|Shares Out. (in M):||39||P/E||0||0|
|Market Cap (in $M):||398||P/FCF||0||0|
|Net Debt (in $M):||200||EBIT||126||128|
Despite running up with the rest of the market over the last few weeks, shares in Aegean Marine (ANW) have recently sold off, erasing some of the market led gains. The obvious catalyst was the company’s $150mm convert offering last week as covert traders settling into the trade are likely pressuring the stock. Investors have the opportunity to buy a consistently profitable and cash generative business at 4.7x EV/ LTM EBITDA-Capex. Over the coming months, as ANW continues its solid financial performance, we expect that the shares will gradually re-rate offering 20-40% upside from current levels.
The company is engaged in the marine fuel logistics space, serving worldwide as a distributor of marine fuel oil, marine gas oil and lubricants to ships across all sectors within the global Shipping trade. ANW supplies to ships both docked at ports as well as at sea with operations in over 30 markets across the globe. Unlike pure trading companies, the backbone of ANW’s business is the physical supply of product and managing the entire spectrum of the delivery logistics (primarily using its own owned fleet for delivery) and in some locations including most prominently Fujairah in the U.A.E, ANW operates on shore storage facilities.
ANW has grown steadily over the last few years both organically as well as through various capital intensive initiatives including the acquisition of Hess’ East coast operation in the US (2013), the construction of a large storage facility in Fujairah (2014) and continuously seeking out and entering new markets. The major capex is behind it though. More specifically, in a program that was completed several years ago, ANW engaged in a large scale build out of its own fleet. This left the company with a large fixed asset base which it can leverage as it continues to grow volumes from current levels in the 16-17mm tons per annum. At present, the company has no major capital spend requirements on the horizon leaving the company with historically low levels of required capex spend (sub $15mm per annum).
ANW’s growth is demonstrated both in the number of tons distributed per annum as well as in its financial performance which has shown continuously increasing EBITDA. ANW used to direct investor attention to the gross spread it earned per ton (akin to gross profit per ton) but now emphasizes EBITDA per ton. While it is not encouraging to see a decline in gross spread (a few years ago $25/ton was an oft discussed target compared to $20-21/ton level as of late), EBITDA levels in absolute terms leave us comfortable that no matter which way you slice it, the company is continuously generating robust operating cash flow.
Here is a snapshot of historical figures for ANW:
Two notable events have occurred at ANW since August:
On 12/14/16, ANW priced a $150mm convert due 2021 at 4.25% ($14.95 conversion). Proceeds directed toward reducing $40mm of revolving debt, repurchase of existing convert (due 2018) and general corporate purposes.
In August of this year, ANW shocked the market in a good way by announcing plans to acquire 11.3mm shares at a price of $8.81 from founder Dimitris Melissanidis. This represented 20%+ of outstanding shares and eliminated an overhang that had always lurked behind the scenes at ANW, namely the role of Melissanidis at the company as many followers speculated that all decision making of note was coming down the chain from him. This demonstrated the board’s commitment to doing what is best for ANW, especially now with a much more “independent” equity structure than before. From a price standpoint, importantly this was priced 30%+ below tangible book with the majority of assets in the form of cash, inventory and short term trade receivables, all easily liquidated.
ANW is cheap on an earnings basis. Near term cash flows have absorbed some working capital increases but over time we would expect this to normalize and lead to meaningful cash flow generated. On a run rate basis, ANW should hit 17mm+ tons in 2017 and likely continue growing. Below is a sensitivity table showing different EBITDA outcomes at 17mm tons per annum along with valuation for the company at different EV/EBITDA-Capex multiples and EBITDA/ton assumptions:
As noted in the table above, we adjust Net Debt in line with the company to factor in Working Capital given the working capital intensity of distribution businesses such as ANW’s (much of the debt is tied directly to inventory/receivable, both sides of the ledger short term in nature). The adjustment we use is slightly more conservative than ANW’s own adjustment in its presentations and is pasted below:
Two Macro Issues– Upside (sulfur) / Downside (lower oil prices)
There are two major macro issues which impact ANW, one positive and one negative:
On the negative front, lower oil prices over the last few years has reduced the working capital required per ton thereby making smaller operations with less capital than large players like ANW able to more effectively compete. This is certainly a negative and has been repeatedly flagged by ANW on conference calls as a primary driver for lower spreads (resulting from heightened competition). The silver lining though is that the impact of lower oil is not a new or near term issue and within reason has likely played itself out. Accordingly and ironically, oil prices which has been somewhat of an Achilles heel for ANW can be a positive catalyst should prices surge higher (we don’t need this whatsoever for the thesis to remain intact) which would increase the working capital requirements that many smaller operators are simply not equipped to satisfy.
