Another Norwegian renewables play
Family-owned Bonheur ASA (BONHR.OL) (“Bonheur” is French for happiness and good humour) is another conglomerate (market cap $1.2 billion) that traces its roots back to 1848 with Petter Olsen and his two brothers. Initially the company was concentrated in the nascent shipping industry (Fred. Olsen & Co.), before expanding into ship building and aviation and later contributing to the development of the offshore energy sector in Norway in the 1970s. In recent years it has transitioned to become mainly a renewable energy company, starting with green investments as early as 1992 while it was still heavily invested in offshore oil and cruises.
Prior to 2016 most investments were largely carried out jointly with Ganger Rolf ASA, of which Bonheur owned 63%: in May 2016 the two companies merged with Bonheur ASA as the surviving entity. Then in 2019 Bonheur first deconsolidated and later sold its 52% stake in Dolphin Drilling (formerly known as Fred. Olsen Energy), marking their exit from the oil & gas industry: while offshore drilling was an important historical source of the Olsen family wealth that ultimately created Bonheur (Dolphin Drilling has been part of Bonheur’s investments since the 1970s), it had ceased to be a meaningful slice of the pie after years of negative results.
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Today the group’s business activities fall under four segments: renewable energy, wind services, cruise and other investments.
The group’s activities in renewable energy are carried out through the 100%-owned Fred. Olsen Renewables AS (FORAS), one of the largest independent power producers in Northern Europe.
FORAS is a fully integrated, in-house vertical developer, owner and operator of onshore wind farms and was an early mover with its first wind park investment in 1996: today it owns a substantial portfolio of both operating wind farms and development projects. The overall strategy is to participate from the early stages of a project and to deliver throughout its life cycle services such as site selection, planning and construction. With the head office located in Oslo, the company owns and operates thirteen wind farms (ten in Scotland, one in Norway and two in Sweden) for total capacity of 788 MW. A fourteenth farm in Sweden is in the construction phase; it also has further 4.000 MW in the development phase in UK, Norway, Sweden and Italy (of which 288 MW already consented).
This installed capacity is owned by subsidiaries of FORAS, in particular:
Fred. Olsen Wind Ltd (FOWL), of which FORAS owns 51% and the UK-listed closed-end fund The Renewable Infrastructure Group Limited (TRIG.L) the remaining 49%
Fred. Olsen CBH Ltd (FOCBH), of which FOR holds again 51% and Aviva Global Investors the remaining 49%
Another fully owned subsidiary, Fred. Olsen Seawind ASA (FOS), was separated from FORAS and established as a new business unit in December 2021 to engage in the development, construction and operation of offshore wind farms. FOS will co-develop the Codling wind park project, Ireland’s largest offshore wind farm with a capacity up to 1.500 MW, in a 50/50 joint venture with EDF, and has an agreement to develop a float¬ing offshore wind farm in Scotland with capacity up to 800 MW together with Vattenfall.
Capitalising on its vast experience from diversified marine operation, Bonheur’s activities have expanded further into the offshore wind service industry where it provides transportation, installation and maintenance services related to wind turbines.
These operations are organised in Fred. Olsen Ocean Ltd (FOO), which in turn owns and controls several subsidiaries where the daily activities are conducted: Fred. Olsen Windcarrier AS (FOWIC, 100% ownership), Global Wind Service (GWS, 92% ownership) and United Wind Logistics (UWL, 50% ownership).
FOWIC was established in 2008 to meet the increasing demand for offshore wind turbine installation vessels and related marine service vessels. Turbine installation is a critical part of a wind farm construction: project execution capabilities and track record are key assets. The company focuses on providing clients with efficient and cost-effective transport and installation solutions. The company has offices in Norway, Denmark, UK, Malta and Taiwan.
GWS is an international supplier of installation services, blade repair services and expertise to the global onshore and offshore wind turbine industry.
UWL is a one-stop logistic solutions services for wind turbines and provides marine transportation for offshore wind turbine components from manufacturing sites to pre-assembly ports with three owned vessels.
The group’s activities in the cruise segment are carried out through Fred. Olsen Cruise Lines Ltd. (FOCL), headquartered in Ipswich, England, and again fully owned by Bonheur.
FOCL operates four cruise vessels (MV Balmoral, MV Borealis, MV Braemar, MV Bolette) with a total combined capacity of 5.000 passengers. The company offers a diverse range of cruise holidays from long round trips around the world to excursions throughout Scandinavia, the Mediterranean and the Canary Islands. It offers cruise holidays ranging from two-night mini cruises in Europe to more than 100 nights on a world cruise. They are focused on smaller ships, allowing cruise passengers to explore places larger vessels are not able to dock. Despite the negative macroeconomic environment and the travel uncertainty, occupancy in the first half of 2022 was 73%.
Renewable energy: 100% ownership in Fred. Olsen 1848 AS (FO 1848), a newly established technology and innovation company that focuses on the development and commercialisation of smart and cost-efficient solutions related to renewable energy. The main technologies of FO 1848 are aimed at solving some of the industry key challenges within floating wind and floating solar.
