2023-09-08 02:47:56 ET
Summary
- Navios Maritime Partners expects net fleet growth in 2023 and 2024, with earnings from tankers and container ships predicted to continue generating profits.
- The company has a gross fleet value of $4.4 billion and a contracted revenue of $3.3 billion on its modern fleet.
- Navios Maritime has increased its profitability through capital gains from ship sales and has secured new financing for future acquisitions.
I am invested in various value stocks and one on my radar is Monaco-based shipping company, Navios Maritime Partners L.P. (NMM). It has a decent dividend yield of 1.18% with an annual payout rate of $0.20. Despite the 14.38% (YoY) stock decline, I have derived significant returns in the last two years on the value of the capital gains. My approach has always been to catch this cyclical stock based on the market cycle. Other great investments in my shipping portfolio include Global Ship Lease with an annual forward dividend yield of 7.78% and an annual payout of $1.50.
Thesis
Navios Maritime expects net fleet growth in 2023 and 2024 despite geopolitical concerns that have disrupted supply and demand across the globe. The maritime giant is bolstering its fleet of tankers with two Japanese MR2 product carriers with their deliveries set for H1 2026 and H1 2027. Other earnings from tankers and container ships are also predicted to continue generating profits into 2024. I also believe that the company will benefit from stronger global trade trends into 2024 with more product volumes expected to cover the shortfall caused by the Russian-Ukraine war.
Navios Maritime's gross fleet value as of Q2 2023 stood at $4.4 billion with a net fleet equity of $2.2 billion. The company boasts of a contracted revenue of $3.3 billion on its modern fleet with an average age of at least 9.8 years. Despite having a higher market cap of $1.41 billion Zim Integrated Shipping Services Ltd. ( ZIM ) total revenues for Q2 2023 declined 61.8% (YoY) to $1.31 billion as the company sought to overhaul its fleet profile and instead advance its ESG goals.
Chartering Strategy
On its part, Navios Maritime, increased its profitability in Q2 2023 boosted by capital gains from the sale of ships especially container ships and tanker ships that recorded stronger earnings. The company had spent $80 million as of Q4 2022 on the acquisition of two Japanese newbuilding MR2 vessels. The company was optimistic that it would attain $52.5 million as the aggregate EBITDA for the 2 MR2 vessels after five years with a 13% annual yield. Aside from that Navios is looking at an aggregate charter revenue of $84.5 million with a 20% residual value after the charter contract.
The delivery of the two new builds is expected by the end of H1 2026 and H1 2027. Navios managed to negotiate a similar interest rate on both consignments meaning that they will each cost about $40.2 million each.
Already, Navios has $270.1 million in cash as of Q2 2023 representing an increase of 26.6% (QoQ). Each of the two MR2 vessels will be chartered out during the 5 years at a net rate of $22,959. This gain is significant since the company has at least 175 ships in water as well as under construction. The new acquisition will put Navios' total fleet at 177 ships comprising 81 bulk (ship) carriers, 47 containers, and 49 tankers. Under construction are about a dozen boxships, 6 MR2s, and 6 Aframax/LR2s. I have known Navios to not shy away from making big purchases as long as there is a perceived value at stake. In Q2 2023, the company agreed to buy the 2019 Navios Horizon 1 for $28 million (built and chartered). I also expect the 81,692 dwt ship to be delivered by Q3 2023.
Despite experiencing an almost 50% (YoY) drop in the charter market in Q2 2023, Danaos Corporation ( DAC ) recorded $241 million in operating revenue and even secured about $500 million in new charter contracts in the quarter. By the end of the quarter, DAC's total charter backlog rose to $2.5 backlog with the contracted charter coverage 99% for 2023 and 86% for 2024.
For Navios, Q2 2023 contracted revenue stood at $46.8 million identified as long-term revenue from 3 contracted MR2 vessels. These vessels are responsible for an average daily net pay range of $21,831 for at least 2 years.
Sales/Acquisitions in the Quarter and New Financing
As noted earlier, fleet proceeds (YTD) from the gross sale of 13 vessels in the quarter yielded about $242.2 million. In Q1 2023, Navios generated $160.3 million, in Q2 2023 it generated $59.6 million and in Q3 2023 it is expected to generate the remaining $22.3 million. From the total of $242.2 million, Navios intends to spend about $108.4 million in acquiring 2 new building MR2 vessels to be delivered by 2027 and an additional 3 new building capsize vessels for delivery within 2023.
