DFDS: the Danish shipping line buying back its own shares as profits soar

DFDS: share buybacks and rising profits at the Danish shipping line

DFDS A/S has spent years doing what many Spanish value managers preach and few practise: buying back its own shares while the business grows. The Danish shipping line, with 150 years of history behind it, closed the first quarter of 2018 with a pre-tax profit of 173 million Danish kroner, up 10% on the previous year, and revenue of 3.5 billion, 8% higher. The market celebrated. The shares, which had been in an uptrend for months, kept hitting all-time highs.

The thesis repeated over and over is simple: a P/E of 13, low EV/EBITDA, net debt to EBITDA of just 0.5 times, return on equity above 12% and return on shareholders' funds above 20%. The profile of a boring, predictable and profitable company that, nevertheless, trades at a discount. Or so claim those who have trinc it for years.

A buyback programme that never stops

The company launched a 350 million kroner buyback programme in August 2016 that was almost fully used up: by the end of that year it had accumulated 779,829 shares for 251.8 million, 71.9% of the total planned. In February 2017 it started another of 300 million. Week after week, the purchase announcements kept coming: 39,065 shares in week 50 of 2016, 32,411 in week 23 of 2017. For advocates of long-term investing, there are few more reliable signals than a company putting its money where it says the value is.

Growth on the water: new routes and ships

DFDS is not just buying back shares; it is also expanding. In 2016 it added capacity on the Rotterdam-Immingham route with the Friedrich Russ, a vessel capable of carrying 110 semi-trailers. In 2017 it ordered two new ro-ro ships from the Chinese shipyard Jinling, for delivery in 2020, and christened the Tulipa Seaways as the second cargo ship of the series. The growth plan pointed to new routes in the Baltic, the Mediterranean, Greece and Turkey. The purchase of a Turkish shipping line triggered one of the stock's nastiest scares: the lira plunged and the shares fell 7% in a single session, at one point losing 11% intraday.

Brexit and Turkey: the two open fronts

Exposure to the United Kingdom is structural: much of its freight network connects the continent with British ports. Brexit introduced uncertainty over tariffs and trade flows. The Turkish adventure added another front: if the United States tightened trade measures against Ankara, Turkish exports would fall, and with them the freight for the fleet. Those defending the position argued it was temporary, that the company was still cheap and that, if it fell further, it was time to buy. Those who sold did so with modest gains, unwilling to take on the risk.

The cruise sector, a tailwind

The passenger business was also blowing in its favour. In 2015, 6.6 million passengers sailed on cruises in European waters, 3% more than the previous year, and the industry had accumulated 49% growth since 2008. DFDS, with passenger routes in northern Europe, benefited from that tide. It is not the core business, but it adds up.

The question that remains open

With the first-quarter 2018 results on the table, the company maintained its forecast of beating the previous year's record. The numbers were favourable. Debt remained ridiculously low. The buybacks continued. And the P/E, according to the estimates circulating, was still around 13 or 14. The most repeated prediction was that the shares would be worth far more in a few years. The caveat: nobody knew how heavily Brexit would weigh on the British routes or how the Turkish bet would play out. Only time would tell whether patience would be rewarded.