This is a recommendation to Buy shares of Oslo-listed Aker Philadelphia Shipyard, ticker AKPS NO Equity on blooomberg. My guess is that I wish I could received $1 for every Q&A comment on regulatory risk -- specifically the oil export ban and the Jones Act.
Aker Philadelphia Shipyard (or “Aker Philadelphia” or “AKPS”) possesses many of the attributes of a lucrative value stock: a company majority owned and controlled by a rags-to-riches risk-taking Norwegian high school-dropout-with-Dyslexia-turned-billionaire-tycoon, accounting results that materially obfuscate the business trajectory, domestic small capitalization traded on a foreign exchange, confusing ownership structure with several brother/sister companies, still largely owned by a foreign entity (~70%), significantly underreported backlog on a contract dollar basis, shift in business model that will drive significant earnings growth – and into a business line where earnings are valued at a higher multiple, with near-term catalysts of soon-to-be-initiated dividend payments on common shares and Apollo recently acquiring 12% of shares that further tighten float given they're not traders. Tickers are AKRRF in US OTC (very, very illiquid), and AKPS in Oslo.
Accounting results obfuscate actual business trajectory:
Q3 2013 results appear abysmal – revenues and EBITDA down YoY 50% and 70%, respectively. But, this is entirely influenced by the fact that the company delivered a product tanker in August 2012 that it had previously built for its own account (zero revenues recognized during construction, 100% realized at time of sale), whereas today the company’s building capacity is on a contracted basis with revenues recognized per percentage of completion. A better indication of revenues and margins would be to note that $109mm in Q3 2012 revenues was entirely from just the sale of one vessel (recall the second vessel, delivered in Jan 2013, was also built for Aker’s own account so had no associated revenue recognition until time of sale and delivery), while the company today is selling these ships for $125mm each ($500/4). Kinder’s purchase price implies $138mm per ship (same size product tankers as well). NASSCO’s backlog includes the 4 ships on order in the 9-ship Kinder purchase, with 2015 and 2016 deliveries targeted, with NASSCO‘s per ship contract value cited by a 3rd
party source at $130mm/vessel (http://gcaptain.com/jones-act-us-crude-productio/
Also, a profit-share agreement resulted in the entire PV of a signed thee-year charter being recognized in Q3 ’12, and no revenues thereafter until a new lease is signed at expiry, despite disclosed $2.9mm/year in cash receipts from this arranged over next 3 years (3yr lease at ~$60,000/day rate). This arrangement is on the two ships (17 and 18) built on spec that Crowley purchased, as the profit share is reported on a present value basis for life of the leased time charter ($3.3mm in Q4 ’12 for vessel 17 and $3.2mm for Q1 ’13 for vessel 18). Discount rate here is roughly 10% based on investor ppt that shows $2.9mm/year total for both ships, quarterly reports indicate these were signed for 3 years. Releasing these at $80,000 rate at the end of their term would triple annual profit share from $2.9mm to $9mm/year.
Domestic Small Cap traded in Oslo: AKPS is a U.S. company that hardly trades on the OTC bulletin board (average 3 month daily volumes is about 700/day) float is virtually non-existent, with avg 3mo daily volume of about 700 shares, Oslo shares are of course more liquid, relatively. Oslo-listed shares trade about 24,000 per day, but that still represents roughly USD $700,000 of daily trading as the Oslo price of NOK 180/share.
Confusing ownership structure with similarly named brother/sister entities, controlled by Norwegian tycoon:
- Ownership and control. Aker Philadelphia is 71% owned and controlled by Aker through Converto Capital Fund. Aker is a Norwegian conglomerate largely owned and controlled (67% ownership), a Norwegian billionaire – 55-year old Kjell Rokke – ranked #458 globally on Forbes list. Aker ASA has reported NAV of about $3.5B in USD (at USD:NOK of 0.16), with “financial investments” representing about a third of that value, or $1.2B and Aker Philadelphia representing ~$200mm at today’s ~USD $30/share (NOK 180/share). Aker ASA has numerous investments in “Aker”-named operating and controlled financial investments. Market cap is $320mm USD at current share price of roughly $30/share USD, given 10.7mm shares outstanding. Other entities that Aker ASA has interest in include Aker Solutions and Aker Biosciences, and Aker ASA itself is traded in Norway as well.
- So Who is Kjell Rokke? According to the book “Billion-Dollar Fish: The Untold Story of Alaska Pollock” by Kevin M. Bailey, Rokke grew up in Norway and was a high school drop at age 16 who suffers from Dyslexia. As the story goes, his parents, fearing he was heading nowhere in life, landed him a job on a fishing boat. He worked his way up the responsibility ladder and ultimately emigrated to the US and bought his first boat in 1982, utilizing Pollock fishing skills he had acquired in the Bearing Sea. The book cites Rokke as one of the earliest to convert American built tankers to Pollock trawlers and processors (the conversion apparently was done abroad, at a cheaper cost, while still complying with US legislation once converted), which became the backbone assets of his company American Seafoods. Rokke is described as a risk-taker: His American Seafood company was entirely leveraged to the success of the Pollock fishing industry (Pollock is used in all fast food fish offerings: patties, fish sticks, popcorn fish, etc – no disrespect to tuna, it’s the chicken of the sea) which took off, and as another example in 2011 he recapitalized Aker Philadelphia and ordered 2 ships to be built on spec at a time when day rates and demand were so robust – this is the controlling shareholder and it should not be forgotten that he’s been both lucky and good.
