So, I think I have mentioned Stolt before - and I must admit that I sort of like Norwegian shipping companies. It is a particular expertise of these crazy Scandinavians (Moller-Maersk is Danish, but they crowns were in personal union for about five hundred years before the Napoleonic settlement saw Norway handed to the Swedes for a century). Norwegians also operate Wallenius Willhemsen, which is a very interesting freight company that specializes in automotive transport and is moving from specialized ships (and the cost and efficiency there) to whole solutions end to end, which is pretty smart.
A company that already does this, though is Stolt-Nielsen; still controlled by the founding family, the sons of the late founder, it has had its challenges like so many other freight companies. The specialties of Stolt are chemicals transport, and this they manage, often on very long term contracts, on either a stage or an end to end basis. Because 70% or so of their volume is contract (COA) they have stable revenues and can therefore manage some higher debt levels than many of the competitors, it also means that even when, during the weakness in shipping that has seen massive consolidation in say dry bulk shipping, Stolt has been profitable. They operate deep sea Tankers (specialized with multiple compartments to be able to handle multiple different chemicals), barges for inland shipping, Tank Containers (these are basically container frames with a tank inside of them instead of a box; they are much safer and cheaper, actually than the alternative, which is the liner inside of a standard container, and of course, they are fully intermodal, so rail or truck work for these as well. The also operate the storage terminals that are the lifeblood of the system - so managing chemicals that need to be offloaded for the tank containers to be reused or for the vessels so they can reload. These are very long-term assets and they are rare, at least in the locations that really matter (like Houston).
Finally, they have a fish technology, focused on land aquaculture - basically an indoor, above ground fish farm focused on turbot and sole. this business lost money for some time but lately has managed to be consistently profitable as they believe they have finally "cracked the code". There is considerable environmental benefit, actually, as it reduces demand on sea-based aquaculture and also generates fertilizer and another useful by-products. They are gaining share and are able to power much of the facility with solar, as they tend to place them in pretty sunny areas.
For capital renewal, they have filed to publicly list the tanker biz, though they have declined to do it so far. There is a reason they plan to do this. More on this in a minute. They also have looked to list the fish business as a stub. Both are a means to access more capital for their core strategy which they finally admitted in full in todays' results. The business has done ok, in a tough environment but has finally started to show the real EBITDA earning power that is there. Even so, the sector remains somewhat stressed. You can see that EBITDA is rising and debt levels are really starting to fall, and if 1Q beats last year EBITDA by 20-30m they will be well on their way to $600m EBITDA, interest coverage of 5x, lower debt and just all-around improved ratios. This can give them the power to reload for the next phase of the plan.
Their goal has been to consolidate and in today's chart it is evident why this is so:
They have 10% share of a market and believe that consolidation is going to be the future here. Shipping has earned, by their own admission, poor returns over the past 20 years. Many of the smaller players are poor operating stubs from hedge funds that saw shipping as a carry trade. In fairness, management has been pursuing this strategy with JVs and also by acquiring some other solid operators, like JO Tankers. That has caused debt levels to be higher than expected, but I now expect that they will be opportunistic and strategic buyers over the next five years. I expect that they can use their size and balance sheet and operating advantages to grow their share of the market - whether through having a disproportionate share of Newbuildings (note the middle graph with the tonnage shares) and through deals (and a possible listing of the deep sea business, which offers them the potential benefits of low cost equity AND the ability to hold themselves out to financial investors in the future as a kind of "tanker trust" - for that hedge fund that wants a market exposure to shipping but not the operational headaches:
Stolt is probably the only player in the space with this many strategic options. A fair question is whether this is going to be a great space in the future. I cannot say for sure. I believe that chemicals will remain immensely important to (post)modern life and that transport of those chemicals - ideally in ways that are seen as environmentally friendly (no FIJI water, please) - will be important. Transport of the chemicals means better distribution, but also manufacturing and refining of those chemicals in fewer, more efficient sites than otherwise would be necessary. Again, Stolt is probably in the best position to modernize its fleet, not only does it have certain economies and efficiencies, itis a strategic industry in Norway, a place known for generous subsidies for green projects:
So, what could this / is this worth? Well, I think forward EBITDA is likely to come in around $600m, though I confess that most of the risk there is to the downside. But EBITDA now is finally over the $150m threshold, and trailing 12 month is $538m, which means that even with some seasonally weak quarters, NTM can still get close. There's about $2.3bn in net debt, tho that has been on a downward trend of late and seems likely to continue (except if they start buying other firms, but then revenue is likely to rise and profits are likely to go with it). And the market value is about $850m or so, for an EV of $3.2bn, which is roughly 5.3x. EV / EBITDA (forward, assuming the $600m). That is not exactly expensive. Lower debt and improved operations, I think, could see - a restoration of the $1 dividend (something management is committed to), further balance sheet enhancements and possibly a higher rating from the market. No guarantee, but could a more profitable growing company in a long-cycle business see a few turns or at least one, even as EBITDA rises? If so, could we see a 2x of this in the next 12-18 months; from rising EBITDA, lower debt and lightly expanded multiple? Say $200m from debt reduction, $200m from expectations of further forward EBITDA and a half turn of multiple expansion, if only from yield hungry investors being willing to accept a 3-4% yield?
The risks, of course, are inflation - that multiples contract. This is a risk, but honestly, how much could they contract from here? Take out a turn and the equity goes to $200m, at which point, buybacks and speculators would surely be on the table. The dividend yield would be, what 12% even at $0.50... Seems unlikely. Also, if that happens, it means competitors should be available pretty cheaply, too and so their ability to increase operations and share would increase.
Moreover, many of their costs are actually pretty stable - their assets, purchased at legacy prices are likely to retain much of their value, and some things, like the land they have, are just more and more wealthy as they go. So. I see this as pretty asymmetrical - I think they are in a key industry, I think they have very smart operations and a very good operating model and I think that bigness will give them an advantage going forward.
It's not conventional, but I like being paid while I wait and I think that like many long-cycle industries, this is one that has been punished for the time it has taken to turn the ship around, even though theirs was always sailing a profitable course.
I am long and have been for some time, and I think we are on the cusp of seeing this break out, so there is a chance to get in here at a very fair valuation and experience some pretty nice gains.
