4
Feb
2017

Thoughts on ports

One explanation for populist politics is that globalisation has created more losers than winners. Most people have not benefited, but the few that have done well, very well indeed. Taking the side of the losers (who are in the majority), is going to be a promising path to political power.  

I’m not so interested in populist politics.  But I think what is true for people, is also true for businesses.  Most have been losers from globalisation, but a few have done very well indeed. And I’m interested in the characteristics of the few companies that have done very well.
So I looked at a couple of companies, that might reasonably be expected to benefit from globalisation and trade. Over the last 20 years one has benefited from globalisation, and become a 16 bagger and the other one hasn’t. An economists would say that markets are “efficient” and you can’t know this in advance…But time and again economists have disagreed with reality, I am not interested in their elegant theories, I’m much more interested in how the world really works.

For me, if I can make 16x my money investing in one company, and not gain anything by investing in something similar, then it is worth ignoring economic “experts”. Maybe you can’t identify “baggers” with 100% certainty, but it’s worth trying to list some heuristics that could tilt the odds in your favour.
The two companies are Ocean Wilsons and Braemar  (previously Braemar Seascope). They are both in the shipping and logistics business. As world trade has grown faster than economic growth, they both ought to have gained from globalisation. But there are subtle differences, which meant one company did 16 times better than the other one. Compare and contrast:

Ocean Wilsons / Wilson sons

Ocean Wilsons Brazilian business was originally founded in 1837 by two Scottish brothers, Edward and Fleetwood Pellew Wilson who opened a maritime services and coal business in Salvador, Brazil.
Wilson Sons is now one of Brazil’s largest port and logistics companies. The Group operates the Tecon Rio Grande container terminal in Rio Grande, Rio Grande do Sul, and the Tecon Salvador container terminal in Salvador Bahia. Both terminals are operated under 25 year concessions from the port authorities granted respectively in 1997 and 2000 with the possibility of an additional 25 years.
The corporate structure is slightly complicated, because in 2007 some of Wilsons Sons equity was listed on the Sao Paolo Stock Exchange, but Ocean Wilsons retains a majority 58.25% holding in Wilson Sons. The rest of Ocean Wilsons is a portfolio of emerging market investments.

Braemar Shipping Services

Cory Brothers has operated in ship agency and logistics for more than 150 years. It started as a business at Cardiff docks, exporting coal and shipbroking. But is now part of Braemar Shipping Services.
Braemar was a shipbroker (ie they chartered ships) that was founded in 1986. 15 years later, it was bought by Seascope (founded in 1972), which also had a background in shipbroking. The price paid by Seascope was £7.3m (which was 20% of the enlarged group). Although Braemar was the smaller business, the name was later changed to Braemar Shipping Services. Now the company is split into 3 divisions: i) Shipbroking, ii) Technical (loss adjusting, marine engineering, vessel design and environmental consultancy) and iii) a Logistics business that trades as Cory Brothers.
Braemar is one of the largest chartering and shipbroking companies in the world with 16 offices spread across the globe.

Same, same but different

OCS and BMS seem pretty similar. They ought to benefit from similar trends in globalisation and maybe also rising oil prices.
Except not. One of the companies is now (February 2016) is at the same level it was in 1998.
The other company’s share price also trod water between January 1995 and early 2003. But from 2003 has since doubled. And doubled again. And doubled again. AND DOUBLED AGAIN. Now in (February 2016) it is a 16 bagger.

Which company is the winner – and were there any clues in the Annual Reports?

No one seems to be doing this sort of analysis. All professional equity analysts are paid by banks to build valuation models and write reports with 12 month target prices with 20% upside (and much more rarely sell notes with 20% downside).  Because no one is paying me, I’m an amateur.  Other people paint soldiers, or go fishing.  My hobby is researching “baggers”… 

But which company did 16x better? 

The key to thinking about this is competitive advantage: Ocean Wilsons has a subtle advantage. It owns the lease to operate ports in Brazil. And ports can have subtly good advantages for investors, it is a franchise (an authorization granted by a government to a company, enabling the company to carry out specified commercial activities.) Although Cory Brothers / Braemar started out in Cardiff docks, it no longer has the port concession.
Other “baggers” that I have looked at have an obvious competitive advantage. They are eating someone else’s lunch. Rightmove explained clearly in their 2009 Annual Report how they were not competing with estate agents, they were competing with local newspapers, which used to make decent money from estate agents paying to advertise property in them. This advertising was now moving online, to Rightmove (not to online local newspapers). It is not subtle – they are obvious.
Another example is online clothes retailing by ASOS. If people began to buy clothes online then this would clearly threatened the high street – once it had proof of concept. They made it obvious for anyone who read their Annual Report.
But ports are a different type of competitive advantage. You have very little choice if you want to ship stuff around the world. You have to use ports. It’s like a toll road that you have to use. And tolls have existed since antiquity. When making their case to investors, Ocean Wilsons is not being disruptive like ASOS and Rightmove. But if you read the Annual Reports, the management make it clear that they operate a valuable franchise.
One thing I’ve noticed, is that companies that have a competitive advantage, don’t always feel the need to be over optimistic and relentlessly upbeat.  Google does not like to point out that its business has monopoly like characteristics. Instead good companies are often quite open about the difficulties and challenges that they face. It hasn’t been all plain sailing for Ocean Wilsons.  If anything Braemar management seem more upbeat – despite not having nearly such good prospects.