- Back to Aker Philadelphia. In 2011, Rokke installed his son, Kristina Rokke (27 yrs old at the time), as CEO of Aker Philadelphia. Kristian Rokke is a US citizen, born in Washington state, and is currently attending Wharton’s Exec MBA program, and worked at the Shipyard in white collar roles since 2007. His prior schooling includes Colby College for Undergrad, as well as London School of Econ and Norwegian School of Management. He/the company is humble enough to attribute much of the company’s recent good fortunes to luck, “Some say, “Better lucky than smart.” Although we rely on in-depth analysis and hard work rather than luck, there is probably some truth to the saying in this event. Regardless, it all came together positively for our stakeholders…” (2012 Annual report, page 7) but remains committed to maximizing the opportunity by continuing to move down the cost curve with each produced vessel. There is plenty of press on the younger Rokke, especially on his taking the helm at AKPS, here’s a decent article: http://articles.philly.com/2011-05-22/business/29571380_1_aker-asa-kjell-inge-rokke-vessels
Aker Philadelphia Shipyard’s EBITDA will significant shift from entirely shipbuilding to largely shipping: has just recently begun construction of the first of 4 product tanker vessels for Crowley. Crowley is paying 75% of the construction costs and Aker 25%, through a JV arrangement. AKPS will realize at 49.9% economic interest in each ship once they are leased, bringing significant economics to the AKPS entity. At $90,000/day time charter rates, each ship will bring $7mm in annual EBITDA to AKPS. Note that today rates are 10-20% higher, based on some headlines such as Exxon releasing at product tanker for 6 months at $110,000/day. Moreover, Hull 17 and 18, product tankers built on AKPS’s own account on a speculative basis, were also sold to Crowley with a profit share agreement. Rates are likely up 50% to 100% since these ships were signed to 3-year leases (which will expire Q4 ’15 and Q1 ’16, so a ways to go for now), but at $90,000/day AKPS would realize $6mm/ship vs. $1.5mm under the current rate lease. AKPS also has the option on 4 additional product tankers with Crowley under the same 49.9% economic arrangement, and the ability to execute a similar arrangement with the existing 17 and 18 ships that are currently just profit share. The ship building business can do 2 vessels per year, at roughly $125mm/vessel, and company is putting up around 10% EBITDA margins. This is a shipyard with a visible runway on $250mm/year in business, so $25mm/year in EBITDA, ignoring any accounting or economic adjustments for the fact that they themselves are in on the next 4 ships at 25%. The shipping business, at current rates (their preference is longer-term leases so Exxon’s $110,000 6-month lease may overstate what Crowley/AKPS could achieve). If we use $90,000/day that’s $28mm in EBITDA according to management, plus another $12mm when they re-lease 17 and 18 currently on the below-market-rate profit-share. Before even getting to the next Crowley 4-ship option AKPS could have economic interest in 6 ships producing $40mm in EBITDA/year. (The market is paying decent multiples on these assets -- Kinder Morgan just paid pro forma 8.1x for 9 Jones Act tankers!).
Shipbuilding business strong, with visible trajectory -- significant backlog through 2018. AKPS’s shipbuilding operations are backlogged through end of year 2018, with 2 container ships on order from Matson. On a dollar basis, this backlog (including recently begun Hull 21 for the first of the 4 vessel Crowley order) represents $1.4B or $1.2B net of AKPS’s $115 in the first $500mm 4-ship order for Crowley and same math for the next 4 on option. This is roughly half of the officially reported backlog of $654mm as of Q3.
Near-term technical catalysts:
- AKPS plans to pay a dividend out of its 2013 account and to continue that practice thereafter. Zero sense from discussion with CFO as to how much, but company could easily support 1.5% yield on today’s market cap (~$300mm) without incurring debt and still servicing capital plans including the $115mm investment for Crowley JV. The company has YTD FCF of $37mm and is doing $5mm-$6mm EBITDA/qtr on $50mm of revenues. AKPS has Q3 ’13 net cash of $46mm (cash + restricted cash less customer advance, less debt, less payables & accrued expenses). All of this is in the context of a company with a market cap of USD $300mm (at ~$29-$30/share).
- Also, Apollo acquired a 12% stake in the company in Oslo, from another financial holder (QVT Financial) – notably, not from Rokke/Aker ASA. Apollo’s stake was mostly acquired through its Special Opportunities Managed Account or “SOMA” in its filings.
Aker Philadelphia shipyard is one of only two Jones Act shipyards currently capable of producing oil tanker ships. The other is General Dynamics’ NASSCO shipyard in San Diego. The shale-driven growth of U.S. oil production has driven down the price of LLS relative to Brent, especially as most of the supply infrastructure sends high quality crude oil from the Bakken (Jan 2014 production of 1.01mm bopd, up 32% YoY based on EIA data), Eagle Ford (Jan 2014 production of 1.25mm bopd, up 49% YoY), and Permian (product of 1.37mm, up 7% YoY) to various Gulf Coast ports, where Refineries have already maximized their input for these oil stocks. The Jones Act, signed into law in 1920, has for nearly a century mandated that any domestic port to domestic port shipping be conducted on U.S. owned, U.S. built, and U.S. crewed ships. Moreover, the crude oil export ban leaves nowhere for the excess supply to go but to be shipped around to west and east coast refineries (where the product now comes in cheaper than world prices).
Aker Philadelphia is located in the Philadelphia Navy Yard section of Philadelphia, south of center city near the sports complex district, along the Delaware River. To refurbish the neglected yard, various government entitites collectively invested $438mm to modnernize and AKPS invested $135mm. AKPS leases the yard on a 99-year lease, for $1/year!!! (source: http://articles.philly.com/2010-12-31/news/26356634_1_aker-philadelphia-shipyard-state-aid-navy-yard) As part of the Master Lease Agreement AKPS must maintain at least 200 employees. As of 2012 year end the shipyard had 984 employees split roughly half between direct and subcontracted.