2023-11-28 07:57:45 ET
Summary
- MPZZF's share price has fallen below its fleet's scrap value and contract backlog. The downside seems limited and may represent a more attractive pricing point.
- Its low leverage ratio of 17%, strong free cash flow, and 1.7 years of firm backlog prepare it to grow and pay dividends should opportunities arise.
- Additionally, it has no significant debt maturities until 2027. However, due to tax and fees, some investors may find its domicile and stock exchange unfeasible.
Investment Thesis
MPC Container Ships ASA (MPZZF), a 40-percent-yielding container feeder owner and operator, just released its Q3 results. Riding off the back of historic rates fixed in the last few years, it has delivered attractive dividend yields and deleverage. That yield will come down in the future, but having a relatively long contract backlog at great rates, even 2025 yields are estimated at 12 percent.
MPZZF's recent share price drop to about NOK 14 (USD 1.30) offers investors a more attractive pricing point. At USD 1.30/sh, its market capitalization is about $576 million. Compared to an estimated fair market value of $558 million of its fleet on water, $220 million in new builds, and a projected EBITDA backlog of $700 million ( p. 18 of its latest earnings presentation ), it is currently priced well below the value of its firm backlog (even if discounted at 12 percent to $625 million) and scrap value of the fleet. While there are few positive signs to be found for future charter rates, there are signs that interest rates may be peaking. Also, MPZZF's sub-segment is not exposed to the extensive order book weighing down the larger container shipping segments, as it operates in the smaller sub-segments. In other words, the downside seems limited from here - unfortunately, the upside seems limited, too.
It has no significant debt maturities until 2027, and all of its four new builds have firm contracts commencing from delivery. At a debt-to-equity ratio of 17 percent and with $100 million cash on hand, MPZZF can grow and continue paying dividends.
This amounts to a weak "buy" recommendation for investors not exposed to the friction (taxes, currency risk) outlined in the chapter on risk and "hold" otherwise.
Company Overview
MPC Container Ships ASA is an owner-operator concentrating on intra-regional routes and controls a fleet of 60 ships, ranging in TEU capacity from 1,200 to 3,600.
It is headquartered in Oslo and listed on the Oslo Stock Exchange. Since its inception, it has prided itself on its ability to pay generous dividends to its shareholders.
Management Team
MPZZF is headed by CEO Constantin Baack, who has served in the role since its founding in April 2017. He has been with the MPC Group (its "Capital" arm was heading the foundation of MPZZF) in various roles since 2008. Before joining MPC, he worked at Ernst & Young within its auditing and advisory business and had a stint in Hamburg Süd's marine operations.
Mr. Baack is joined by CFO Moritz Fuhrmann (joined in 2022), COO Christian Rychly (joined in 2023), and EVP Pål Sætre (joined in 2021). In other words, it is a relatively fresh management team in a young company.
Contract Backlog: Remember Those Rates, They Are Fading Away
As of September 30, 2023, MPZZF has a firm contract backlog of $1 billion (about 1.7 years duration).
Its Q3 presentation (p. 16) summarizes its backlog as follows:
With two-thirds of its available days already booked in 2024, the downside risk to its revenues is limited. However, in 2025, just 25 percent of open days are contracted. The contracted rates are far above what one can reasonably expect to receive in the current market. Consequently, MPZZF will have to see its "contracted forward TCE" go down further to fill open days.
By just how much?
A "Chartering Update" on p. 5 of the presentation above offers a glimpse. It fixed charters on three 2,800 TEU ships in September and October, ranging from USD 12,000 to USD 14,700/day. Its "Fleet Employment Overview," starting on p. 27, reveals that its other 2,800 TEU ships are contracted between USD 14,000-USD 39,000/day.
On p. 19, it expands its view on future rates by offering the following overview of its sensitivity to charter rates.
