James Fisher (FSJ): 85% down but is a recovery possible?

I hope this is ok, but I am going to re-post a blog entry I wrote tonight on James Fisher.


James Fisher – LON:FSJ
Share Price – 318p
Market cap – £160M

Introduction

James Fisher is a 175 year old maritime services company that has maintained a listing on the London Stock Exchange since 1952. While the business has shifted over time into adjacent areas, it’s always been predominantly focused in the maritime domain. Today the company operates in four primary areas.

  • Marine Support
  • Specialist Technical
  • Offshore Oil
  • Tankships

Descendants of the founding Fisher family haven’t been actively involved in the company since the 1960’s, but they still hold a 23% holding of the company through a charitable trust, which uses the dividend to donate to local causes. Surprisingly, the John Fisher Foundation which holds the shares, actually increased their stake from 17% to the current level in April 2020. Insiders clearly didn’t anticipate the disaster that was to come.

Capital Markets Day 2021

The best source to get a better understanding of these businesses is the recent capital markets day (June 2021). The video and accompanying presentation provides some interesting viewing/reading on the particulars of what the company actually does.

Capital markets event video

Capital markets event presentation

As someone who doesn’t even know his stern from his keel, I focused more on the financials. The main takeaway I took from the CFO presentation was that going forward, the company would focus more on business that would yield a ~15% ROE and a ~10% operating margin. Having gone through several years of previous annual reports, these were the sorts of investment returns that the business has historically generated, so it seems that some of the recent acquisitions that took place during the tail-end of the previous management’s reign have not performed well.

Acquisitions Gone Wrong

The most significant of these laggards was the purchase of two DSV’s (diving support vessels) for £40.2m in July of 2019. Only two years later, the company has been taking steps to dispose of businesses and assets, one of which was the DSV acquired just two years earlier. Scuttlebutt suggests that the other DSV which was purchased for $24m two years ago, is on the chopping block for just $9.2m, representing a significant loss.

I am not certain whether these disposals are being driven by mis-management, concerned lenders demanding reduced leverage, or whether there’s simply no demand for the use of these vessels.

Share Price Decline

The first signs of trouble came on the July 2020 trading update when the company issued what looked like a mild profit warning, but some hope for the second half of the year.

The subsequent September 2020 trading update delivered more bad news. An expected recovery in trading had not taken place.

An October 2021 trading update delivered yet more misery on shareholders, causing the share price to levels not seen since 2008.

In the face of three separate profit warnings, the company has lost ~85% of its value. Ouch.

Is it too cheap now?

James Fisher was always a company I was aware of in the past, but it wasn’t something that every interested me due to its lofty valuation. The valuation in relation to a rather mediocre and volatile cash-flow failed to attract me. Not only that, but it faces other challenges.

  • The business is very capital intensive
  • It has significant commodity/geographical risk
  • Operating margins are mediocre (historically ~10%)
  • Earnings/cashflow can by volatile
  • Balance sheet weakness (high-ish debt, substantial goodwill on the asset side)
  • The company is an aggressive acquirer

With that said, when something declines by 85%, it’ll attract my attention. Sometimes a mediocre business like James Fisher can be value at the right price.

Possible recovery

I think a recovery is possible, I could not hazard a guess at how likely it is, but there is some cause for optimism.

From reading the historical annual reports, which go as far back as 1980 and can be found on the Companies House, the company has shown remarkable resilience despite the challenges of business domain in which it operates. While the company has been a serial acquirer of businesses down through the years, the outstanding share count has only increased very slightly in that time. The company did double its share count in 1996, performing a one-for-one rights offering in order to acquire the P&O’s tankships business. Since then the share count has only increased slightly, going from 48m shares outstanding, to 50m today, which I would regard as an acceptable amount of dilution to take place over 25 years. The company has faced challenges before, but always overcome them without needing to raise equity, or restructure in a way that would damage shareholders.

As I suggested earlier, the financials of the company of this company I would describe as mediocre, but at least they are largely consistently mediocre. The operating margin for the last 10 years was usually stable at about 10% (until last year). Looking at previous annual reports going back to the 90’s, this is broadly in-line with what we’ve see recently

Cash flow is more volatile. While operating cash flow has always been positive, it has fluctuated year to year. The drop through to free cash flow isn’t consistent as historically the company acquired many businesses (which admittedly seem to have worked out ok, at least up until 2019).

