In this article from the IRS Report published in August 2010, Peter Shearlock talks about the safer long-term bets among the world's emerging markets..

Asset-rich Ocean Wilsons for Brazilian growth

According to the old song, they've got an awful lot of coffee in Brazil.Well, now they have an awful lot of oil as well. The Tupi offshore oilfields, in which British Gas has a substantial interest, will start producing in 2012. It is reckoned there are 60 billion barrels of oil to extract, worth around $4.5 trillion at current prices. With plenty of other minerals and commodities, Brazil looks one of the safer long-term bets among the world's emerging markets.

One company quoted in London offers what amounts to a pure play on Brazil's petro-fuelled future. Ocean Wilsons owns 58.25% of Wilson Sons, the largest provider of towage services in Brazil. It also operates harbours, container terminals, an oil and gas terminal and logistics in the country and builds small vessels around the Brazilian ports of Rio Grande, Salvador and Guaraja. Its fastest growing business is supporting and servicing the offshore oil industry.

Ocean Wilsons is a Bermuda-registered business and long ago sold all its other interests to focus on Wilson Sons. Its only non-Brazilian asset is an investment portfolio last valued at $247m, or about £160m. The portfolio is managed in Guernsey by Hanseatic Asset Management which has nearly doubled the money it started with 9 years ago with big bets on emerging market and a lot of hedge fund investments.

Ocean Wilsons consolidates the whole of Wilson Sons in its accounts and then treats the 41.75% of the company it does not own as a minority interest. On that basis, and including the value of the investment portfolio, Ocean Wilsons' net worth is around £300m, or about 850p a share. That compares pretty favourably with the current share price of 922p.

But there is another way of looking at the numbers. Wilson Sons has been a quoted company since 2007, when its parent floated it on the Sao Paulo and Luxembourg exchanges. At the last count, its shares were trading at $22.85. Taking that price, Ocean Wilson's 58.25% stake in the business is worth more than $500m, or around £325m. Add in the value of the Guernsey investment portfolio and you have a value of £485m - equivalent to £13.70 a share.

As a value investor first and foremost, I delight in finding a share with strong asset backing. But it is rare to find a trading company with such a substantial asset base as Ocean Wilsons - and particularly so in a fast-growing economy such as Brazil's. Although the company experienced a shallow recession last year, it is slated to grow by between 5% and 6% this year and the Tupi oilfields virtually guarantee continued strong growth over the next couple of decades.

It is not all plain sailing. Last year, the company weathered the downturn in the Brazilian economy by chalking up a huge gain on its investment portfolio. This year, investment gains are going to be more elusive - though one encouraging sign is that the fund managers sold a big holding in BP last year, switching into the Invesco Global Energy Long/Short fund.

But while Wilson Sons' revenues look to be rising again at double-digit rates, the Brazilian company is having to deal with sharply higher costs. Like its parent, Ocean Wilsons, the company reports in dollars but its costs are largely in Brazilian Real, which until recently was appreciating strongly against the US currency.

Wilson Sons suffered a major reversal in the first-quarter this year, when profits tumbles from $16.1m to $6.2m. Part of the problem was a fall in higher margin warehousing and logistics volumes as the strong Real continued to hold back exports. The strength of the Real increased expenses in dollar terms by nearly $8m. A new collective labour agreement and a significant rise in numbers employed also had a big impact on the bottom line.

Ocean Wilsons will be reporting its half-year figures on August 13th and they should point to a better second quarter and a promising second hald. The Real/dollar rate has stabilised and it looks as if world trade picked up substantially in the second quarter.

The Brazilian company is certainly doing its best to take full advantage of the opportunities on its doorstep. It is expanding its Guaruja shipyard, which produces tugboats, and is preparing to build a new shipyard at Rio Grande to produce offshore platform support vessels as well as tugboats. It has recently bought out the minority in Brasco, which operates an oil and gas terminal, and it is looking to increase its offshore capacity through a joint venture.

Last year, the company generated earnings per share of nearly $2 - around 129p at current exchange rates. It is most unlikely to repeat that in 2010. Operating profits at the Brazilian company accounted for less than half of Ocean Wilsons' total earnings last year. The rest came from gains on the investment portfolio, and are unlikely to be repeated on anything like the same scale. Meanwhile, the shares yield 3% on last year's 42 cents a payout.

But Ocean Wilsons should be viewed as a long-term value play, not a short-term earnings story. On a three- to five-year view, its strong presence in the offshore oilfield support market and its ports and warehousing operations in one of the world's fastest-growing economies must surely prompt a rerating that reflects the true value of the underlying assets.

You can see all of Peter Shearlock's articles at www.TheIRSReport.com

Peter Shearlock writes in The IRS Report regularly

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