Wilson, Sons: Benefiting from Brazilian Oil and Gas Boom (Bovespa-WSON)
Rapidly Growth with a Small Cap Brazilian container terminal and towing company
Wilson, Sons (Bovespa-WSON, $13.35 US)
Brazil is on the verge of a new era in offshore oil and gas development. Speculation abounds that one, or more, of the largest discoveries in the last 25 years has been found in Brazilian waters. While one elephant sized field is generally all that is required to turn a company into an oil "major", concessions largely owned by Petroleo Brasileiro S.A, or Petrobras (nyse: PBR $70.5), the Brazilian oil company, may potentially be home to an entire herd of elephants. Ultimately, production from the Campos, Santos and Espirito Santos basins may rival that of the North Sea.
Oil production from the new deepwater finds isn't likely to commence before 2011. However, companies that provide infrastructure to offshore rigs are already profiting from recently awarded contracts. Petrobras, as a partially state owned firm, has an informal mandate to distribute oil wealth throughout the domestic economy. Brazilian companies that supply goods and services to Petrobras will be first in line to benefit from this corporate largesse. Just as in other rushes, owning low risk businesses which provide "picks to prospectors" might, once again, represent an easy way to earn big returns over the long haul.
One local firm positioned to profit from this boom is Wilson, Sons (Bovespa-WSON11, 21.8 Brazilian Real). All amounts are converted from Brazilian Real to US dollars. The company operates two container terminals and an oil terminal, builds and owns drilling supply vessels (DSV) and owns the largest and most modern towing fleet in South America. A fast growing logistics division manages 1.5 million square feet of warehouses, and handles shipping and storage for a variety of multinational and domestic companies. The company was founded in 1837 and raised $117.8 million in an IPO on the Sao Paulo Stock exchange in April 2007. Wilson's Brazilian Depository Receipts (BDRs), were listed at a price of $11.74 US, 10.6X the trailing 2007 EV/EBITDA ratio.
Perhaps due to its limited history as a public company, this rapidly growing small cap is priced at what I consider to be value multiples. The discount certainly can't be attributed to a weak balance sheet. Total liabilities were just $55.6 million on March 31, 2008. There are 71.2 million shares outstanding for the market cap is $950 million. From 2005-2007 revenues grew from $258 million to $404 million, an annualized increase of 18.9%. EBITDA grew from $49 to $91.4 million, an annualized increase of 28.8%. Net profits grew from $25 million to $57.8 million, an annualized increase of 43.8% over the past 36 months.
With funds raised from the IPO, management embarked upon a major expansion of all operations. $220 million of capital spending is planned for 2007-2008. This represents a substantial increase over the $78.4 million invested in the two years preceding the IPO. Port handling capacity will increase by 55%, to 1.4 million twenty foot equivalent units (TEU) per year, up from .9 million TEU in 2007. The terminals had been running above capacity and had turned away substantial business in the past. Much of the newly added capacity will be immediately utilized.
Expansion plans in other divisions are equally well defined. Wilson is adding 12% more towing vessels to its fleet this year. The wholly owned DSV fleet will grow by more than 130% in size by 2010. All supply boats will be chartered to Petrobras. A $100 million four year contract to build supply vessels for a Chilean firm has recently been awarded. Petrobras has also announced a new 24 DSV tender. Wilson intends to bid for a further 8 vessels in this round, the maximum award any one company can receive per bidding round. Additional tenders for 122 more DSVs are likely during the next 6 years.
The expansion of high profit container ports, offshore platform supply businesses and towing services should produce strong revenue gains and improved operating margins. By 2011, revenues could exceed $610 million. EBITDA may surpass $180 million. If my forecast is met, three year EBITDA growth of 96% is possible, on revenue gains of 51%.
Despite all this potential, Wilson, Sons sells at valuations below that of slower growing peers. Trico Marine (nasdaq: TRMA, $38.39), Hornbeck Offshore (nyse: HOS, $52.70) and Gulfmark Offshore (nyse: GLF, $61.57) sell for 10.5X, 9.9X and 10.5X my 2008 forecast EV/EBITDA ratio. Wilson could generate $110 million of EBITDA in 2008, which prices the shares at 9.1X my forecast EV/EBITDA ratio. Arguably, a faster growing company with a stronger balance sheet than peers deserves a premium valuation.
I prefer owning overlooked companies capable of doubling earnings in three years, without leveraging up their balance sheets. Wilson nicely meets my criteria. Net profits may grow to $120 million by 2011. Management intends to pay out 25% of net annual profits in the form of dividends. The current payout of $.225 per share (1.8%) could increase by 100% by 2011. My three year price target is $26.80 per share, roughly 102% above the current quote.
Wealthy people often attribute success to simply being in the right place at the right time. If this is the case for individuals, can't this also be true for entire companies? It certainly appears to me that Wilson, Sons, a fast growing firm prior to the Petrobras discoveries, is about to embark upon an extended run of good fortune. The biggest two year capital expenditure program in corporate history will be completed by late 2008. Results of these investments should be apparent to all in 2009. Furthermore, Wilson's logistics division should produce superior returns as the Brazilian economy prospers. Finally, as a local company, Wilson will have the important "home field" advantage over foreign competitors, when attempting to generate more business with Petrobras. Intrepid global investors will find this small cap stock to be right up their alley
Wilson, Sons can be purchased by a wide variety of brokerage firms. I was able to place an order with my full service broker as easily as with any other foreign. The shares trade on the Bovespa (Sao Paulo Stock Exchange) in Brazil under the ticker symbol WSON11. Shares are quoted in Brazilian Reals and converted to US funds at purchase. The corporate website can be found at www.wilsonsons.com