The newbuilding development by Navios has used up almost 95% of its available financing. In Q2 2023, the company arranged a total of $350.2 million in new financing which I think came in at an opportune moment since its total debt stands at $2.22 billion. In its Q2 2023 transcript, Navios explained that it organized its "first export credit agency backed facilities in China and South Korea." Of the $350.2 million attained, $287.8 million is expected to refinance 36 vessels- which are already existing facilities with an average margin of 2.4% running for about 3 to 5 years. The remaining $62.4 million will be used to finance the two Japanese newbuilding MR2 vessels (at an implied interest rate of 7.0%0 for a 10-year term).
In the containership section, Navios acquired 12 vessels for $860 million hedged on a long-term credit line, and expected to generate about $1.1 billion in contracted revenue in about 6.5 years. Then there is also the LR2/ Aframax tanker subsector where the company ordered 6 vessels for $380 million. In the dry bulk newbuilding section, Navios is looking at 81 vessels with an average age of 10.4 years and a carrying capacity of 9.9 mdwt. The contracted revenue from the dry bulk fleet is the lowest at $308 million against $2.1 billion from container ships.
Factors Spurring Growth into 2024
Navios expects the global GDP to grow by 3% in both 2023 and 2024 bolstered by the rising demand for world oil. Reports indicate that in the first 7 months of 2023, crude oil imports into China grew 12.4% clocking 122.4 million tons. It is expected the Chinese economic growth in 2024 may be delayed if the Russian-Ukraine war persists. I am also looking at slower industrial production and the constant overhang of inventory as possible inhibitors of the recovery of the shipping industry.
Analysts expect dry bulk cargo volume to rise 1.5% and 2.5% in 2023 and a range of 1% to 2% in 2024. Sanctions on Russian coal are also expected to motivate a 0.5% and 1.5% increase in average haul in 2023. This trend will also positively affect the shipment of iron ore and grain shipments in Brazil. With the abandonment of the Black Sea grain export deal by Russia due to the ongoing war, Navios expects to reap additional grain volume transportation from Brazil, Europe, and Russia. Overall, seaborne grain trade is expected to grow by 2.5% in 2023 alone.
Valuation
Navios' price-to-earnings ratio [TTM] stands at 1.14 against the industry average of 19.66. This mark leaves off a difference of -94.22%. The enterprise value against EBITDA [TTM] also stands at 4.11 against the industry average of 12.03 (indicating a difference of -65.86). It is not uncommon for high-value shipping stocks to have low PE ratios. GSL's PE ratio stands at 2.18 against the industry average of 19.66 (a difference of -88.91). I think NMM is slightly undervalued and has a strong upside potential, especially when the 2 new MR2 Japanese vessels come online.
Risks
The persistent uncertainty over grain and fertilizer supplies from Ukraine due to the ongoing war may affect global shipping into 2024. Wheat futures have also been plummeting in 2023 lower than $5.8 per bushel. Global consumption of the commodity may also be revised lower with forecasts down 3.4 million tons to 796.1 million.
Navios also indicated in its transcript that seaborne coal trade is expected to decrease by 2.7% in H2 2023 due to the shifting patterns caused by the Russian-Ukraine war.
I also feel that the LR2/Aframax subsector tankers ordered by Navios for $380 million will not generate enough money to cover the expenses (not unless I am missing something from the statistics). The company ordered 6 vessels to be chartered out at an average net daily rate of $26,580 per day for 5 years. These vessels are expected to generate roughly $290 million, meaning that the company will incur a loss of about $90 million exclusive of any maintenance charges.
Bottom Line
Navios Maritime Partners has increased its profitability over time, bolstered by capital gains from ship sales and accretive acquisitions in the industry. Q2 2023 has seen the company register strong earnings, especially from container ships and tankers within its diversified fleet portfolio. I am looking forward to the delivery of its new build tanker fleet from Japan and the recovery of the global logistical economy as the key drivers to the company's growth into 2024. For these reasons, I recommend a hold rating for the stock.
For further details see:
Navios Maritime Partners: Strong Quarter Results Amid Challenging Logistical Market