Elite Client Idea #83

MPC Container Ships ASA ‘MPC’ (Ticker: MPCC; Price: kr13.54/share)

(Latest financials are for the quarter ended September 30th 2023; Year-end: December 31st; Financials are in US$)

MPC is a Norwegian shipping operator. It owns 65 medium-sized feeder vessels leased to major shipping liners - 20% of revenues were generated from Maersk and ZIM.

It commenced operations only in April 2017. Over the years it has issued shares to acquire vessels (including ~$150mn in FY21 to acquire Songa Container - resulting in ~$2mn bargain purchase). However, shareholder distributions to date have exceeded cumulative share issue amounts.

It’s an active buyer and seller of vessels – and is currently replacing ~30% of its fleet with eco-friendly/fuel-efficient vessels subject to less stringent EU regulations.

Geographic split of FY22 revenues (by route): South America (27%), Intra-Asia (27%), Middle-East (22%), Europe (9%), Africa (6%), Others (9%).

There’s currently an oversupply of vessels - expected to correct only around FY25. This has resulted in lower charter rates and vessel values. Further, fuel and other operating cost increases (crew, maintenance/repairs, etc.) have pressured margins.

MPC reported TTM revenues of $721mn (FY22: $617mn), ebitda of $508mn (FY22: $403mn), and net profits of $393mn (FY22: $435mn).

TTM earnings included $45mn in impairment charges and held-for-sale markdowns due to deteriorating industry conditions.

Earnings have fluctuated widely since inception. We’ve conservatively taken ~$90mn as normal earning power based on average ebitda since FY18 (first full year of operation) less current depreciation. [Note: MPC is subject to tonnage tax included in operating expenses - and negligible corporate tax.] Cash conversion is satisfactory.

MPC operated with net debt of $82mn, which is a fraction of ebitda. Liquid asset ratio is satisfactory. Gross borrowings of $174mn includes $67mn in sale-and-leasebacks. The rest comprises floating-rate debt - but capped via interest rate swaps.

Tangible equity stood at $778mn - largely composed of vessels at cost ($740mn), ‘Newbuildings’/vessels-under-construction ($60mn), and vessels held-for-sale ($82mn).

The equity trades for $592mn (enterprise value: $677mn), which is 1.3x TTM ebitda, 6.6x average earnings, and 76% of tangible equity.

Management indicated that MPC has locked-in leases expected to yield $712mn in ebitda plus $674mn in charter-free vessel market value - which provides substantial downside protection.

They’ve committed to paying out >75% of profits. TTM dividends including “event-driven dividends” (on vessel sales) yielded ~53% at market. Projected dividend yields until FY25 may exceed 10%.

Global demand is reasonably permanent and growing. MPC seems to have the financial strength to overcome near-term headwinds and the margin of safety in property values and earning power to warrant an investment rating.