Get startedLog in
    17
    Archived articleThis is an archived article from 2011 - please note that any content within the article may be out of date.

    Ocean Wilsons: Wilson Sons 2010 Results

    by
    Profile picture of marben100
    marben100
    10 comments·8,658 Reads

    The largest asset of Ocean Wilsons (LON:OCN) is its 41.44m shares in Wilson, Sons (58.3% of Wilson, Sons share capital). Wilson, Sons is a major Brazilian ports, oil services and logistics operator, established for over 170 years.

    Wilson, Sons Q4 earnings and full year financial statements were released late on Friday. All figures in my following analysis are in US$. Superficially, the results don't look that great. Whilst full year revenues have increased by 20.4% to US$576m, net income is down from US$90.0m to US$70.5m. However, there are some very interesting details buried in the full year financial statements...

    Firstly, IMO the reduction in profits is largely due to investment in growth. Additional port capacity and new vessels are being added at pace. Staff numbers have grown from 4,264 to 4,936. CAPEX of $166.7m was deployed in the year. Most interesting, however, is the cashflow (see note 27 in the financial staments). Operating cashflow has grown from US$69.9m in 2009 to US$97.0m in 2010 - an excellent rate of cash conversion, demonstrating that this is a highly cash generative business. I expect this strong growth to continue, going forward, as the impact of the increased investment on earnings is felt.

    I also noticed a strange anomaly in the company's finance costs. At the year end, gross borrowing (see note 15) stood at $314.2m and cash and short-term investments (note 14) totalled $154.9 - yet borrowing costs were $11.8m... against investment revenues of $13.9m! How does this come about? From note 15, it appears to me that Wilson, Sons is executing a rather cunning carry trade: borrowing at US$ rates well below 5% and investing short term cash at high BRL rates of over 12%.

    Moreover, I observe from note 15 that Wilson, Sons has entered into a superb financing agreement, backed by the Brazilian state, granting access to a large pool for funding for offshore support vessel building:

     

     

     

    Brazilian Economic and Social Development Bank (“BNDES”), as an agent of Brazilian

     

    Merchant Maritime Fund (“FMM”) finances tug boat and platform supply vessel

    construction, in the amount outstanding as of December 31, 2010 of US$198.2 million

    (R$330.2 million) (2009: US$230.6 million (R$401.5 million)). As of December 31, 2010

    the BNDES’s FINAME product mainly finances equipment for logistic operations, US$26.8

    million (R$44.6 million) (2009: US$5.1 million (R$8.9 million)). The amounts outstanding

    at December 31, 2010 are repayable over periods varying up to 21 years. For the part linked

    to US Dollars the loans carry fixed interest rates between 2.64% and 5% per year, whereas

    for the loans denominated in Real, the interest rates are between 4.5% and 14% per year...

     

    ...On September 28, 2010, the Group signed a US$ 670 million Financing Agreement. The

    Financing Agreement is between the joint venture Wilson, Sons Ultratug Offshore and

    BNDES as agent for the Fundo da Marinha Mercante (FMM). The 18 year financing

    includes a three year repayment grace period and is intended for the construction of 13

    Offshore Support Vessels (OSV’s), to be constructed in the Wilson, Sons’ Shipyards.

    The 13 vessels are expected to be delivered between early 2011 and 2015 increasing the

    joint venture fleet to 24 vessels. Construction has already commenced on three of the

    vessels.

     

     

     

    I.E. The group has access to a very substantial pool of low-cost finance (effectively free money, whilst the apparent carry trade continues!), which should lead to ever growing cashflows over the years to come.

    What about currency risk, I hear you ask? ;0) See note 25 d):

     

    The operating cash flows are subject to fluctuation in currency, because they are

    denominated part in Real and part in US Dollars, the proportions of which vary

    according to the characteristics of each business. In general terms, for operating cash

    flows, the Group seeks to neutralize the currency risk by matching assets (receivables)

    and liabilities (payments). Furthermore, the Group seeks to generate an operating cash

    surplus in the same currency in which the debt service of each business is denominated.

    Nice! The note provides a detailed sensitivity analysis of interest rate and currency risks.

     

    Putting the net earnings on a multiple of 20 (recognising the great potential of this business), and deducting net debt of $159.3m, I arrive at a fair valuation for Wilson, Sons' equity of R$28.9 per share - very close to the current share price of R$28.0.

    Ocean Wilsons looks like a good investment to me, trading at a 30% discount to its NAV. I also expect Ocean Wilsons to report some growth in its NAV shortly, as a result of 2010 gains in its investment portolio, comprising roughly 25% of the total NAV (the Wilson Sons shareholding constituting the other 75%).

    Mark

    Disclaimer

    This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.

    LON:OCN^L25

    10 comments

    Create an account
    Avatar for bsharman
    bsharman

    Hey both,

    I bought into Hansa Trust 'A' Ord (LON:HANA) (Hansa Trust) recently - It's on a 34% discount to NAV and 28% of the fund is in Ocean Wilsons Holdings (LON:OCN).

    Access to Ocean Wilsons Holdings (LON:OCN) at a discount and a nice diversified fund which focuses on Value and Special Situations.

