Boskalis: Long-Term Potential In The Lumpy Business

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Posted November 20, 2019


  • Boskalis is the leading global dredging and maritime expert.
  • The company is going through a difficult time in the cycle due to the volatile nature of its business operations.
  • The difficult environment in which it operates makes the company only more attractive for someone with a long-term horizon and ability to survive the current environment.

Investment Thesis

Boskalis (OTCPK:KKWFF) (OTC:RBWNY) is the leading global dredging & maritime expert. It is active in 90 countries across 6 continents. The headquarter is in the Netherlands, and the company is listed on Euronext. The company is going through a difficult time in the cycle due to the volatile nature of its business operations. Despite that, the company has a solid balance sheet (less than 0.5x leverage based on estimated EBITDA for 2019 and the current net debt position of €150m) and generates enough cash to invest, pay a dividend, and opportunistically execute share buybacks.

Business and Industry Overview

The core activity of Boskalis is dredging. It is the biggest (56% of revenues) and most profitable (66% of EBITDA) segment of the company. The rate at which the market is expected to grow is modest, but the industry characteristics are compelling. Boskalis holds an important share of this heavily consolidated market and has a very strong global presence. The total market size is around €5-6bn.

The second pillar of the Boskalis strategy is Offshore Energy which accounts for 40% of revenues and 26% of EBITDA. The main problem with this segment is a cutback in capital expenditure by the offshore oil and gas industry over the last couple of years.

Towage is dependent on the rate of growth of seaborne trade and the number of vessel movements through ports. Boskalis took strategic decision to sell Kotug Smit Towage and Saam Smit Towage (completed at the beginning of the third and fourth quarters respectively). The company has two remaining towage joint ventures (Smit Lamnalco and Keppel Smit Towage).

The volume of work for Salvage is by its nature unpredictable. Boskalis has a global footprint and presence in ports around the world.

The key drivers of long-term growth for Boskalis activities could be summarized by the following table:

The cyclicality of the industries in which the company operates combined with potential volatility of the stock market made Boskalis less attractive to short-term owners. My view of earning power and industry fundamentals over the long run can give us a playing field tilted in our favor.

Capital Allocation

Dividend: the company has the policy to distribute 40% to 50% of the net profit from ordinary operations as a dividend. For 2018, they paid a cash dividend of €0.50 per ordinary share (or €67m in absolute amount), resulting in a payout ratio of 79%.

Boskalis has paid a dividend for many years, but in my view, if the price significantly drops, I think they should reconsider capital allocation towards even more share buybacks.

Share buyback: On 15 March 2019, Boskalis announced the start of a €100m share buyback program. The buyback program is aimed at reducing the issued share capital. Since the beginning of the program till the week of 4 Nov 2019, the company bought around €37m of its shares at the weighted average price less than €20.

What could go wrong?

The answer to the above question is: Many things could go wrong. I will not go in every potential risk; rather I will focus on the key ones. In my opinion, the most pronounced long-term risks in Boskalis's case: (a) ability to withstand the current negative cycle; (b) capital allocation (not to overpay for own shares and M&A); (c) severe economic recession; (d) aggressive behaviour of competition; (e) execution risk; (f) environmental and social risks. Short-term risks are more like (a) forex; (b) fuel prices; (c) political risks. I'm always focused on the long term, but I think both are important and they should be looked together.

Among the risks, the ability to withstand the current negative cycle and behavior of competition is more pronounced in the Boskalis case. The current negative cycle could stay for a decade so the company needs to be prepared for it and make the right moves. Despite the fact that the dredging industry is relatively consolidated, it could easily start to heavily compete.

Recent Results & Outlook

The company published its third-quarter highlights on Friday last week. The main highlights from the report are:

  • Top-line slightly increased compared to the averages of the first and second quarter
  • Operating results increased sharply in the third quarter
  • The order book is at the level of €4.2bn

Dredging & Inland Infra had a solid quarter. Revenues for the quarter were comparable to the average of the previous two quarters. Offshore Energy had the third quarter considerably better than the first half. Both sub-segments (contracting and services activities) made a positive contribution to the operating result. Towage & Salvage segments' contribution was in line with expectations.

The picture of 2019 should not significantly change from that seen in the first nine months of the year. The company expects a sharp profit improvement in the second half of 2019 compared to the first half and that EBITDA for the full year, including all exceptional income and expenses, would be stable relative to the approximately €350m of last year. The CAPEX for 2019 should be around €250m and will be financed from the company's cash flow.

It is difficult to give a precise projection of Boskalis' future results due to the lumpy nature of the business, but if we move our focus to the long term, then I think fundamentals are in favor of the company.

To Sum Up

The current valuation of the business appears to extrapolate that this lower level of activity is some type of new normal. But we should keep in mind that high returns tend to attract capital, just as low returns repel it. Therefore, if you think the company has a good market position and management, the difficult environment in which it operates makes the company only more attractive for someone with long-term horizon and ability to survive the current environment. I believe Boskalis is in such a position. Since 2015, profitability and confidence have deteriorated, but, on the other side, the company made some inroads towards complex and value-added activities. From a valuation standpoint, EBITDA (after exceptional items) should be around €350m while the current net debt (excluding the right-of-use assets recognized under IFRS16) is around €150m. Based on the current market cap of €2.8bn, the Company trades at 8.4x EBITDA. On top of that, Boskalis has accumulated specific expertise which is hard to value. Putting all pieces together, in my opinion, Boskalis is a very interesting name for potential investing.