage (45% of EBITDA) results were also good, especially since the weaker US dollar negatively affects its margins. Harbour manoeuvres rose by 7% y-o-y in H121 and EBITDA rose by 13% as prices firmed up during the period.

The Offshore Support Vessels (WSUT) joint venture, which is the third largest EBITDA contributor (11%), continues to be affected by relatively low levels of activity in oil and gas exploration; the offshore platform services company is also affected. WSUT’s EBITDA fell 25% y-o-y in H121 affected by lower volumes, softer prices and the weaker US dollar (its prices are in US dollars). Our previous FY21 EBITDA forecast was for a 7% decline, so it is not a great surprise to see this weakness. While oil and gas prices are currently high, there is a lag before investment decisions are taken and actual oil and gas exploration starts. Management expects that palpable uplift in WSUT results will only start to be felt in late 2022 and in 2023.

With its Q221 results, WSON announced that the proposed share listing restructuring is moving ahead of schedule. Previously this had been expected to be concluded in November. Management now feels that it is on track to complete the move by October. WSON is changing from being a Bermuda-based company with Brazilian depository receipts (BDRs) listed in Brazil to being a company directed listed on the Novo Mercado segment in the Brazilian exchange. This will be achieved by a downstream merger of the Bermuda parent company with the 100% owned Brazilian one. There will be no shareholder dilution. A Novo Mercado listing will mean (1) greater share liquidity, (2) a stronger corporate governance seal and (3) an opportunity to join the main Brazilian and Latin American stock market indices.

OCN shares are currently trading at a significant discount (39%) to its look-through valuation, which consists of its 57.09% stake in WSON and the OWIL global investment portfolio. The discount has widened from 35% when we last wrote in June 2021. OCN’s stake in WSON continues to account for almost all of its market value (currently 98%; it was 99% in June).

We continue to think a very cautious valuation is being applied to OCN. We believe that a 39% discount is unjustified even though we do accept that some investors have concerns due to Ocean Wilsons’ relatively small market capitalisation and the fact that three shareholders, Hansa Investment Company, Victualia and Chris Townsend, in total own 50.21% of the company, reducing liquidity. Positively, this ownership position enables both OWIL and WSON to maintain their long-term approaches to investment and operating the businesses.

Exhibit 7 compares WSON with a selection of Brazilian and international port and shipping companies. The range of earnings and EV/EBITDA multiples is wide, and the businesses are differentiated in terms of activity and geographical exposure, but WSON trades at a significant discount to its peers even after outperforming them over the last 12 months. Its P/E ratios remain significantly lower than peers at 33% (FY21e) and 32% (FY22e) discounts. Its EV/EBITDA discounts to peers are 24% and 27%, respectively. Our forecast return on equity (ROE) for 2021 is 12.1%. This is only 13% below the forecasts for the peers (13.9%), but WSON trades on an FY21e P/BV of 2.0x, while its peers’ average is 50% higher at 3.0x.

WSON’s valuation ratios are noticeably lower than Santos Brasil, its closest peer, whose key asset is the container terminal in the Santos port in the state of São Paulo. This discount likely to narrow when WSON lists on the Novo Mercado on the Brazilian stock exchange.

We include a table showing the recent share performance of the same group of comparators. This shows sharply differentiated performances between the companies, arguably reflecting their varied exposures. We note that WSON’s shares have strongly outperformed the average of the companies shown in the exhibit below over the last 12 months, including WSON’s most comparable Brazilian peer, Santos Brasil.

We have made some adjustments to our forecasts on the back of the H121 results.

OCN’s forecasts for FY21 have been positively affected by the assumption of a greater contribution from OWIL (this comes in below the EBITDA line) after such a good first half of FY21. This has been offset by some trimming of our WSON FY21 forecasts. All in all, we have increased our FY21 PBT estimates by 2.1%, while EPS is little changed at 178.1p. PBT and EPS for FY22 are 9.6% and 9.4% lower, mostly due to adjustments to our cost of debt assumptions.

We calculate an ROE of 8.1% in FY21 and 7.7% in FY22 for OCN and estimate that PBT will increase by 48% from $74.6m in FY20 to $110m in FY21.

On the WSON side, although the Q221 numbers did not have much in surprises we have trimmed out of caution our FY21 numbers, and mostly in in container terminals as July operating data shows some bottlenecks in global supply chains are appearing. The revenue has been reduced by 1.6% but increased by 1.9% in FY21 and FY22 forecasts (WSON’s revenue being basically the same as OCN’s). WSON FY21 EBITDA (IFRS basis) was reduced by 4%, while the FY22 raised by 1%.

We are now forecasting 8% revenue growth in FY21 and 9% in FY22 on IFRS basis. EBITDA is forecast to increase 18% and 14% in these two years. We forecast that WSON’s earnings will almost double in FY21 and then they will increase by over 20% in FY22 as profitability starts to normalise.

Our forecasts for OCN’s are also affected by OWIL and this brings additional volatility and earnings risks to our numbers. We are assuming that combined investment portfolio returns and investment income increase from $35m in FY20 to $41.9m in FY21 (it was $30.9m in H121 and the market has remained buoyant). We are then estimating that this income falls by about 50% to $22.9m. We continue to assume a 6% return on prior year end assets for OWIL in FY22. This compares with the 11.4% assumption for FY21. However, market performance may lead to significant divergence from our assumptions.

Our assumptions of lower returns for OWIL in FY22 versus FY21 lead us to forecast a 7% increase in PBT for OCN in FY22 to $117.4m, less than in WSON. Furthermore, we note that financial markets may be choppy in FY22, especially with the threat of high inflation in several countries and this may lead to an equities sell-off in 2022.

We estimate OCN’s pro-forma net debt to EBITDA ratio to be 3.2x in FY21 and this seems a reasonable level of debt, in our opinion. With the Salvador container expansion now completed and rising EBITDA, we expect this ratio to drop to 2.6x in FY22.