A rising tide for Ocean Wilsons
This investment company is valued at less than its Brazilian ports and logistics assets alone
Commodities have had a poor decade, but as we face possible stagflation, companies such as Shell (up by 45% yearto-date) and Glencore (up by 33%) have begun to benefit. Meanwhile, absolute-return hedge funds – those that try to deliver steady returns in all market conditions – have struggled to cope with central banks’ quantitative easing (QE) since the financial crisis, but could now do better as QE is withdrawn. Ocean Wilsons (LSE: OCN) is a small, relatively obscure UK-listed company that could benefit from both trends.
This 180-year-old firm is something of an oddity, consisting of a 58% interest in Wilson Sons (a Brazilian ports and maritime services firm) and 100% ownership of an investment subsidiary (Ocean Wilsons Investments). Taking the former first, Wilson Sons was set up in the Brazilian port of Salvador by two Scottish brothers, Edward and Fleetwood Pellow Wilson in 1837. Last year, it listed on Brazil’s Novo Mercado exchange in São Paulo, where it has a market cap of about 4.17bn Brazilian reals ($870m/£690m). The market price of Ocean Wilsons’ 58% stake in the ports business alone is worth about 1,100p per share versus a UK share price for the group of 930p.
Attractive monopolies
Ports can be excellent investments because they represent natural monopolies. The successful private investor John Lee mentions Associated British Ports, which was the first of Margaret Thatcher’s privatisations in 1983. The shares were sold to the public at 112p and over the next couple of decades were a 70-bagger, before eventually being bought by a Goldman Sachsled consortium and delisted in 2006. I repeat: a 70-fold increase! By comparison, when the government listed Royal Mail on the London Stock Exchange at 330p in 2013, it was accused of selling too cheaply. Almost ten years later the price is just 325p.
Wilson Sons is recovering well from the pandemic. It recently reported that firstquarter revenue grew by 10% to $93m and net profit increased by 5.8 times to $28m versus the same quarter last year. These are encouraging results, given that performance is still constrained by lack of empty shipping containers and supply-chain bottlenecks in China. Annualising the firstquarter results gives $372m revenue, well below peak revenue of $698m in 2011, although the operating margin is now considerably higher at 24.5% in the 2021 financial year. Brazil is a commoditydriven economy and the real is one of the few currencies to have strengthened against the US dollar (and against sterling) so far this year.
A free hedge-fund portfolio
The tide may also be turning for the investment portfolio. For more than a decade, central banks, who were once considered the “lender of last resort”, have consistently intervened in financial markets and become the “dealer of last resort”. This behaviour has had its critics, not least from absolute-return hedge funds, who need market panics to create mispriced assets so that they can outperform the index.
This is now changing as central banks commit to tighter monetary policy. Earlier in May the Bank of England said that it was prepared to raise interest rates to bring inflation back under control, even if it caused a recession by doing so. It’s unlikely that broad market indices such as the S&P 500 or FTSE All-Share index would perform well in a recession. But a sell off should present hedge funds with an opportunity to demonstrate their superior skills, which would benefit Ocean Wilsons’ investments.
The performance of this sprawling portfolio has been unremarkable over the past decade (see below), but it is still worth around 708p per share. Since Ocean Wilsons is already valued at less than its stake in Wilson Sons, investors are effectively getting it for free.