On the very positive front, ANW stands to benefit from increased environmental regulation stemming from the IMO which is looking to reduce sulfur emissions from global ships. In October of this year, the IMO set new requirements, which will require sulfur emissions to fall from the current maximum of 3.5 percent of fuel content to 0.5 percent beginning in 2020. The regulation will increase the complexity of the global fuel logistics market. Large physical suppliers like ANW are well positioned to benefit as this entails a combination of infrastructure (more complex vessels, potential for utilizing on shore storage to blend etc.) and know-how which could push out the many mom and pop operations that compete with ANW, thereby leading to increased spreads over time. The capital that ANW just raised with its convert offering will prove handy for both tuck in acquisitions worldwide but more importantly to capitalize on the IMO edict should there be beneficial capex projects relating to this regulation.
Short pressure from cvt traders levels out
Higher oil prices leads to higher spreads
Continued steady execution
IMO and / or other regulatory bodies push up timelines or increase scope of emission and other regulation
|Entry||12/24/2016 10:14 PM|
Book value of their vessels is 480 million before depreciation - my impression was vessels are scrapped after 20 years on average, implying cap ex of about 24 million annual to maintain their fleet. What gives you confidence longer term maintenance cap ex is lower than this?
|Subject||Re: Cap ex|
|Entry||12/26/2016 12:35 AM|
Xds68- The author's capex estimates are far too low. Management capitalizes the drydocking expenses and in most years actual costs are higher than the estimates. Your assumption about the vessels is basically correct. A fair amount of the vessels are old POS and the company is probably starving them of maintenance capex. Plus, they are usually sold at a loss. Aegean also spent $200M building an on-shore storage facility, which will require millions in maintenance capex. The market bid up the stock in 2015 on the assumption the company will generate a great deal FCF only to see management raise the dividend one penny a share.
|Subject||Re: Re: Cap ex|
|Entry||12/28/2016 01:15 PM|
xds68, while jhu2000 is factually correct, i'm not sure that it really changes the "cheapness" argument even if capex is $24m and not $12m...
|Subject||Re: Re: Re: Cap ex|
|Entry||01/03/2017 11:51 PM|
Agree. See prior thread for lengthier discussion on asset intensity. One can argue for greater "fleet renewal withholding capex" but that would require precise perspective on need to keep full vessels (whereas critique of company historically is they overbuilt and are nowhere near full utilization; I don't have a good sense on actual utilization unfortunately). Even if you want to ding it for more theoretical capex to renew fleet down the road the stock is quite cheap. I used maintenance here to cover what they are actually spending in a world where the M&A / major projects from a few years ago are not currently on the table.
|Entry||01/03/2017 11:58 PM|
Good question on the convert and I don't have an answer as to why they specifically chose a convert over vanilla debt but they did need to bolster balance sheet (convert coming due and smart to issue in lower rate environment). Whether vanilla would have been preferred route can be debated.
Fair point on including interest associated with financing receivables/inventory. If used all interest and deduct from EBITDA on run rate basis you are sub 5.5x not at 7. Would not make sense to use all interest though as good chunk is convert and fixed asset debt so still likely hover close to 5.0x or below.
Regarding using WC for all companies, by all means and many sharp people make that point. I don't know if you need to go that far though but do think it is absolutely appropriate for distribution businesses with quick turns but massive inventory at any point in time (which could easily be liquidated with associated payables and debt paid down if we froze time for a week etc).