Media: 54% ownership in NHST Media Group AS, publisher of Norway’s leading business newspaper Dagens Næringsliv, in addition to PR software service companies and other local and global publications.
Venture capital: Fred. Olsen Investments AS (FOI) is a another newly established company to find and manage oppor¬tunities to strengthen existing business and expand into new, but still related, business areas. As of today, five investments had been made:
NPP Renewables, a renewable energy consulting company
Cenate, a battery materials company
Measurable Energy, a technology company within energy efficiency
Tepeo, a company within renewable energy storage for heating
Celsia, a provider of software solutions for sustainability management and reporting
Bonheur ASA also own properties (office and residential buildings), the service companies Fred. Olsen Insurance Services AS (FOIS) and Fred. Olsen Travel AS (FOT) and a portfolio of bonds and shares.
Management & shareholders
Being a pure holding company, Bonheur has no employees as all operations are conducted in the subsidiaries, with just Anette Sofie Olsen acting as managing director (equivalent to the role of CEO) as part of the services provided by Fred. Olsen & Co.: administrative, financial, legal and HR to both Bonheur ASA and related companies.
The company has a 6-persons board of directors which has been chaired since 1955 by Thomas Fredrik Olsen, born in 1929 and Anette’s father. According to Bonheur, three out of six are independent experts.
Through the investment vehicles Investo AS and Quatro AS, Fred. Olsen & Co. (whose sole proprietor is Anette Olsen) owns 51.8% of Bonheur shares.
Financials and valuation
Until few years ago, Bonheur’s divisional disclosure was opaque, leaving out information necessary to value the company: fortunately, it changed the way it reports its activities around 2017-2018.
As shown in the chart below, as at last year Wind Services was the largest segment in terms of revenues (46%), followed by Renewables (32%), Other Investments (15%) and last – due to the impact of the pandemic – Cruise (7%).
Things are different in terms of operating profits, with Renewables providing the vast majority of them (equivalent to $145 million) followed by Wind Services ($40m), while both Cruise and Other Investments were loss-making in 2021 (for a total of $85 million).
After languishing for few years due to depressed oil prices (which until 2016 comprised the majority of the business), the transition from an oil&gas-dominated name into a renewable-energy company did not go unnoticed by the investor base, with the price up 8x from a minimum of ~NOK 50 to a maximum of around NOK 400 this past August (price has now retraced to below NOK 300).
In terms of valuation, this is where things get tricky: but if you read my previous posts, you know that using a complicated DFC or arriving at a precise target price is not my cup of tea.
Currently, Bonhuer is not really expensive as it trades at an EV/EBITDA of 7x and EV/EBIT of 10x, but at a P/E of 100x (this is because of the impact of minority interest: most of the profits are indeed in the renewable energy segment, but are “shared” with external investors); it also pays a 1.3% dividend yield.
I think a back-of-the-envelope sum-of-the-parts is the best way to get an idea of Bonheur’s intrinsic value. Thankfully, the company provides the allocation of tangible assets and debt for each segment.
Renewables. I used data from similar European pure renewable production companies to create the following table:
With the exception of Orsted (whose earnings are difficult to interpret as it combines operating assets with development projects in subsidiaries), the other companies currently trade at NOK 18/20 million ($1.7/$2.0 million) per installed MW. Relative current prices are always affected by a lot of factors factors, but there have also been a couple of recent M&A transactions in the sector (plus myriad of acquisitions of wind parks by private equity and infrastructure funds): in February a vehicle sponsored by JP Morgan Investment Management acquired Falck Renewables for €2.6 billion, equivalent to around NOK 28 million per installed MW; and in August KKR acquired Albioma for €1.6 billion, equivalent to NOK 18 million per installed MW.
Bonheur itself has been active in M&A, although some years ago. In 2015 it sold a 49% stake in FOWL (comprising at the time 6 Scottish wind farms) to TRIG at an implied price of £1.8m per MW of capacity (or NOK 18 million at the time). And in 2018 it sold 49% of two new Scottish wind farms to Aviva at an implied price of £3.2 million per MW, or NOK 34 million. (Due to changes to subsidies in the UK in 2017, an older wind farm is worth less than a newer one: that accounts for the difference in the prices paid in the two transactions).
Triangulating this data, the range from the table above is – roughly speaking - correct: with Bonheur having 787.7 MW of installed capacity, its EV can be currently estimated at between NOK 14.2 billion and NOK 15.8 billion. Finally, the pure renewables European companies trade at an average EV/EBITDA multiple of 14x: applying this to Bonhuer’s expected 2002 EBITDA (something more than NOK 1bn for the renewable segment) gives an EV of NOK 14 billion.
Let’s keep it simple and say it’s NOK 14 billion: subtracting NOK 5.5 bn of debt issued by FORAS, the equity valuation for the renewable segment is around NOK 8.5 billion ($825 million), or NOK 200 per share.
Wind Services. Despite growing demand for offshore wind installations, this is a capital-intensive, low ROIC business: operating margin was 11% in 2021, but it is frequently negative (on average ~4% over the last decade) and pre-tax ROA is just 2% over a full cycle.