The notes (p. 31) refer to these figures as "illustrative scenarios" rather than forecasts. MPZZF's inclusion of the 10-year average and the current market rates side by side seemingly means it thinks the current market rates are overly low.
Assuming a $385 million net profit for 2023 (taking the YTD net profit of $289 million and multiplying by 4/3) and applying its dividend policy (aiming for a recurring dividend of 75% of net profit after tax), one would expect a 2023 dividend as follows:
$289 million net profit * 75% allocated to dividends / 443.7 million shares outstanding = 0.49 USD/sh dividend for 2023
A closing price of NOK 14.11 (USD 1.32) as of November 27 implies a 37% dividend yield for 2023. Given current market conditions and assumptions, MPZZF expects this to drop to 28% in 2024 and 12% in 2025.
Fleet Composition: MPZZF is Well-Positioned in the <3k TEU Segment
The following image compares the fleet composition of MPZZF to its peers Danaos (DAC), Global Ship Lease (GSL), and Costamare (CMRE). To create the image, fleet data was pulled from each company's website and adapted to classify ships by age and class. Data is from November for MPZZF and October for the others. The result is illustrated below:
MPZZF tilts towards smaller and newer ships compared to its peers. Furthermore, it plans to divest two of its older, 2004-built ships (see next paragraph).
Its Q3 earnings presentation (p. 6) lists the following upcoming divestments:
The sales of the AS Romina, AS Pauline, AS Paulina, and AS Petra will bring in a total of $32.5 million of additional liquidity, based on the gross price listed above.
Newbuilding program: Straight from Yard to Time Charter
As of September 30, 2023, MPZZF has four ships on order ( Q3 report, p. 21 ), all of which will be going straight into long-term charters upon delivery:
Ship class | Contract price | Delivery | Charter |
5,500 TEU eco | $72 million | Q2 2024 | 7-year TC with ZIM |
5,500 TEU eco | $72 million | Q3 2024 | 7-year TC with ZIM |
1,300 TEU dual fuel | $39 million | Q4 2024 | 15-year TC with NSea Container Line |
1,300 TEU dual fuel | $39 million | Q4 2024 | 15-year TC with NSea Container Line |
The remaining commitments on these four ships total $163.3 million:
Year | Remaining commitment |
2023 | $18.3 million |
2024 | $145.0 million |
Sum | $163.3 million |
Generating about $155 million in free cash flow in the first three quarters of 2023 (CF from operations of $387 million minus upgrades, new builds, and acquisitions of $232 million) and adding in the $32 million from sales of ships, the $35 million under unused revolving credit facilities ( p. 18 of Q3 presentation ), as well as $100 million cash on hand. It is also in talks with a European Bank to finance up to $55 million of the total new building cost of $220 million (see next chapter for details). MPZZF appears likely to be able to finance these new buildings.
Long-Term Debt Repayment Profile: Next Significant Outlay in 2027
As of September 30, 2023, MPZZF has a total outstanding debt of $174 million, of which $81 million is classified as current and $93 million as non-current ( Q3 report, p. 22 ).
In its earnings presentation (p. 23), its repayment obligations are laid out:
MPZZF will have no significant maturities until September 2027, when its BoCom leasing agreement of $65 million expires. The BoCom leasing stems from a sale and leaseback transaction in September 2023. At the end of the term (September 2027), it carries a purchase obligation for all twelve vessels included in the agreement.
Interest Rate Exposure: Hedging About 40 Percent of Interest-Bearing Debt
As the table in the preceding chapter shows, MPZZF is exposed to SOFR rates and has no fixed-rate loans. It employs swaps for a notional amount of $80 million plus options for another $43 million:
In other words, a little less than half ($80 million) of its long-term debt of $170 million is covered by swaps, having a weighted average rate of about 3.50%. Starting in 2024, the 2% swap will expire, increasing the average rate. The SOFR rate is about 5.3% as of November 2023.