Compare for example, the outlook statements for both companies in 2000, 2002 and 2003.

Future Prospects

2000
Ocean Wilsons

Trading results for the first quarter in 2001 are down on the corresponding period for 2000, principally due to a decline in port movements in Brazil. Since the year end the $Real has devalued a further 16% against the US dollar to 2.26. The results for the current year may be very adversely impacted if the current unexpected weakness in the currency persists. New investments for 2001 include a new distribution centre under construction at Campinas in the state of Sao Paulo. The booming oil and gas market in Brazil continues to present opportunities for the Group. We were successful in a public tender to operate a platform supply vessel (PSV) for Petrobras, the Brazilian state oil company. Our associate company Brasco with our Scottish partner, ASCO plc., which provides logistic services to the oil industry is producing encouraging results.

Braemar
We feel that whilst 1999 was disappointing for shipping as a whole, in 2000 we shall participate in markets enjoying varying degrees of recovery. In this respect, it is encouraging to note some of the quoted tanker owners’ improved performance with their share prices close to 12 month highs. In conclusion, with the values of tankers and their charter rates climbing we can only be optimistic about the outlook for the current year – analysts are even speculating about a major freight rate spike in the next 18 months.

  • Then skip forward two years, for the 2002 Annual Results.

2002-3
Ocean Wilsons
The underlying business remains strong with results for the first quarter in 2003 significantly ahead of the corresponding period in 2002. Management is succeeding in linking the necessary portion of invoicing to the US Dollar exchange rate to service the Group’s capital investment. The Brazilian economy is showing encouraging signs of improvement. Investors have responded positively to the new government prompting a sharp rally in Brazilian assets. The monetary and fiscal policy decisions adopted so far have smoothed market concerns. As a result the $Real is undergoing a revaluation trend since year end, strengthening 16% against the US Dollar to 3.04. Were this level to be maintained at year end, this would generate significant exchange gains in the profit and loss account and increase the tax payable.
Braemar
‘The overall result for 2002-3 demonstrates the new Group’s breadth and resilience in what for much of the year was a weak shipping market.’
‘As anticipated, in the aftermath of the war in Iraq and the resumption of oil exports from Venezuela we have witnessed a noticeable softening of tanker freight rates. This trend is likely to continue while consuming nations use up extra stocks, built up in the preceding months as protection against supply interruptions, which in the event did not materialise.’
‘The recovery in the Dry Cargo market has continued and freight rates are now at their highest level for many years with the outlook remaining positive.’

  • And now look at the 2003-4 commentary below. 

 

2003-4
Ocean Wilsons
The Group entered 2004 in its strongest position for many years, and is expecting to benefit from the management actions it took last year as well as the continued improvements in the performance of the Brazilian export sector. In 2004, the Board is reviewing a number of further opportunities for organic investment including further investment in Platform Supply Vessels to serve the offshore oil and gas industry and expansion of the Tecon Rio Grande container terminal. Results for the first quarter of 2004 have made good underlying progress, but are below the corresponding period in 2003 due to changes in federal tax legislation. The $Real continues to trade around 2.90 to the US Dollar, similar to its year end level.

  • Ocean Wilsons first sentence tells anyone who is reading that it is in “its strongest position for many years”. This is just around the time the share price really took off – and the management told you.  
  • See Ocean Wilsons share price chart, in log scale.  Click on the chart to see that the share price went from 60p in 2003 to well over £10 a decade later.  A sixteen bagger!

 

  • Braemar on the other hand, is upbeat as well. But they just talk about broadening their business.

Braemar
The strength in the shipping markets is underpinned by the increased demand for raw materials and oil. We view the outlook positively across all our major broking areas. If these conditions persist, and provided there is no adverse exchange rate impact, broking should continue to prosper, particularly Dry Cargo and Newbuilding. In addition the first half of 2004/5 will benefit from the significant volume of second hand sale and purchase business concluded in the final quarter of 2003/4 but for delivery in the current year.
Increasingly there are opportunities to broaden our business within shipping and we therefore expect to continue expanding geographically and through the enhancement of our existing teams. We remain committed to the development of other shipping services where we can add value.

  •  And the Braemar share price goes nowhere.

Could a computer learn to do this?

Now the question I find interesting – could this be automated? Could an AI machine read the statements and pick up when a company has a valuable franchise? Could a computer detect any sort of signal, not in the numbers, but in the management commentary. I don’t know. It seems clear to me that a simple “sentiment analysis” would not work, because the company with worse prospects is more upbeat.

But actually I don’t think it is that complicated.  It doesn’t need a machine. A human being just needs to think about it a bit, and learn from the past.
And the past shows that ports tend to reward investors handsomely. In 1983 Associated British Ports was privatised by the Thatcher Government at 112p. Of the privatisations, ABP was the most profitable by far, according to Lord John Lee. It has gone on to be a 70 bagger, before being bought in 2006 by a consortium led by Goldman Sachs offered £2.795 billion.
The conclusions is that you don’t need to be global to benefit from globalisation.  You just need a valuable local franchise.

Note for lawyers and regulators: The author own shares in Ocean Wilsons Holdings.

Charts from stockopedia

Leave a Reply