In November 2017, I explained in an article I was completely surprised to see Vopak’s (OTCPK:VOPKF) (OTCPK:VOPKY) share price tumbling on the back of what appeared to be an ‘okay but not bad’ financial update. Granted, Vopak’s performance wasn’t great, but I thought Vopak would prove to be a golden investment on the back to an expected return to a contango situation on the oil market, whilst the continuous investments in new (oil) storage facilities would help as well.
Vopak is a Dutch company, and its listing on Euronext Amsterdam is definitely much more liquid than its listing on the OTC market. The ticker symbol in Amsterdam is VPK, and the current market capitalization is now 5.41B EUR given a share price of 42.41 EUR. This means the share price has moved up 21% since the November article, and if you’d include the 1.05 EUR gross dividend, the total return in the past 6.5 months is approximately 24.2%. Not bad.
2017 wasn’t as bad as the market feared, and Q1 2018 was pretty decent as well
Whilst I wholeheartedly agree the company’s results in 2017 weren’t exactly stellar, the final outcome wasn’t as bad as the market had feared.
Yes, Vopak’s revenue decreased by approximately 3% to 1.3B EUR, and its EBIT decreased by in excess of 40% to just 423M EUR. At first sight, these double digit decreases would be a horrible performance for any company. But let’s not forget the performance in 2016 was boosted by a one-time event, which contributed about 280M EUR to that year’s EBITDA result. In that year, Vopak reported a substantial gain (288M EUR) on the sale of some of its assets, and this completely skewed the financial results in that year.
Source: footnotes annual report
If I would deduct the 288M EUR from that gain from the 2016 results, the ‘new’ EBIT would have been 471M EUR, and the drop in the EBIT in 2017 would have been more benign at ‘just’ 10%. Sure, that still isn’t great, but keep in mind that when you are selling terminals, they can’t contribute to the EBIT[DA] result anymore. Considering Vopak’s average EBITDA margin is approximately 50%, it’s not unrealistic to assume Vopak’s EBITDA wouldn’t have moved much if it would have sold its UK terminals in 2016. So I’m not sure if this huge swing in EBIT and EBITDA was what spooked the market, but on an underlying basis, Vopak’s results weren’t too bad at all. The 1.85 EUR EPS (down from 4.19 EUR in 2016) wasn’t entirely unexpected at all.
Source: annual report
In fact, the 2017 cash flows remained very strong. Vopak reported an operating cash flow of 714M EUR, but on an adjusted basis (taking taxes, interest expenses and working capital changes into account), the OpCF decreased to 493M EUR. Although that’s a lower result than in FY 2016, that’s still pretty decent outcome considering it sold some assets the year before.
Source: annual report
The total capex was approximately 343M EUR (excluding loans to investees and excluding the proceeds from divestments). As the total dividend came in at 134M EUR, Vopak’s cash needs were pretty much fully covered.
So, I really wasn’t worried about Vopak’s performance. And as I didn’t expect the oil terminal market situation to improve before 2019, the results of the first quarter of 2018 didn’t surprise me either. The revenue decreased by 7%, but the EBITDA decreased by just 6% to 190M EUR. According to Vopak, the entire difference compared to Q1 last year was explained by the fluctuations on the FX market. Using the same exchange rates as last year, the EBITDA result would have been ‘comparable’ (despite a lower occupancy rate of just 87%).
I thought the market didn’t appreciate Vopak’s investments in growth
And Vopak makes my life a bit easier, as it provides the maintenance capex on its assets, independent from its growth capex. Vopak spent 239M EUR on sustaining capex (and investments in intangible assets), which means its sustaining free cash flow is approximately 254M EUR, or roughly 2 EUR per share. And that was enticing enough for me to initiate a long position when the market clearly didn’t understand what was going on.
Source: annual report
At a share price of 33-34 EUR, the sustaining free cash flow yield was approximately 6%. That’s pretty good for an infrastructure play, but I was looking further ahead to the future. Not only were Vopak’s cash flows sufficient to cover the maintenance capex and the dividend, the company continues to invest in new expansion programs. Last year, in excess of 100M EUR was spent on growth, and I expect that amount to be at least the same this year.
Vopak is currently building an additional 3.1 million cbm of storage, on top of the 35.9M cbm it already operates. This indicates a capacity increase of 8.6%, and if I would apply that on the adjusted operating cash flow result of FY 2017 (493M EUR), we would end up with an increase of the operating cash flow to 535M EUR.
Source: company presentation
If you’d deduct a similar amount of capex spent on maintenance and intangible assets, the adjusted free cash flow of Vopak would increase to almost 300M EUR, or 2.35 EUR per share. That would have indicated a forward free cash flow yield of approximately 7%. Again, pretty cheap for an infrastructure play.
I strongly believed the market was short-sighted and overreacted. Considering Vopak’s EBITDA margin usually is around (or in excess of) 50%, I thought investing in new facilities was a smart thing to do as this would eventually allow Vopak to increase its EBITDA and operating cash flows again.
Fortunately the market started to realize that as well, and the share price increased by 21% since I made that call in November. However, I sold my position in Vopak again, as the risk/reward ratio has now changed. The ‘easy money’ (as far as that term actually exists) has been made now, and at a forward free cash flow yield of just below 6%, Vopak no longer is the opportunity it once was.
That being said, I hope the market misinterprets Vopak’s upcoming financial results later this year again, as I really wouldn’t mind getting back in in the mid-30’s again.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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