That brings us to the £92m in capex spending that occurred in 2019, that stands out, especially in relation to earnings. It’s not surprising that the acquisition spree which the company embarked on (right before the Covid epidemic) was likely done at prices higher than would those assets would fetch today. I have some sympathy that the current under-fire management are dealing with the legacy of previous mistakes.

Lord Lee’s greatest triumph?

Incidentally, Lord Lee was (any may still be) and investor here.

In 2014, Lord Lee reported that he originally invested in this company in 2000 at prices below 80p, although he had sold much of his holding by 2014 by the time the share price reached a high of £13.50 in 2014. In an interview last year, Lee described his purchase (along with Treatt) as one of his greatest successes in investing.

I am sure Lee is glad he sold now.

Final thoughts

In a market where momentum, quality, and growth are investment attributes that are prized above all, it’s not surprising that James Fisher has performed so badly. The growth has reversed, the quality the business (perceived at least) has gone, and the momentum has disappeared with it.

The question investors face now is if the worst is over, or whether there is more bad news to come. Management have guided to a 2021 full-year operating profit of £27-32m, which based on a £160m market cap is cheap. That number could be even cheaper again, if the company can return a more normalized operating profit of £50m.

Alternatively, the business could continue to struggle, or perhaps decline further. With the balance sheet in a precarious situation and cash flow weak, it’s not beyond the realm of possibility that the company could face a forced capital raise.

I have been consciously trying to steer myself from looking at turnarounds (they usually don’t). I felt in this case, given the long-term track record of the company, there was a reasonable prospect of a recovery.

For now, James Fisher is one that will remain on my watchlist. No position.

4 Likes

Hi tabhair,

Many thanks for the write-up and welcome to the forum. FSJ is not a company I have looked at before.

This could be the crucial part:

September’s interims declared underlying (ex-IFRS16) net borrowings of £179m. That feels large versus the projected underlying operating profit of c£30m, especially when a significant proportion of income is derived from winning contracts where the timing can be unpredictable. The H1 statement said:

“At 30 June 2021, the Group had headroom against its committed revolving credit facilities of £117.0m (2020: £115.6m). The ratio of net debt (including bonds and guarantees) to Ebitda was 2.9 times (31 December 2020: 2.8 times; 30 June 2020: 2.5 times). The covenant requirement at 30 June 2021 was 3.75 times, which reduces to 3.5 times at 31 December 2021.”

Trailing 12-month underlying Ebitda was £27-£36m+£75m = £66m, giving a £179m/£66m = 2.7x net debt/Ebitda ratio. Add on performance and payment guarantees of £38m to the net debt of £179m…

“Subsidiaries of the Group have issued performance and payment guarantees to third parties with a total value of £38.4m (June 2020: £81.3m, December 2020: £48.2m).”

… and the ratio is £217m/£66m = c3.3x. So I can’t derive FSJ’s calculated 2.9x ratio, although at least my 2.7x and 3.3x ratios are below the 3.75x covenant requirement for June 2021.

The projected c£30m underlying operating profit for the year implies £17m for this H2. That could mean H2 Ebitda of £31m with the same £14m H1 D&A.

So: 2021 Ebitda could be £27m+£31m = £58m and a 3.1x ratio to net debt. Factor in the £38m guarantees and we have £217m/£58m = 3.7x. That is greater than the 3.5x covenant requirement for Dec 2021, which is not ideal.

The risk therefore is an emergency fund raise to shore up the balance sheet. Like you my experience of turnarounds is that they take much longer to turn (if they ever do) than you (or management) imagine. Waiting for the fund raise may well be the better option rather than risking significant dilution as City investors demand a rock-bottom entry price to fund the recovery.

One way to look at FSJ is assessing the valuation based on its enterprise value. EV is £160m mkt cap + £179m net debt = £339m. Projected operating profit of £30m = £24m after tax. So clear the debt entirely and you are paying £339m/£24m = 14x possible near-term earnings with no funding issues whatsoever. An obvious bargain? Not sure.

