Summary
- MPC Container Ships is a Norwegian company focusing on the small containership segment.
- The company is currently printing cash and now the net debt has decreased to just over $100M, the dividend payout ratio was increased to 75%.
- The current enterprise value represents just 70% of the contracted EBITDA.
- Although I'm reluctant to invest in the container shipping space knowing more supply will come online, it looks like MPC has its ducks in a row.
Introduction
MPC Container Ships (MPZZF) is a Norway-listed lessor of container vessels to a number of Tier-1 operators like COSCO, CMA CGM, Maersk and Seaboard. As this is a relatively small company with a market cap of just under $1B and as it doesn’t have a full US listing, the company is still flying under the radar as it is trading at less than 3 times earnings on an annualized basis.
Yahoo Finance
MPC’s most liquid listing definitely is its listing on Euronext Oslo, where it's trading with MPCC as ticker symbol . The average daily volume in Norway exceeds 3 million shares so interested investors should definitely use the company’s Norwegian listing. There are currently 444 million shares outstanding resulting in a market capitalization of approximately 9B NOK. At the current exchange rate, this represents less than $900M.
The website contains download-only links, but you can find all relevant data here .
A strong performance in the first half of the year
MPC Container Ships focuses on the smaller segment of the container vessels as its average capacity per vessel is just around 2,500 TEU. The fleet list shows 69 vessels but this includes one vessel available for sale and the four newbuilds which will only be delivered in 2024. There are 64 vessels active for MPC and the average amount of vessels deployed during the first and the second quarter came in at 60.
The total revenue in the second quarter was just over $151M, an increase of in excess of 5% compared to the first quarter. Meanwhile, the operating expenditures actually decreased compared to the first quarter and the only reason why the gross profit and EBITDA came in lower than in the first quarter was the much lower contribution from joint ventures. Excluding this element, the gross profit would have increased by approximately 10% in the second quarter.
MPC Container Ships
This doesn’t mean Q2 was bad. The company was still printing cash thanks to the exceptionally high charter rates and the quarterly net income was approximately $90.1M resulting in an EPS of $0.20. This brought the H1 2022 earnings to $0.47 and at the current exchange rate, this represents an EPS of approximately 4.8 NOK. This means that if you would annualize the H1 earnings, MPC Container Ships is essentially trading at just over 2 times the net income. Not bad at all, and that’s slightly lower than its peers like a Global Ship Lease ( GSL ) which I think is the closest comparable.
It also doesn’t come as a surprise to see the operating cash flow come in at a very strong level as the company generated approximately $99M in operating cash flow and after deducting the interest expenses and lease costs, the adjusted operating cash flow was a very strong $97M.
MPC Container Ships
The company spent about $15M on scrubbers and dry-docking resulting in a free cash flow result of approximately $82M. A very strong result which also means the company is in an excellent position to cover the dividend and shouldn’t have any issues to finance the new vessels.
The company’s dividend policy is pretty clear: The company plans to use 75% of the recurring earnings for dividends and based on the $0.20 EPS in Q2, a dividend of $0.15 per share was paid. That’s approximately 1.5 NOK and represents about 7.5% on the current share price for just the second quarter.
MPC Container Ships
Of course, charter rates are coming down a bit so it wouldn’t be wise to just assume the dividend will remain stable: It will always fluctuate in function of the recurring earnings. The dividends can be increased if extraordinary circumstances occur. The shareholders will for instance also benefit from the sale of a vessel.
Between now and the end of 2024, MPC Container Ships will need to spend almost $225M on four new vessels. But MPC played it smart and it has already secured charters which should generate in excess of $280M in EBITDA. So basically MPC is already pretty sure these new vessels are paying for themselves.
MPC Container Ships
The majority of the days have been fixed for 2023 and 2024 as well, creating strong visibility
The main issue in the container shipping sector is the lack of visibility when it comes to charter rates for vessels. Fortunately MPC has locked in longer term contracts for a large portion of its fleet. For 2023, for instance, 84% of the days have been fixed at an average charter rate of almost $32,000/day. This means the contracted revenue for 2023 is already $548M with 16% of the available days still open for new charters.
MPC Container Ships
Even for 2024, about 56% of the days are fixed at an even higher average daily rate of in excess of $35,000 per day. So although the percentage of contracted days drops from 84% to 56% (a 33% decrease), the total revenue falls by just over 20% as the higher charter rates are making up for the lower amount of contracted days.
The next image is a very interesting slide provided by MPC. It explains how the current contracted EBITDA and the scrap value of the vessels already exceed the current enterprise value of MPC.
MPC Container Ships
And since this slide was published, the market capitalization fell by an additional $200M. Based on a net debt of just $101M and a market cap of $900M, the enterprise value is just $1B which is handsomely covered by the combination of contracted EBITDA and the scrap value of the vessels.
Investment thesis
While MPC is attractively priced, it looks like the dividends are subject to the 25% Norwegian dividend withholding tax and this could be a handicap versus other container ship lessor companies that are domiciled in more advantageous jurisdictions.
While I’m not really a big fan of the owners of container vessels as quite a few newbuilds will hit the water in the coming years, I always will have a good look at well-run companies with a strong balance sheet and high contracted revenues with reputable parties. MPC fits that bill and although the charter rates will remain volatile, MPC’s longer term contracts provide excellent visibility. There is a realistic chance the company will pay out its entire current market capitalization in dividends by the end of 2025.
I currently have no position in MPC but will keep an eye on the company’s performance.
For further details see:
MPC Container Ships: Providing A 25-30% Dividend Yield For The Next 2 Years