    Ben.

    1
    Avatar for rhomboid1
    rhomboid1

    I did look at Hansa but prefer the income characteristics of Ocean Wilsons Holdings (LON:OCN), I'm not convinced that Hansa are competent investment managers frankly , but do like having exposure to Brazil

    0
    Avatar for marben100
    marben100

    Whilst western investors are panicing about global growth, emerging markets are getting on with building their infrastructure and growing very nicely thank you ;0): http://www.investegate.co.uk/Article.aspx?id=201109300955382862P

      

    Wilson Sons Limited ("Company") announces that it has been granted the Environmental License for Installation (LI) from FEPAM (Fundação Estadual de Proteção Ambiental) in relation to building a shipyard facility in the city of Rio Grande (RS). The project area located in the "Superporto" region of Rio Grande, has more than 120,000 square meters and require estimated capital expenditure of R$ 259 million (Two hundred and fifty nine million Brazilian Reais) to develop. When fully operational, we expect the shipyard to create 800 direct and 1,600 indirect jobs. Further approvals are required for the Company to initiate civil works at the site.

    The Wilson, Sons Rio Grande Shipyard will focus on building offshore support vessels to service platforms. When the site is fully developed, the shipyard will have a steel processing capacity of 13,000 tons per year. The new shipyard facility along with the expansion of Wilson, Sons Guarujá (SP) shipyard will increase current capacity fivefold. The expansion of the Company's naval construction capacity will facilitate the strategy of building vessels to meet the demand driven by the growth in the oil and gas industry in Brazil.

     

    [rant]If instead of penalising the offshore oil & gas sector with tax increases and creating uncertainty about future returns, the British government actually encouraged it, we could have similar investment and job creation here.[/rant]

    There is an animation of the new shipyard here: http://www.youtube.com/watch?v=-22r5hfP0Uk&feature=player_profilepage

    Mark

     

    2
    Avatar for rhomboid1
    rhomboid1

    Hi Mark

    Are you still holding? I bought in at an average of 7.70 to give me an income stream non correlated to the uk, I'm happy with the operating company but very unimpressed with the investment portfolio which seems like a very complicated mechanism to give commission to a related party and in return lose money on the resulting investments.

    1
    Avatar for LongbeardRanger
    LongbeardRanger

    Hello rhomboid,

    Interesting you say that, I looked at Ocean Wilsons Holdings (LON:OCN) again recently (having last looked a few yeara ago) for similar reasons to you, i.e. I was attracted by the geographical diversification, and also like the "owner occupied" aspect of the business, but was put off by the investment holding part of the business....so am on the sidelines....

    1
    Avatar for marben100
    marben100

    Hi Rhoboid1,

    After the 2011 results were published and signs of problems with the Brazilian economy became more apparent, I trimmed my holding heavily, in 2012 (retaining a small holding for monitoring purposes). Last month, however, I added back some shares, at a similar level to you, on some signs of improvement to volumes being handled by Wilson Sons.

    I am cautiously optimistic and, as you say, it increases my non-UK exposure, but still a fairly small position.

    I generally report my trades on Twitter @marben100

    Cheers,

    Mark


    1
    Avatar for marben100
    marben100

    Exclusive to Stockopedia readers, I now have some feedback from my Brazilian contacts. :0) Here is their opinion regarding economic conditions in Brazil:

    • There was a certain laxness in economic management, in the run-up to the recent election.
    • However, the concern about this is not so much on the current account deficit, which is manageable, rather on incipient inflation.
    • Whilst the government has been keeping it quiet, it has since the election, been squeezing spending budgets to try to control inflation [interest rates are already very high - 12% currently]. In the short-term, however, we could see a rise towards high-single digit inflation.
    • The strong Real also helps counteract inflation from imports, but doesn't help the current a/c (sucking in more imports). Were it not for constant Central Bank intervention, the Real would undoubtedly go higher still.
    • Some of the imports have been machinery, as well as consumer goods. The former shuld help economic productivity (and hence the current account) going forward.
    • If China sneezes, Brazil will catch a cold. ;0) A consequent upset to commodity prices could have a severe impact on Brazil's economy. My own view, however, is that a collpase in the Chinese economy is not as ilikely as soon of the doomsters would have us believe.

     

    By happy coincidence, I see that another article concerning the Brazilian economy was publihsed in the FT's "BeyondBrics" yesterday. In many respects it concurs with my contact's views. Here is the article's conclusion:

    The central bank is likely to attempt to ensure its anti-inflation credibility is unthreatened, and we should expect at least one or two 25bp hikes in the Selic rate between now and the end of the third quarter. By then, inflation may have peaked and could move back rapidly within the central bank’s target (4.5 per cent +/- 2 percentage points). If the announced fiscal rectitude is maintained, the slowdown in headline inflation should be enough to induce a rapid reversal in interest rate policy, possibly associated with some quantitative measures on credit expansion. If this happens at the same time as progressive change in the Fed’s policy and a reversal in commodity prices, it will immediately create strong downward pressures on the BRL. Brazil has however accumulated very large foreign currency reserves ($315bn at the end of March 2011), which would be useful to ensure that such currency pressures do not translate into a run and that liquidity issues do not become significant.