I also noted the term “unlimited guarantee” in the small print:

The Group has given an unlimited guarantee to the Singapore Navy in respect of the performance of First Response Marine Pte Ltd, its Singapore joint venture, in relation to the provision of submarine rescue and related activities.

I am not sure how such a guarantee is included within the covenant requirements.

Maynard

1 Like

Thanks for an excellent summation of where we stand with James Fisher. It is a company that I have always admired, and made money from in the past, especially when its share price went to silly levels.

In the short term the biggest concern is the balance sheet. Fingers crossed that it can avoid breaching its banking covenants, and struggle through to 2022 when profits should be recovering. My other big concern is whether the top management team (chairman, chief executive and finance director are all new ) are up to the task of reviving FSJ’s fortunes. The next year should prove one way or the other.

Following the October profit warning the new ceo invested around £100,000 at £4.19 a share to nearly double his stake. But several of FSJ’s non-execs do not own shares in the business and a couple of well regarded small cap investors – Downing and Montanaro – have recently reduced their holdings in FSJ – hardly a reassuring sign.

Rosemary Banyard, manager of Downing’s Unique Opportunities Fund, explained her reason for exiting FSJ in her fund’s latest fact sheet.“ Capital allocation errors by previous management have come home to roost, and existing management has been slow to react… The painful decision was taken to exit the holding, and amongst our reasons to sell, it falls firmly into the category of “made a mistake”.

As for the increase in the shareholding of the Sir James Fisher Foundation this reflected a donation of shares from the John Meryn Fisher Settlement rather than a conscious decision by the charity to increase its stake in FSJ.

The trust is far and away FSJ’s biggest shareholder, and is not in a position to stump up fresh equity since virtually all of its income comes from its FSJ shares which make up the vast bulk of its investment portfolio. Clearly, it cannot be happy with FSJ’s recent share price performance which will have severely curtailed the circa £3m a year that it donates to local good causes in Barrow in Furness, FSJ’s home port.

The foundation does not appear to have a representative on the James Fisher board but one should not underestimate its influence behind the scenes. According to the charity’s last annual report it has hired John Lawson as a financial adviser to maintain contact with the directors of James Fisher and liaise with the trustees with “a view to containing the risks which have been identified”. I assume that John Lawson is the former shipping analyst who worked for Investec, the company’s broker.

2 Likes

Hi DarwenLad,

Many thanks for the extra insight :+1:

I did not realise Rosemary had got involved with FSJ (and indeed Avon Protection). Her factsheets are here: VT Downing Unique Opportunities Fund | Downing LLP

FSJ was an early investment for the fund:

And made a one-month appearance in the top ten earlier this year:

Fund is up almost 80% since its inception during the March 2020 lows, so the FSJ problems have not caused too much portfolio pain.

Other names in the fund don’t appear to operate with the same high-debt/contract income mix.

All very sad how the charitable foundation has suffered. Just goes to show that dividends don’t just go to anonymous pension funds or well-off retail investors.

Maynard

1 Like

Hi Maynard

Rosemary Banyard was interviewed by David Stredder on Mello on 29th November.

First time I had heard her. It was a very informative interview, well worth a watch for those who have access to Mello recordings.

Of particular interest was her bullish assessment of Chemring Group (CHG) which was quite compelling.

As for James Fisher (FSJ) I did have a look at that 12 months ago and was almost tempted in. Perhaps that temptation was mostly ruled by heart rather than head as they are based in Barrow-in-Furness (my birthplace). Thankfully my head won the argument.

Snazzy

2 Likes

Apart from the debt, left by the prior management, which means a slow grinding recovery, another problem is that it’s caught in the freeze to oil exporation spending due to ESG and also affected by the death of business activity in the pandemic with negative oil prices. This has caused asset selloffs at a discount, and income streams to collapse which they have to diversify out of. The desperation to utilise idle divisions during this downturn saw a huge contract loss for work done in Africa from dodgy clients which was unpaid. They really need the majors to fire cap-ex back up. I would have thought oil majors would have reinitiated cap-ex by now, but not yet - clearly we need oil to get meaningfully over 100 usd. These factors are reversing somewhat and income will grow longer term is my belief. But with all that debt - I do think equity needs to be raised unfortunately.

2 Likes