Description

Wilh. Wilhelmsen (WWI) has been one of the best long-term investments in shipping.  If we compare the long-term return from WWI versus a basket of publicly traded shipping companies (Moller, Evergreen Marine, Mitsui OSK, Yang Ming, Matson, Kirby and Frontline) it is clear.  Since 2000, WWI has had a total return of 13.3% annually versus 10.2% for the shipping basket.  The S&P 500 had a 7.2% annual return over the same time period.  Shippers are very cyclical so there is more volatility than the S&P 500.  The roll-on roll-off (“RoRo”) market that WWI competes in is more stable than other shipping segments.  As evidence of this WWI’s average RoE since 2000 has been 12.3%.

WWI is comprised of a capital light marine operations services segment, Wilhelmsen Maritime Service (“WMS”), the offshore services segment (Norsea and New Energy) and investments in the world’s largest RoRo carrier, Wallenius Wilhelmsen (“WW”) and in the third largest carrier (Hyundai Glovis) via Treasure ASA.  punchcardtrader has a detailed description of WWI’s various segments and investments in his write-up of WWI in 2017.

WWI was founded in 1861 and has operated many types of ships over its years of operations. Currently, WWI focuses on RoRo shipping, automobile and high & heavy (“H&H”) logistics worldwide and providing capital light maritime services for third-party fleets as well as supporting offshore energy exploration and generation.  WWI is controlled by the Norwegian Wilhelmson family and it’s CEO, Thomas Wilhelmsen, is the great-great grandson of the founder.

Return on equity for the core business (WMS) has increased from 6% in 2018 to 23% for 2022 with a return on incremental invested capital (“RoIIC”) of about 30% laid out below.  2017 was the first year after WWI contributed its RoRo assets to form WW and received a 38% stake in the combined entity in return.

WWI’s largest investment largest (representing 33% of WWI’s NAV), WW, which WWIB contributed its RoRo fleet to in 2016, also has increased its return on equity from 7% in 2017 to 44% in 2022 with a cyclically driven RoIIC of 140% over the past 5-years as laid out below. 

The Ro-Ro market that WW competes in has steadily increasing demand from auto and H&H exports from China and supply which is moderately growing and returning to long-term trend growth of 3% by 2027.  See chart below detailing Chinese demand picture[1]:

As a part of the plan to emerge from COVID, China is investing in manufacturing capacity for both auto and high & heavy equipment for export.  Pricing is driven by supply as it is fixed in the short-term.  The current increase in RoRo rates reflects the higher demand than supply for RoRo carriers, see chart below[2]:

Gram Car Carriers expect the higher prices to persist given the modest supply growth.  See the current RoRo orderbook projection below[3]

The projected 7%/year in the next four years will return the fleet to the long-term trend of 3% CAGR.  WW is currently generating a 17% return on invested capital (“RoIC”) in an oligopolistic industry with modest supply growth and robust demand growth.   The current ship utilization is high evidenced by fixed asset turnover increasing from 0.7 in 2019 to 0.98 currently.  WW is largest of the RoRo carriers in a seven player market.

Below is an intrinsic value for WWIB based on the value of the underlying subsidiaries they hold.

What makes WWI and WW interesting are their high returns on equity of 30 – 40% and the factors that have driven this situation, namely Chinese export and modest increases in fleet, are expected to continue over the next few years.  These factors including the oligopolistic nature of the RoRo market, whose participants have settled price fixing charges in the past, should allow for high returns on equity for the next few years if not longer.  The price for entry into this oligopoly is currently only 3x EPS.  Although the specific terminal value for WWIB has considerable uncertainty dependent upon future lease rates, the terminal value is durable as the there are few substitutes for RoRo shipping and the associated rigor of shipping high value cargo across rough seas.

Below is how WWI valuation is compared to comparable RoRo and auto logistics firms:

Of the options to play the RoRo shipping market, WWIB has the highest 5-year net income growth as well as the lowest MVIC/EBITDA and price/earnings.

[1] From WW 3Q presentation, page 8

[2] From Gram Car Carriers 3Q presentation, page 5

[3] From WW 3Q presentation, page 10

Catalyst

Increased RoRo rates will last longer than expected due to increasing demand from China & constrained supply growth