2023-07-21 12:11:38 ET
Summary
- Hamburger Hafen, a port company based in Hamburg, Germany, is currently undervalued despite being one of the most significant ports in Europe. The company has been struggling with increased debt, margin compression and a growing cost of servicing debt.
- The company's recent results show a challenging market environment, with ongoing political tensions and economic sanctions impacting overall throughput. The company is expected to see increasing EPS in 2024 and 2025, which could provide a solid foundation for future growth.
- Despite the company's current struggles, I believe that it is a good investment opportunity, and I give it a higher PT.
Dear readers/followers,
Over the past few weeks, I've been through some of my smaller, older holdings that have not yet materialized their full upside and seen which companies warrant more investment, and which ones may warrant a step back. I don't sell businesses or investments that haven't yet seen upside if I believe that this may still materialize. Overall, I'm "slow" to sell off a company that hasn't done as well as I had hoped. Hamburger Hafen ( OTC:HHULF ) is one such example.
The company has generated negative RoR since my first article on it a few years back in 2020 and COVID-19, even though at one time I was up 40%. I didn't add more shares until the company declined, but even now the company is in a very small position in my portfolio.
However, it's time to revisit this company, and I'll show you why I see this as a potential opportunity, all things considered.
Hamburger Hafen - There's a lot to like about undervalued quality
Hamburger Hafen is a port company. There aren't that many of those around - not ones that are publicly traded, at any rate. Hamburg also happens to be one of the most significant ports in Europe, next to of course some closer to the ocean in the Netherlands like Rotterdam. Still, the Hamburg port is a sprawling complex covering many square miles - over 7,200 hectares , and it handles large portions of all goods coming from Asia and across the Atlantic.
The fact that it's in fact a tidal port means that every class of vessel, despite Hamburg being nowhere near to the ocean, has the ability to dock there under the right circumstances. This includes the latest class of vessels on the planet, the so-called megamax-24, but only during certain hours of the day.
The access to the port is the river Elbe , which requires a depth of 13-14 meters to be able to accommodate all types of ships accessing the port.
This is also one of the oldest ports in Europe. The company trades under the native ticker HHFA in Germany and is extremely undervalued here. Despite what I would call average profitability ratings (except operating margins, which are above average at 12.5%), the company scores high on most fundamental safeties and potentials. As a business, it generates over €1.6B of annual revenues, which it manages to turn into around a €100M net income, giving it a ~6% net margin. As expected, this company is extremely COGS-heavy at over 75% of revenues, with only a 10% OpEx. The mix is 54/36/ to container/intermodal in revenues, with small segments in logistics, real estate, and holding. The core areas are container and intermodal - logistics as a third.
A few years ago, the company took on substantially more debt, which is of course what has driven the company's valuation down given the higher interest environment we're moving into. The company, fundamentally, is moving in the "wrong" direction - albeit slowly.
What do I mean by the wrong direction?
When it comes to a healthy company, I look for:
- Good margins and profitability, preferably above average.
- Growing net income/EBITDA/EPS over time, as well as growing sales.
- No excessive SBC/dilution
- Solid fundamentals, both on a sector-based comparison but also on the company as a whole.
- Growing or at least stable ratios of asset ownership for stockholders.
Any move in the other direction of these things implies to me that a company may be not as great, or may indeed be signs of trouble. Hamburg has been showing small signs of issues, such as increased debt, a declining ratio of SE to total assets, margin compression, and a growing cost of servicing debt/WACC.
This in itself doesn't mean anything - if it turns around.
Recent results from Hamburger Hafen tell us the following. The market environment remains challenging for the company. Ongoing political tensions and economic sanctions have an obvious effect on the overall throughput through the port. Both transport and overall throughput are down, leading to a nearly 6% revenue decline in the latest quarter, which impacted EBIT by declining 62.5% , which is obviously significant. The EBIT margin fell, ROCE is down by 6.1 pp, and operating cash flow dropped below €75M.
It's not a strange development that we're seeing share prices drop, as the company's results are for the time being, down.
To find what the company is doing well we need to look at longer-term plans and targets. Efficiency programs are being locked in. Automation pushes and block storage areas are being increased. The German government has approved CSPL's minority stake in CTT - which took much longer than overall expected. Despite the fact that Ukraine is at war, the company's hinterland transport routes are still very much operational, and some grain vessels are still being loaded.
Overall, it is not strange in the least to see the company's share price decline as we have when results are as we see here. Together with the overall economic slowdown leading to lower transport volumes and a rise in energy costs, it's completely natural to see the company at these levels. The company is combating these trends as well as it can, but nothing that this business can do can change macro.
