Rubis: Vessel Ownership Benefits Kick In, Strong Legacy Businesses (OTCMKTS:RBSFY)

Rubis (OTCPK:RBSFY) delivered a really good quarter. Support and services would have been the trading angle this year as shipping rates climb, but the retail segment driven by the Caribbean saw excellent performance, and Haiti dragged less. The bulk liquid storage J.V is doing well on the back of investments that had been recently completed and are now being monetised. In the renewable energy business, which we regard with suspicion as per our last coverage, grew in EBITDA on the back of continued large investments in the segment. We still don’t find these investments particularly economical or impressive, and we note the impact that the larger debt burden is having on the ability for the performance higher up the sheet to translate into the bottom line. Nonetheless, the inherent operating leverage of the business, the high probability growth drivers and the security in being strategic infrastructure has brought the business clearly forward while being valued clearly at a multiple not typical for infra, which universally goes into the double digits even now.

Earnings Breakdown

The results were strong. Firstly, the topline is irrelevant and can be ignored. EBITDA is the place to start, or gross margin which is provided in the PR.

Support and services saw growth of 25%, a very solid result. Part of the reason for this is that they do shipping and trading, and with the conflicts in the Middle East, longer charter periods and less ship availability has caused shipping rates to reflate once again. It helps that the fleet also grew further in H1 2023, before the conflicts actually happened and when less ship owners would be scrambling for new vessels. The SARA refinery in the French Antilles, which operates with a fixed regulated margin, continues to provide a strong and stable underpinning to support and services.

The retail and marketing segment saw about 60% of the growth come from substantially better operating results in the Caribbean. Volumes were up 2%, and 5% excluding Haiti, with market share gains and the ability to push higher margins in the region growing results substantially by 45% in the region. The recovery in tourism, and general strength in tourism, drove the dynamics in this business. Europe was stable in volumes and saw some gross margin improvements.

Africa did well in terms of volumes, but FX effects impacted results. This was in spite of down volumes in bitumen, where Rubis is positioned to provide bitumen in Africa to support infrastructure development. Aviation volumes were strong in Africa this year, driven by Kenya, in addition to them being strong in the Caribbean.

Photosol saw increased EBITDA as new capacity comes online. It continues to be the main CAPEX sink, and is the sole cause for increases of net debt in a high interest environment.

We note the dramatic increase in total interest costs in the income statement which dampened the impact of higher operating results on the bottom line, with adjusted earnings (adjusted for an impairment of Haiti last year and a litigation gain this year) only increasing 8%.

However, to the segment’s credit, it is quite profitable and one day will start reducing leverage coming from the non-recourse debt used to finance the Photosol projects. However, as we detailed in our last coverage, terminal yields are not going to be that high, generously maybe ahead of 8% pre-tax, and the company states that the projects will have an IRR around 7-9% unlevered. While it’s an alright rate, it’s still below what the company could achieve with substantial buybacks and deleveraging, particularly given the current rate environment, or reinvesting in its flagship businesses. But depending on the investment opportunities that would be available in a couple of years’ time, a 7% IRR wouldn’t be that bad if they can deliver. Also, this business works on PPA agreements, often agreed prior to development and on a pretty long-term basis, so it is stable. We just don’t think the yield is there compared to alternatives, and given debt costs.

Bottom Line

We continue to be impressed with the strategic value in its support and services business. We had expected some downturn in the business due to its exposure to shipping, where charter rates were part of the general deflation in commodities and commodified services. Otherwise, retail and marketing continues to perform well, and is similarly strategic for the governments that require Rubis supply to develop.

For the storage J.V which we haven’t mentioned so far, we see very solid revenue growth and in-line EBITDA growth as inflation is passed on to customers. Utilisations remain very high at 95% driven by reserves of non-fuel products.

Markets have responded well to this news, with the stock now exceeding pre-dividend levels mid-2023, possibly beginning a long recovery from its highly depressed stock prices, that have been sinking now for years, relatively inexplicably.

The only reasons we could think of were dividend sustainability, weak-ish FCF conversion due to the Photosol projects and general capital intensity, and possibly the emerging market focus. While there are emerging market risks, with Madagascar making a stink last year with price caps and Haiti being a weight on the Caribbean business, it isn’t really a good explanation for the progressive declines since it’s always been the case that Rubis serves these markets. We really don’t like the Photosol business, particularly because both the dividend yield and earnings yield, in other words, in every way you account for stock value, it would be more beneficial to do a buyback than make these Photosol investments. There was also quite a lot of leverage from before that could have been brought down, and surely some ways to sink cash into their existing businesses more meaningfully.

At any rate, the strategy is already underway, so looking at outlook, nothing can be concretely predicted outside of the continuation of the secular trends in demand for supply of energy in emerging markets, as well as entry into new markets like Guyana and Suriname which are risky but may have a lot of potential. For support and services, ongoing conflict continues to support that business’ profits outside of the SARA business, but it could turn down if conditions normalise again. Photosol will continue to bring new capacity online. Based on “under construction” operations in Photosol, around a 20% capacity increase seems reasonable to expect in 2024 as a baseline, up to the possibility of doubling if all ready-to-build projects are realised as well. Adjusted net income is expected to grow another 10% or so, but before the application of the new global minimum tax, which will offset all growth and cause a flat evolution. Similarly, they seem to expect EBITDA to stay more or less flat. That’s not a bad outcome, and looks pretty good for an infrastructure play with a 10x PE and an 8% dividend income proposition, where infra multiples typically get quite stratospheric and yields rather compressed. A 5.3x EV/EBITDA is clearly low for infra.

We’ve been following Rubis for a long-time, and the valuation case has always been compelling, as well as yield, but we just don’t like how they are sinking cash and insisting on this renewable development. It doesn’t seem optimal, and it looks like they are fishing for ESG points, and we’d rather press on with just as cheap businesses, usually with better economics, in other markets.

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