    Overall, a return of the BRL to a more competitive level of R$2.10-2.30 to the dollar, associated with slightly lower real interest rates, would create a far better environment for both cyclical and structural development of the country. As always, the challenge is to move from here to there while managing the potential impact of highly volatile capital movements.

     

    In one respect this would be negative for Wilson Sons, in that it would reduce the benefit the company currently gets from high levels of imports. OTOH, it would bring down personnel costs considerablly, when expressed in US$ (which much of Wilson Sons' income is denominated in). In the longer run, this would lead to a more sustainable situation. Another impact, obviously, would be that the GB£ denominated value of Ocean Wilson's stake in Wilson Sons would reduce - so perhaps the discount to NAV is not really quite as high as it seems. ;0)

    There is one aspect of Apotheker's article that I disagree with, to some extent:

    Higher rates are weighing down on investment spending...

     

    As we've seen, in Wilson Sons' case, businesses with US$ revenues may be able to borrow in US$, at US$ rates, to fund industrial investments. The high BRL certaintly hasn't hindered Wilson Sons' CAPEX plans! I can imagine, however, that this option may not be so easy for small manufacturers, especially those serving the local economy.

    Mark

    6
    Avatar for marben100
    marben100

    Q1 IMS just released. It appears that Wilson Sons is delivering on its promise of growth:

    Revenue for the three months ended 31 March 2011 was US$156.6 million up 29.0% on the comparative period in 2010 (US$121.4 million) due to growth in terminal, shipyard and logistics revenue. Terminal revenue benefitted from strong results from our oil & gas support business, Brasco and improved sales mix at our container terminals.  All the Group's sales are derived from our Brazilian operations held through Wilson Sons Limited.

     Operating profit at Wilson Sons Limited for the period rose 89% to  US$27.1 million (2010: US$14.3 million) driven by higher operating margins at their terminal business and a credit of US$5.8 million for the period (2010: US$1.5 million charge) in respect of the Wilson Sons Limited share based payment expense...

     

    Wilson Sons' Q1 report is available here: http://wilsonsons.riweb.com.br/ShowResultado.aspx?IdResultado=EAViLRlJO/UGpfNUwYDUbg==

    There is a conference call by Wilson, Sons at 4pm BST today (accessible from the same webpage).

    Some highlights from the earnings report:

     

    ...Today, we are also unveiling our investment plan for the next 7 years. Our current plan is to invest USD 1.8 billion in the growth of our port, logistics and maritime infrastructure. This investment plan is for the organic growth of existing businesses supporting international trade, oil and gas, and the Brazilian domestic economy. We believe that the current expansion of our fleet, the container terminal in Salvador, and doubling of our shipbuilding capacity in Guarujá demonstrates our commitment to create value for our shareholders. The realisation of this investment plan will expand Wilson, Sons’ ability to deliver services of the highest quality...

    ...Brasco revenue growth was an exceptional 120.0% compared to 1Q10, with both exploration and production activities increasing across our existing long-term clients.

    Cashflow this quarter was a little disappointing, with operating cashflow of US$20.8m vs US$29.8m for 1Q10. A significant part of this decrease is due to a big increase in tax paid this quarter.

    However, this report maybe of some concern regarding the Brazilian economy:

    Brazil's current account deficit ballooned to a record for the month of March as foreign companies in Brazil sent more profits home and Brazilians spent more on travel and goods overseas. In January, the International Monetary Fund warned fiscal balances in Brazil, China and India were weaker than it had earlier projected.

    Wilson Sons has benefitted from growing imports:

     

    Container terminals revenues rose for the quarter with stable volumes and a strong Real stimulating higher-yielding imports which, in turn, favoured warehousing revenues

    I am seeking the views of my Brazilian contacts on Brazil's current account deficit.

    Mark

    6
    Avatar for marben100
    marben100

    PS: IMO concerns about the deficit have resulted in the Brazilian stock market generally being oversold, now trading on a P/E of 11.9 and a yield of 3.9% vs figures of 13.9 and 2.9% for the UK market, according to the FT data archive. I have therefore added some £JPB today to my holding of Ishares Msci Brazil (LON:IBZL) (which I had trimmed a little, for portfolio balance, earlier in the year). Thanks, SirL, for suggesting the JP Morgan trust, which is less dominated by commodites than the ETF and the BOVESPA generally.

    NB, despite a general market selloff, Wilson Sons' shares remain strong in Sao Paulo, and Ocean Wilson's NAV/share now stands at 1853p (using the SP market price to value its controlling stake in Wilson Sons), according to my calculations.

    3
    Avatar for marben100
    marben100

    Ocean Wilsons' final results published this morning. They show an increase in the value of the investment portfolio from US$245.2 million at 31 December 2009 to $263.4million at year end. Including the stake in Wilson, Sons, that results in an NAV/share of 1,698p at current exchange rates. The dividend is maintained at USc 42 per share, offering a yield of 2.2% at the current SP.

    NAV and yield according to my calculations, which may contain errors!

    Mark

    1
    Get the free newsletter