Description

Investment Opportunity

Despite running up with the rest of the market over the last few weeks, shares in Aegean Marine (ANW) have recently sold off, erasing some of the market led gains. The obvious catalyst was the company’s $150mm convert offering last week as covert traders settling into the trade are likely pressuring the stock. Investors have the opportunity to buy a consistently profitable and cash generative business at 4.7x EV/ LTM EBITDA-Capex. Over the coming months, as ANW continues its solid financial performance, we expect that the shares will gradually re-rate offering 20-40% upside from current levels.

Business Overview

The company is engaged in the marine fuel logistics space, serving worldwide as a distributor of marine fuel oil, marine gas oil and lubricants to ships across all sectors within the global Shipping trade. ANW supplies to ships both docked at ports as well as at sea with operations in over 30 markets across the globe. Unlike pure trading companies, the backbone of ANW’s business is the physical supply of product and managing the entire spectrum of the delivery logistics (primarily using its own owned fleet for delivery) and in some locations including most prominently Fujairah in the U.A.E, ANW operates on shore storage facilities.

Financial Profile

ANW has grown steadily over the last few years both organically as well as through various capital intensive initiatives including the acquisition of Hess’ East coast operation in the US (2013), the construction of a large storage facility in Fujairah (2014) and continuously seeking out and entering new markets. The major capex is behind it though. More specifically, in a program that was completed several years ago, ANW engaged in a large scale build out of its own fleet. This left the company with a large fixed asset base which it can leverage as it continues to grow volumes from current levels in the 16-17mm tons per annum. At present, the company has no major capital spend requirements on the horizon leaving the company with historically low levels of required capex spend (sub $15mm per annum).

ANW’s growth is demonstrated both in the number of tons distributed per annum as well as in its financial performance which has shown continuously increasing EBITDA. ANW used to direct investor attention to the gross spread it earned per ton (akin to gross profit per ton) but now emphasizes EBITDA per ton. While it is not encouraging to see a decline in gross spread (a few years ago $25/ton was an oft discussed target compared to $20-21/ton level as of late), EBITDA levels in absolute terms leave us comfortable that no matter which way you slice it, the company is continuously generating robust operating cash flow.

Here is a snapshot of historical figures for ANW:

Recent Events

Two notable events have occurred at ANW since August:

1. On 12/14/16, ANW priced a $150mm convert due 2021 at 4.25% ($14.95 conversion). Proceeds directed toward reducing $40mm of revolving debt, repurchase of existing convert (due 2018) and general corporate purposes.

2. In August of this year, ANW shocked the market in a good way by announcing plans to acquire 11.3mm shares at a price of $8.81 from founder Dimitris Melissanidis. This represented 20%+ of outstanding shares and eliminated an overhang that had always lurked behind the scenes at ANW, namely the role of Melissanidis at the company as many followers speculated that all decision making of note was coming down the chain from him. This demonstrated the board’s commitment to doing what is best for ANW, especially now with a much more “independent” equity structure than before. From a price standpoint, importantly this was priced 30%+ below tangible book with the majority of assets in the form of cash, inventory and short term trade receivables, all easily liquidated.

Valuation

ANW is cheap on an earnings basis. Near term cash flows have absorbed some working capital increases but over time we would expect this to normalize and lead to meaningful cash flow generated. On a run rate basis, ANW should hit 17mm+ tons in 2017 and likely continue growing. Below is a sensitivity table showing different EBITDA outcomes at 17mm tons per annum along with valuation for the company at different EV/EBITDA-Capex multiples and EBITDA/ton assumptions:

As noted in the table above, we adjust Net Debt in line with the company to factor in Working Capital given the working capital intensity of distribution businesses such as ANW’s (much of the debt is tied directly to inventory/receivable, both sides of the ledger short term in nature). The adjustment we use is slightly more conservative than ANW’s own adjustment in its presentations and is pasted below:

Two Macro Issues– Upside (sulfur) / Downside (lower oil prices)

There are two major macro issues which impact ANW, one positive and one negative:

Negative

On the negative front, lower oil prices over the last few years has reduced the working capital required per ton thereby making smaller operations with less capital than large players like ANW able to more effectively compete. This is certainly a negative and has been repeatedly flagged by ANW on conference calls as a primary driver for lower spreads (resulting from heightened competition). The silver lining though is that the impact of lower oil is not a new or near term issue and within reason has likely played itself out. Accordingly and ironically, oil prices which has been somewhat of an Achilles heel for ANW can be a positive catalyst should prices surge higher (we don’t need this whatsoever for the thesis to remain intact) which would increase the working capital requirements that many smaller operators are simply not equipped to satisfy.

Positive

On the very positive front, ANW stands to benefit from increased environmental regulation stemming from the IMO which is looking to reduce sulfur emissions from global ships. In October of this year, the IMO set new requirements, which will require sulfur emissions to fall from the current maximum of 3.5 percent of fuel content to 0.5 percent beginning in 2020. The regulation will increase the complexity of the global fuel logistics market. Large physical suppliers like ANW are well positioned to benefit as this entails a combination of infrastructure (more complex vessels, potential for utilizing on shore storage to blend etc.) and know-how which could push out the many mom and pop operations that compete with ANW, thereby leading to increased spreads over time. The capital that ANW just raised with its convert offering will prove handy for both tuck in acquisitions worldwide but more importantly to capitalize on the IMO edict should there be beneficial capex projects relating to this regulation.

Catalyst

Short pressure from cvt traders levels out

Higher oil prices leads to higher spreads

Continued steady execution

IMO and / or other regulatory bodies push up timelines or increase scope of emission and other regulation