The company has delivered a 2023E EBIT guidance, calling for a decrease or increase (slight) in overall throughput, expecting normalization in 2H23, together with a moderate increase in transport. Revenue is expected to either be stable or go up, with a moderate decrease in container revenue specifically. EBIT is the worst here - expecting a strong decline in container, while intermodal es expected to go up slightly, but at an EBIT of no higher than €175M - but potentially as low as €145. CapEx will be higher than EBIT, upwards of €270M due to heavy company investment.
The company continues to commit to paying 50-70% of net in dividends, but most analysts are expecting the company to cut the dividend to around €0.4 or €0.45, based on an 2023E expected EPS of around €0.8, a decrease of 30% from 2022.
This isn't a company that would eliminate the dividend. It hasn't done so for a very long time - in fact, since it was listed, it has always paid a decent dividend. However, long-term RoR for Hamburger Hafen isn't the best, and long-term shareholders that bought before the GFC have obviously lost money - to the tune of around 5% loss per year.
However, if you took care and only bought when the valuation was below 15x normalized, your RoR for this company could have been at least 5-6% per year - still not good, but that's due to the company's current valuation. Going forward, as you can see, the company is expected to see increasing EPS to the tune of 34-35% in 2024E, and 2025E, coming to almost 30% annualized once the 2023E results are in. If the company keeps or continues this decline, that's a solid foundation to build upon.
When it comes to what I would look for given the rather poor last quarter (though how poor can we really argue it being, when the company doesn't control the underlying factors) is a reversal in macro. Any improvement in macro is likely to have improvements in Hamburger Hafen. Easing in SCM and shipping is expected to have effects here.
Let's look at what the valuation is that you should be buying at, if you're looking at investing in this company.
The valuation for Hamburger Hafen is good here.
The company currently trades at an average P/E of 12x. This is well below a premium of 16x. In fact, expecting that 30% EPS growth for this company means that if this materializes and we don't move from 12-13x P/E, we have a current upside in this investment that's as high as 22% per year - on one of the largest ports in Europe.
It's to me intuitively obvious that the port of Hamburg is not going anywhere. It's equally obvious to me that volumes will eventually normalize to levels where the company can once again turn an impressive profit.
Because these two things are essential "facts" to me, or at the very least assumptions with extremely high levels of conviction, that means that the only logical result is that this company is currently being traded at a level I consider to be "low" or "cheap".
S&P Global targets for Hamburger Hafen confirm my overall thesis for the company. 2 analysts follow the company - not that many, but still two - and they go from €10 to €14 with their targets, at an average of €12. This is not a high upside - but these analysts have lowered their targets from over €20/share in less than a year due to the current trouble the company is facing.
As before, I have a longer-term view than these analysts do. I'm looking for an upside for the next 3-7 years, and this is where the company delivers. A normalization will result in market-beating RoR for this investment - and in the end, that's all I am looking for.
To beat the market, in capital appreciation, dividends, and preferably a combination of both - without the use of fee-driven ETFs or other vehicles that negatively impact my returns on a compounded basis.
Hamburger Hafen may not be the perfect example of a safe dividend stock. It's volatile and exposed to both geopolitical and cyclical commodity/logistic/GDP risks. But it's a good example where a company, provided that the price is where I can consider it "good", can certainly deliver an upside over time.
This is why invest in Hamburger Hafen. My position is small - but my position exists, and I will continue to add to it here, at an actual not-inconsiderable yield even at a forward basis of €0.4E expected of 3.5% - that's if the company cuts the dividend. Otherwise, it's closer to 6.5% at this time.
So for that reason (and the reasons mentioned here), my thesis for Hamburger Hafen as it stands today, is the following.
Thesis
- The thesis here is more or less the bullish one - as this is the stance I represent in the company. I view HHLA as still appealingly valued, and with a slow recovery more or less confirmed by numbers coming out of the various economies of the world, I see it only as a matter of time until things revert back to normal.
- Reverting back to normal also means that companies like HHLA will see their throughput volumes eventually normalize, which in turn will impact the company's earnings. Based on this, I view the upside I give in this article as quite realistic, at least in the long term.
- I view my share price range based on earnings assumptions, backed by analysts forecasts and historical multiples, as an appealing one. I believe the company should be valued at least close to €18/share based on a 2025E of 13x, which is below the premium, and below a 15x P/E average.
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.
This means that the company fulfills every single one of my criteria, making it relatively clear why I view it as a "BUY" here.
For further details see:
Hamburger Hafen - Further Undervaluation Makes This One Still A 'Buy'