2024-01-02 07:30:00 ET
Summary
- Hamburger Hafen's underlying results show weakness and trough, similar to other companies in the sector.
- Political challenges and economic sanctions have led to decreased volumes and limited potential upside in the near term.
- The company has received a takeover offer from MSC, but the deal is not yet finalized, and there may be competing offers.
Dear readers/followers,
In this article, I'm going to be updating on Hamburger Hafen (HHULF). In conjunction with the last published quarterly report and other news, the company gave a massive bounce, which also means that my stake in the company is currently at a solid "green" in terms of returns.
This is not necessarily reflective of the company's underlying results. I would say that the underlying results for the company show the same weakness and trough that other companies in the same sector see here. The company is certainly undervalued - but the question is just how much it is undervalued after bouncing almost 40% since my last article in June of this year.
Political challenges are just one part of the story here. Tensions and economic sanctions mean that volumes are down, and other factors mean that we don't see a significant potential upside in the near term here.
In this article, I'll take a look at the company's 9M23 results, estimate for the full year, and see where things may go in the future.
You can find my last coverage article on Hamburger Hafen here.
Hamburger Hafen - 9M23 with some bright spots, but mostly a downturn
When I covered the peers in Europe in this segment, we saw continued downward pressure for the company. The pressure resulted in a high single-digit decline in volumes in terms of throughput, transport, revenue, and a double-digit decline of almost 58% in EBIT on a YOY basis. Margins collapsed by more than 50%, and after-tax profit declined by almost 95%%.
The company's ROCE for the 9M23 period is less than 4%, which is one of the lowest overall numbers we've seen in a very long time for this company.
What are the reasons for this justifiably called abysmal performance?
We're seeing continued war in Ukraine, ongoing tensions other than Ukraine with shipping and goods to Russia at zero, sticky overall inflation that seems to be holding on in some geographies, and interest rates, despite current patterns, still pushing down on the typical. purchase patterns.
However, the by far biggest piece of news at this time to consider is the takeover offer for the HHLA A class shares by the MSC group. So while we'll get more into results, we'll begin by looking at this particular piece of news.
Hamburger Hafen has been a target for a takeover for some time - and this is obviously especially enhanced with the company's valuation pressured and at a low overall point, which we've been for some time. Remember that while Hamburger Hafen is publically listed, the city of Hamburg has a 50%+ majority stake in the company.
What we have from this MSC offer, the Swiss-based largest container shipping business on earth, is essentially buying half the company in a deal worth at least €1.3B if the terms go through.
This was of course the reason for the company's shares soaring high, and why I am now in the green in my investment.
Should the deal go through, MSC would obtain 49.9% of the company's A-shares.
However, this deal is far from done, which is also why I'm writing this article still as an "open" potential" because things might still happen here.
German logistics is full of large players. One of them is billionaire Klaus-Michael Kuehne, who has already suggested that he prepare a counteroffer, given that his preference would be for an agreement with the city of Hamburg itself for privatization of the company - and he would prefer this be either with Kuehne Holding, his company, or Hapag-Lloyd ( HPGLY ), another company where he owns 30%, and which I have covered not all that long time ago.
The specific cash offer from MSC is €16.75. The current price for the company comes to €16.76 as I am writing this article.
Hamburger Hafen, as far as logistics businesses go, is the "weakest" of the ones I cover. I've specified this in a previous article, where I've pointed to taking on substantial debt which has been driving valuation down in a fairly firm direction. HHLA's ratio of SE/total assets has been moving down, and we've seen margin compression and a growing cost of debt servicing costs deriving from higher and higher interest rates.
The latest set of results does not provide much in the way of future confidence or safety. While throughput is up on a sequential basis, it remains very impaired, and in the way this impacts the company's bottom line, that's not something that's all that pleasant to see.
Rail and road transport is a bit better, with far better EBIT numbers, but still showed ongoing volume declines, with particularly Polish traffic down for the YoY period.
The company did consolidate its intermodal operations in a new company, which managed improved EBIT due to automation and leasing activities, but not to any degree where it would have a major impact on the company's bottom line.
In addition, CapEx is up, due to planned asset additions, which despite all the company's attempts to save cash left Hamburger Hafen with a Financial Fund less FX lower than it was at the beginning of the year.