Largest Shareholders: 84 Percent Free Float
According to its annual report in 2022 , a few institutional investors are among the largest shareholders of MPZZF. Sixteen percent is owned by MPC CSI, which means that about 84 percent of the stock is free float. Norwegian shipping investor Arne Blystad also owned about 4.5 percent through Songa Capital.
A Look at the Fundamentals
Price/Book: Trading at Below Book Value
After trading at about book value for much of 2023, the price of MPZZF slipped by almost 25% during Q3 and is now trading at around $1.30, about 75% of its book value.
In other words, the market is pricing in further decreases in the time charter rates and asset prices.
Compared to its peers ( DAC , CMRE , and GSL ), MPZZF is still relatively expensive:
Debt: Growth and Dividends May be Possible
Considering debt to equity, we see that peer Danaos Corp. and MPZZF operate at remarkably low leverage. The MPZZF line does not extend to Q3 yet in Ycharts' data set, but it is currently on the same level ( p. 4 of Q3 earnings presentation )
Looking at financial debt to EBITDA, we see the same picture. MPZZF does not use much leverage, even compared to its peers. As in the graph above, the MPZZF line does not extend into Q3. Back-of-the-envelope calculations based on the Ycharts definition of this metric yield a number about the same as it is below (0.27).
Free Cash Flow Yield and Dividend Yield
Reviewing these two metrics illustrates the differences between MPZZF and its peers regarding capability and willingness to distribute dividends to its shareholders.
A dividend yield of close to 50 percent (of course, the recent drop in the share price drives some of that) is nothing short of remarkable. As discussed above, this fantastical yield is set to decline into 2024 and 2025 but remain far above the levels of its peers, all else being equal.
Market Outlook
Order Book: The Market Focuses on the Bigger Ships, Which Benefits Smaller-Sized Carriers
From p. 13 of its Q3 presentation, the slide below shows that the sub-segment MPZZF operates in has favorable supply dynamics.
The more significant segments (8,000 TEU+) are suffering from declining rates and an ample supply of tonnage coming on water. MPZZF's segments look better: the fleet on water is generally older and thus has more candidates for scrapping, and the order book is much smaller.
All else equal, the order book size is manageable for a company such as MPZZF.
Risks
Charter rates. In addition to the tonnage supply, demand for that shipping capacity influences charter rates. For container vessels, the world economy, interest rate levels, and the probability of recessions drive charter rates.
A Financial Times piece published on November 27 titled "Peak-rates euphoria" discusses the recent market optimism. It cites Bank of America's fund manager survey, which found that 61 percent of investors expect lower yields in 2024. Is peak rates here? At least there are signs of optimism in the market.
A peak in interest rates benefits the world economy, lowering the risk of a brutal recession and contraction.
Withholding tax on dividends. U.S.-based investors should consider the effect withholding taxes may have on returns on their investments in Norwegian stocks. The Tax Administration has more .
The NOK . MPZZF trades in NOK, a small and relatively illiquid currency, compared to more significant and liquid currencies like the USD and the EUR. Foreign investors may see lower - or higher - returns based on fluctuations in this currency. In times of uncertainty, investors usually try to avoid riskier bets, which the NOK would represent. The Norwegian Central Bank's primary goal is low and predictable domestic inflation - it does not attempt to peg the NOK to any other currency.
Conclusion
This analysis has compared MPZZF to some of its peers and found that it offers lower leverage and higher yields with a generally younger fleet. Its capacity to grow and pay dividends is excellent, but current market rates imply declining yields in 2024 and 2025. Nonetheless, its solid fundamentals will help when looking for growth opportunities and support continued dividends.
This amounts to a weak "buy" recommendation for investors not exposed to the friction (taxes, currency risk) outlined in the chapter on risk above and a "hold" otherwise. The fundamentals of MPZZF are good; the downside seems limited, but the upside seems limited, too.
For further details see:
MPC Container Ships: Strong Fundamentals, But Yields Likely To Decline In 2024-2025