2023-03-14 08:31:32 ET
Summary
- MPC capitalised on the containership high by realising assets and paying out a 47% yield last year.
- While these are one-offs, MPC will sail into 2023 with 86% of operating days covered at attractive early 2022 rates, with a duration now of 2.2 years.
- The recurring yield should be around 5% from now on, but income investors need to realise this is a variable, albeit quarterly and recurring dividend.
- There isn't much of a value story here on the basis of liquidation value. Moreover, containerships are not something we want to take a risk on due to deteriorating macro.
- However, there are some relative advantages with MPC. But long and deep cycles need to be acknowledged with low profits very possible.
MPC Container Ships ( MPZZF ) is another containership company with 62 vessels with an aggregate TEU of around 134,270, meaning their ships are on average relatively small. They've introduced a dividend last year which is a draw for income investors. Moreover, the company has shown a willingness to pay out gains its made on ships with special dividends. Yield was in excess of 40% last year, and assuming no more specials the run-rate yield should be around 5% which is decent. Moreover, their income is pretty well-defended thanks to the fact that they nailed down a lot of pretty attractive charters, and their fleet is well-utilised. However, there is not much of a valuation story, with the company not trading below liquidation value. Still, we aren't ones to take a risk on something like shipping at the moment, and for that reason alone it is a pass.
Recent Sales
They sold their vessel the AS Cleopatra, a 2006 build, at a pretty good price, as well as some other assets that are instead full-owned. The multiples being paid for TEU vary between around 4-8x, and liquidation values for MPC can be anything between $600 million and $1 billion , where the EV of MPC is really at the midpoint of that, and trades in line with the company's reported carrying value of vessel value - arguably the best source given all the variables that might give a vessel more or less value, including fuel optionality and of course age. This accounts for jointly owned vessels as well, of which there should be six. There's not much of a value story, but there is an income story, and investors in 2022 would have received massive special dividends on several sales that optimised the portfolio, where the fleet was 20% larger in as of the FY 2021.
FY Situation
Early 2022 was still a good situation in terms of the charter rates you could get on vessels. About 2.2 years is the average duration of contracts sealed at those rates or even higher from 2021, and the amount of business locked in is pretty impressive, with MPC able to sail off that income for a while longer.
86% of the business is locked in at fixed contracts for 2023, and 57% will be locked in for 2024. Of course, new contracts being signed on those residuals for chartering their vessels will be at poorer rates in all likelihood, given the economic direction. The good thing is the distribution of open vessels is skewed towards the smaller sizes for more localised and less complex trade routes, also less exposed to congestion that may be caused by various health or geopolitically related trade issues.
Leverage has also been reduced very substantially, and isn't a major concern anymore at net debt around 3% or so of EV.
The performance is what you'd have expected from shipping as of the FY 2022. Massive increases in average charter rates, even relative to the Q4 of 2021 as time charter rates lag spot rates understating the spot effects being seen as of the Ukraine war, and for the FY the growth was even greater as the latter part of the year showed some retreats in time-charter rates as they caught up to a worse economic situation. Costamare ( CMRE ) reported about 30-40% declines depending on TEU towards the end of the year compared to 2022 peaks. Utilisation was high throughout as one would expect, and will remain high in 2023 thanks to contract duration.
Shipping Market Update
While rates are coming down, they are coming down slower than they might have due to very long-term contracts being signed over the last years. Availability in 2023 will be lower than it was in 2022 for the whole market. Still, orderbooks are really big compared to fleets for larger vessels at 68% rather than 15% for vessels between 1-3k TEU. It's even lower between 3-6k TEU which is also where quite a few MPC vessels lie. So these fleets aren't going to grow as quickly, but faster orderbook velocity means that the difference is less than what it seems. Still, smaller TEU is a little more advantaged right now.
This can be seen also in the supply growth chart, where shrinking will happen in 2024 according to forecasts for vessels providing TEU for intra-regional trade, more smaller vessels.
Bottom Line
This isn't to say that MPC will not see eroding earnings, but it's a little advantaged also thanks to locked in charters. When they rollover, it'll be in a slightly more efficient time. With 5% yields on offer and a 1.99x trailing PE, there is definitely a case to be made for the company, especially on a yield basis. The 5% is likely to be sustainable for a while. The problem is that the industry is volatile in terms of earnings over typically quite long and deep cycles, so where all this will go is difficult to call and outside of what we're comfortable with.
For further details see:
MPC Container Ships Has 86% Of 2023 On Lock At 2022 Rates