The company's Guidance is either unimproved or worse in every way that matters, except that the company now expects a slight improvement for CEE.
This in itself is not a problem to me. When I invested in the company, I fully expected a very long turnaround time, with plenty of downturn potential in the short term. That's why I invest step-by-step.
When something like this happens, and it has happened 2 times to different companies this year, it's the equivalent of a curve ball, and I need to re-evaluate. If you recall my last article, you'll know that I set a relatively conservative PT, but one that's not all that far from the current company share price - so looking at the valuation here is not only relevant, it's crucial. If it's conceivable that the company has reached as far as it might here, then it's time to sell and reinvest rather than hold on to see what happens.
Generally speaking, when something like this happens, I more often sell than keep and simply find new targets for my capital allocation.
Let's look at the risks and upsides here.
Risks & upside for Hamburger Hafen
The risks to Hamburger Hafen have expanded. I viewed this as a company to hold until shipping and logistics normalized, at which point a €17-€19/share price wasn't outside the realm of possibility, nor was it even all that unlikely based on historical numbers.
At least, that's what I saw and thought.
Now that the share price is up significantly in what I consider to be a very short time, and I don't see any major hindrances yet - only questions - for this deal to go through, I'm approaching it with a bit more care. I actually bought shares not far off that one day when the company shot up, to a price of €10.80/share, which means that I'm sitting on a quite massive, short-term RoR.
The main risk to the company here that I see is valuational in nature.
The upside, on the other hand, is the same that I gave you when I reviewed Hamburger Hafen last. The company could, and likely will improve, at which point €17-€19/share would not be outside the realm of possibility.
But, that is a problem here, because most of that has materialized in as little as months.
So let's look at what I intend to do in terms of valuation.
Valuation for Hamburger Hafen
I want to make clear, despite the fact that I rotated 99% of my position just prior to the year-end of 2023, is not related to any tax consideration. I don't pay a capital gains tax, and I don't have the ability currently to tax-loss harvest - so keep that in mind.
I sold off most of what I had at a significant profit and redeployed that comparatively small amount of capital into more undervalued and conservative companies - not even in the shipping sector.
On a long-term scale, this movement by the company is actually quite small. The share price we're seeing today was one held by the company's shares as little as 2 years ago. Of course, that was also in one of the best shipping environments in the past 50 years.
So a reversal to that multiple or share price in the short term is, as I see it, unlikely.
The bounce in valuation means that to the expected 2023E results, the company is currently trading at a multiple of 71x. It also means that despite a 126% and 59% expected improvement in earnings respectively for the next 2 years, the company is currently significantly overvalued.
I'm willing to take risks when it comes to companies such as this, and how long I hold them. But with several players fighting for Hamburger Hafen, and the outcome uncertain - who knows, perhaps none will go through - I view the best way to go here as "out".
I might regret this going forward - but I've already reallocated my capital here at a 15-18% annualized upside with far better safety than that offered by HHFA.
If we look at the updated valuation for the analysts following the company here, we find that the company now beats both the lows and the highs as well as the averages that are being set here, with a current average of €15.22/share. I guided for a share price target of €18/share in my last article, but this was in the long term and on the basis of different circumstances.
Those circumstances have, as I see it, now changed significantly.
That is why I have taken home profits here and moved to a "HOLD" with this company.
The thesis is now as follows.
Thesis
- The company is now subject to a takeover offer, potentially by more than one, which has seen the valuation climb up to over €16.75, which is the current concrete takeover offer.
- While anything may happen to the company, and we may even see more and better upside for the business, in situations like these I choose to "go out", and take my capital elsewhere.
- I now view the company as a "HOLD" here and a target for profit rotation, and unless something changes fundamentally and one of these deals does not go through, I may not soon revisit this business. Remember, I only use "SELL" in cases where a company is facing dire straits or significant downturn - this is not such a case.
Remember, I'm all about:
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them ( italicized ).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
The company is no longer a business that I would "BUY" given what has been happening after the takeover/purchase offer.
This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
For further details see:
Hamburger Hafen: Careful With Shipping, But Upside And A Major Set Of News (Rating Downgrade)