We forecast Wilson Sons’ (WSON’s) EBITDA to fall 6% y-o-y this year, still affected by the sluggish Brazilian economy and a tough competitive environment, before rebounding 10% in 2020. However, our Ocean Wilsons (OCN) 2019 forecasts are boosted by good returns in the investment portfolio. The business continues to benefit from the stabilising effect of the diversification of earnings by activity and currency and ownership of its international investment portfolio (OWIL). The current 42% discount to a look-through valuation remains conservative.
The key headwinds that affected WSON’s business in 2018 have largely continued into 2019: weak growth in the Brazilian economy, a slow oil and gas sector, price pressure in port towage and excess capacity in the offshore vessel businesses. As a result, we expect WSON’s FY19 EBITDA to fall 6% y-o-y; this is equivalent to a fall of 15% if we removed the impact of IFRS 16 on 2019 numbers. We see the pressures remaining for the rest of the year before improving in 2020. On the other hand, OCN’s investment portfolio has been performing well and a relatively more stable Brazilian real (FX-related movements had a significant impact on the translation of balance sheet net monetary items, loans and deferred tax in 2018) should help OCN’s earnings in 2019. We forecast FY19 EPS of 107p (FY18: 38p).
Brazilian growth is expected to pick-up in 2020 (the IMF forecasts GDP growth of 2.4%, vs 0.8% in 2019), the oil and gas sector should benefit from further auctions and privatisations, and we expect towage prices to improve as some smaller operators cut their losses. We expect OCN’s EBITDA to improve by 5.1% y-o-y in 2020. The forecast FY20 EPS decline at OCN reflects conservative assumptions regarding the international investment portfolio (OWIL). Subject to political and economic developments, the secular growth story should reassert itself and we look for container volume growth (5–6%) to be about twice the real Brazilian GDP growth in the medium term. WSON has good assets and strong competitive positions in its key business areas.
Valuation: A sizeable discount to look-through value OCN is trading at a 33% discount to its look-through value, which comprises the market value of the stake in WSON and the last reported value for the investment portfolio held by OCN. WSON is trading at EV/EBITDA multiples of 11.8x (2019e) and 8.9x (2020e), more than 20% below its peers despite its relatively depressed profitability. WSON’s P/E ratios at 6.9x and 5.9x are about 25% lower than peers.