peshkov
Last summer, I was not connecting yet with shares of World Kinect (NYSE:WKC) which saw shares lag and underperform, the result of limited organic growth, which in its turn was the result of long-term headwinds in its fuel and related service industry due to the positioning of the business.
After another struggle in 2023, the company started 2024 with some positive news flow, including another convincing dividend hike, a divestment, and aggressive midterm targets, the combination of which looks compelling but needs to be backed up by actual improved results.
About World Kinect
World Kinect is still known as World Fuel Services to many long-term investors. The company provides fuel and related services to its customers which operate on land, air, and sea.
World Kinect essentially provides a distributor role between over a thousand suppliers and over 100,000 customers, which rely on the business for 24/7 support, fuel, and services across the globe.
Pre-pandemic, the company provided some 20 billion gallons of fuel (equivalent) to customers, generating nearly $40 billion in sales, yet these are very low-margin sales given the nature of the activities.
Gross profits of just over a billion worked down to gross margins of just around 3%, as the company posted operating profits of around a percent. Typically engaging in many bolt-on acquisitions, investors have long liked the business and shares, which saw shares peak in 2015. The shares were down to levels at roughly around the $30 mark pre-pandemic, with shares reported at $2 and change per share.
Struggling
Since the outbreak of the pandemic, shares of World Kinect have traded between $20 and $35 per share, as the business has seen stagnation. Sales were nearly cut in half in 2020 to $20 billion, yet a divestment eliminated net debt as earnings held up relatively well.
Following buy-side M&A activity and a recovery in the economy, sales recovered to $31 billion in 2021 and to $59 billion in 2022. Despite the 2022 improvements, adjusted operating profits of $276 million were relatively modest, at just around half a percent of sales, with earnings reported at around $2 per share.
Shares were under pressure, down to $22 per share in August of last year. The resulting valuation multiple contraction looked compelling, yet the mediocre performance in recent years and modest future prospects weigh on the shares. As a counterargument, some 10% of the business now focuses on renewable fuels.
2023 – Rather Stable
In February, World Kinect posted 2023 sales down 19% to $47 billion and change, yet underlying volumes were down just 2% to 18 billion gallons (or equivalent) of fuel, with gross profits reported flattish at $1.1 billion. Reported operating income fell 28% to $198 million, yet adjusted operating profits were up 4% to $288 million.
GAAP earnings were cut in half to $0.86 per share, yet adjusted earnings per share were down just 4% to $1.95 per share. While some of the discrepancy is attributable to amortization charges, which I am happy to adjust for, a big part of the reconciliation was the result of an erroneous bid in its Finnish land business. This turned out to be very costly and raises concerns about risk management practices and strategies.
Net debt is reported at $583 million, defined as the sum of cash holdings minus regular debt, although the company has some net positive value in derivate assets as well. With full-year adjusted EBITDA reported at $386 million, leverage ratios are very manageable at around 1.5 times leverage.
With 60 million shares actually having recovered to $25 per share, the company commands a $1.5 billion equity valuation, actually below reported book values, or $2.1 billion if we factor in net debt. Given the lackluster 2023 results, certainly, as the company did not end the year on a high note, it is understandable why investors awarded shares just a high-teens valuation to the shares in the fall.
Some Upbeat News
Despite the tougher results, World Kinect offered some upbeat comments in March. The company announced a 21% increase in quarterly dividends early in March, now paying $0.17 per share on a quarterly basis, as this now provides a roughly 3% dividend yield.
This was followed by a substantial divestment. World Kinect announced that it has reached an agreement to sell Avinode Group, its air charter sourcing platform, to CAMP Systems in a $200 million cash deal. The deal will be used to repay debt, set to reduce leverage by around half a turn and reduce interest expenses by around $10 million per year. Unfortunately, the press release provides no financial details on the contribution of Avinode (both in terms of sales and margins) to World Kinect´s results.
A day later, World Kinect outlined its goal to achieve 30% operating margins and $500 million in EBITDA by 2026, as this could increase pre-tax profits by nearly $2 per share (assuming stable depreciation expenses). Moreover, the company allocated 40% of the expected free cash flow generation, earmarked for dividends and buybacks.
If we look at the results over the past decade, we have seen World Kinect post gross margins anywhere between 2 and 4%, with margins typically being higher in low fuel price environments, and vice versa. That thus assumes structural improvements in profitability, as operating margins of 30% might result in operating margins near a point of sales.
If that were to happen, gross margins could average 3% of sales and operating margins targeted at 30%, profits might approach 1% of sales, and might easily end up near $4 per share, but that requires some real execution.
And Now?
The reality is that the combination of deleveraging, more focus on shareholder returns, and an ambitious 2026 guidance looks quite compelling I must say, but this is just the talk right here. Of course, the hard numbers still tell a story of no growth which raises concerns, but shares are quite cheap, and ambitions to return money to investors are high. Based on current (adjusted) earnings power, shares trade at low-teens earnings multiple, as there are great ambitions to improve these earnings (after they have shown no improvement for many years now).
Amidst all this, I am performing a balancing act, but I am not just willing to give shares and management the benefit of the doubt, taking into account the long-term underperformance of the share here. Given all this, I am keeping a close eye on and am encouraged by the words spoken but require a little more evidence to back these ambitions up here.
