2023-10-20 10:30:00 ET
Summary
- Stolt-Nielsen is an integrated infrastructure company operating terminals, container division, and tanker vessels.
- Q3 net profit bounced back after a weak Q2 (due to a provision), with a pre-tax income of almost $103M and a net profit of just over $90M.
- The company is benefiting from positive momentum in the product tanker segment, but faces pressure in the Tank Containers segment.
Introduction
As explained in my previous article , we shouldn’t really look at Stolt-Nielsen ( SOIEF ) as a shipping company but as an integrated infrastructure company as it also operates terminals and its container division. But of course, the company is best known for its tanker vessels which ship oil products, chemicals, edible oil products and acids.
Stolt-Nielsen has its primary listing in Norway, where it is trading with SNI as its ticker symbol . As the average daily volume in Norway is 66,000 shares, it for sure makes more sense to use the Oslo Stock Exchange to trade in the company's shares, as liquidity is an important factor in an investment decision.
The Q3 net profit bounced back from a weak second quarter
Stolt-Nielsen’s financial year ends in November, which means the Q3 results it just released offer a look under the hood for the three months that ended in August. As headline results are important for first impressions, it was somewhat disappointing to see Stolt-Nielsen having to allocate a provision for the MSC Flaminia incident during the second quarter, which definitely hurt the bottom line of the income statement. But as that was a non-recurring item, the Q3 results obviously look much stronger.
Looking at the income statement, the total revenue in the third quarter of the year was just over $694M and after deducting the operating expenses and depreciation and amortization expenses, the gross profit came in at $182.2M.
During the quarter, Stolt also reported a $13.2M contribution from joint ventures and associates, while its G&A expenses increased to just over $69M. This ultimately resulted in an operating profit of $127.5M, which is pretty good considering the H1 operating profit of just over $150M, but keep in mind the H1 operating profit included the $155M provision for the MSC Flaminia incident. In 2012, a fire and explosion on board a vessel of shipping company MSC was caused by a runaway chemical reaction and both the manufacturer and the freight forwarder (i.e. Stolt-Nielsen) were held accountable for the fire, explosion and subsequent death of three crew members .
With a pre-tax income of almost $103M and a net profit of just over $90M, the EPS of $1.68 was still pretty good for Stolt-Nielsen. And despite the $155M provision recorded in the second quarter, the 9M 2023 EPS beat last year’s 9M results as the $3.70 compares quite favorably to the $3.47 EPS in 9M 2022. As Stolt-Nielsen has its primary listing in NOK, the $3.70 EPS represents approximately 40.7 NOK per share using the current exchange rate .
So while the 9M 2023 net profit result was impacted by the $155M impairment charge, the cash flow result obviously remained unimpacted. As you can see further below, the operating cash flow was $540.4M but as I wanted to understand the starting point of $634.3M, I dug into the footnotes. And as you can see directly below, this included a net release from working capital changes to the tune of $165M (and this includes the provision which has been booked as a current liability).
This means I should adjust the $540.4M with these working capital changes with the $165M working capital variation to end up with $375M in adjusted operating cash flow, which represents about $335M after also taking the almost $40M in lease payments into account.
The total capex was approximately $194M and this resulted in a net underlying free cash flow of $141M. That’s lower than the income statement due to A) the difference between the depreciation expenses and the combination of capex and lease payments and B) while there was a substantial attributable profit from joint ventures and associates, that mainly represented a ‘paper profit’ as the dividends that were paid by those investees were substantially lower (the attributable net profit was almost $46M but only $19.9M was paid out in dividends.
That is a strong result, and the company is definitely helped by the positive momentum in the product tanker segment. The MR charter rates remain high and with its strong position in the chemical tanker market, Stolt-Nielsen is benefiting on all fronts. And despite the strong charter rates, there are very few new builds that will hit the water in the coming years as the shipyards have been fully booked for the manufacturing of container vessels and bulk vessels when those categories were booming in the past few years. Shipping companies ordering a new MR class product tanker will have to wait until H2 2026 before being able to take delivery.
This further supports the thesis the demand for Stolt’s tankers will at least remain stable and although the third quarter was pretty soft, Stolt-Nielsen confirmed there was a significant improvement towards the end of the quarter. Meanwhile, the pressure on the Tank Containers segment is increasing due to lower container rates while the customers are no longer holding on to tanks for extended periods as the port congestion situations have eased.
Investment thesis
Stolt-Nielsen’s share price remains strong and despite having to record an additional $155M provision for the MSC Flaminia disaster, the reported earnings remain strong on the back of a strong market for product tankers and chemical tankers.
Unfortunately, I missed out on initiating a long position, and although I didn’t want to chase the stock, I was wrong for not doing so as Stolt’s share price just continued to go up while it is also paying attractive dividend thanks to its strong earnings and free cash flow result. The stock still looks attractive as the earnings remain strong, but I need to be a bit careful with my cash, and I’m still not willing to chase the stock after its 40% share price increase in the past two months.
For further details see:
Stolt-Nielsen: Flaminia Provision Weighs On The Net Profit (Rating Downgrade)