FOO closest competitors are all private firm, with the exception of another Norwegian company, Seaway7, which is listed and on average traded at a forward EV/EBITDA of 7x: this sounds about right for this type of business.
Applying this multiple to Bonheur, with wind services having a normalised EBITDA of c.NOK 415 million, we get to an EV of NOK 2.9 billion: deduct NOK 1.5 bn of debt at the subsidiary level and the equity value is NOK 1.4 billion.
Cruises. After a couple of very difficult years, results so far in 2022 have been decent, but cruises remain very cyclical. To be conservative, I simply value the four ships and the other assets at their depreciated book value (net of some NOK 300m in debt) of NOK 1.2 billion.
To arrive at the group’s NAV, there are both some more debt and some extra cash at the holding company level. Altogether, my “guesstimate” of NAV is around NOK 320 per share, just 10% above current market price: 70% of NAV is from the renewable segment.
So: a good business or not?
Wind energy is a key part of Northern Europe’s total energy production and is growing in significance: Bonheur has grown production by 12% p.a. since 2010 and renewables fits perfectly into the broader discussion of energy security (on the other hand, one aspect that is not widely discussed is what to do with the scraps from wind turbine and solar panels, which are highly polluting).
Bonheur is present across the whole value chain: onshore through FORAS, offshore through the services offered by FOO (installation, service, maintenance, carrying and consulting, …) and in future development through FO 1848. It also has a very promising pipeline of development projects, which will markedly increase its installed capacity. Funding and completing these projects should not be an issue: not only some of them as co-developed with European utilities, but it has established a €480 million fund (Hvitsten AS) dedicated to onshore wind projects.
Therefore, on the plus side:
Assets: Bonheur has ships for installation, operation and maintenance for offshore wind that are rare and in demand: over the last few years they have increased their capacity, level of utilisation and total revenues
Know-how and competencies: Bonheur has a long experience and knowledge from offshore drilling and shipping, which is very valuable for offshore wind
Long-term view: as a family company, the focus is not on the next quarter but rather the next generation, and the one following it. This long-term view has so far proved successful in pursuing new successful business ventures
And some cons:
Profitability: ROIC has historically been modest, mostly due to the capital-intensity of the industries it operates in; there’s no near-term risk of default, but this is not a high growth / high ROIC compounder
Corporate governance: not an issue so far, but the lingering presence of a majority shareholders should always be considered
Any investment in the renewables sector should be looked at from a plethora of angles (levelized costs of energy, revenues/cost in different jurisdictions, …), on which I’m not an expert. But Duncan Lamont of Schroders has a very interesting piece on how well renewables perform well in a stagflationary environment (low growth + high inflation): the main reason is because in UK and most of Europe contracts are linked to inflation rates.
“On the cost side, an important differentiator for renewables compared with other assets is that the price of many of the main inputs is zero. Sunshine or wind doesn’t cost anything. And what costs there are (such as maintenance and land leases) represent a relatively small percentage of the revenue and are usually fixed or inflation-linked over the medium to long term. Contrast this with a manufacturing company which is highly exposed to labour and energy costs. “
“There is a need for material investment in renewable energy capacity around the world if we are to transition to a low carbon future. It should not, therefore, be any surprise that the pricing structures that underpin them have been designed to incentivise investment. Long-dated, inflation-linked, resilient, secure cashflows meet the criteria of many investors.“
The report also explains why these projects, although with “long duration”, are not as sensitive to interest rates as are long duration bonds.
“In technical terms, renewables’ duration is shorter. This is for two reasons. First, because the residual value assumed for a renewable asset at the end of its useful life (around 30 years for solar and wind) is zero. Its value is derived entirely from the projected cashflows over that life, not any sale value. And the vast majority of this value comes from the first 15 years of cashflows.”
“In contrast, for a 30-year bond, a big part of its value is driven by a principal repayment in 30 years, whose present value is very sensitive to changes in real yields. Renewables have a shorter duration than you’d think based on their 30-year life, as they “amortise” their value over that period.”
Bonheur it’s not a pure player in the renewable energy space, but it’s one of the companies with the most experience, the assets/know-how and long-term approach to be successful.
For most European family-controlled conglomerates complicated ownership structures and opaque reporting is a feature (see for example Compagnie du Bois Sauvage), as they do not want outsiders to get a full grasp of their wealth: even more so in Norway, where each resident’s worldwide net wealth above NOK 1.5 million (~$150,000) is taxed at 0.85%. The trick – where possible – is to separate those managers creating value even if the market doesn’t yet recognise it from those that are just lining their and their relatives’ pockets.
Bonheur is definitely not expensive but currently trades close to my very rough calculation of intrinsic value, and as such does not offer a significant margin of safety as it was the case few years ago. But I’ve been deliberately conservative in my estimates (i.e. the cruise and wind services segments will probably have a brighter future than I assumed), and the renewable energy business could be worth a lot more given its expected growth in capacity and the value to strategic buyers (dedicated private equity / infrastructure fund but also pension funds).
The Olsen family has demonstrated good entrepreneurship and capital allocation skills: future returns will come from their decisions, not from buying at a clearing price (at the moment we are not in that situation).
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