MCX is safe and cheap. This niche LPG shipping company has 54% upside to replacement value (safe) and offers a potential 29% FCF yield (cheap), which is a nice combination. The stock is also quite timely for 2007, with the recent transaction (unlocking value and adding cash to the balance sheet), with the likely expected reductions in dry-docking, and with the overblown concern about temporarily low day rates for large LPG vessels (VLGCs) in the Arabian Gulf.
Recent transaction
On 12/18/06, MCX closed the sale of 6 small LPG vessels for $52 m (versus BV of $32.8 m) to LTF, a German KG company formed by German finance company MPC. MCX will charter back the vessels for at least four years and reinvest $5.4 m for 25% stake in LTF.
With the proceeds, MCX will pay $22.2 m of debt and keep about $24.4 m cash for future acquisitions. With a series of transactions over the last year, MCX is effectively out of the smaller fleet, instead focusing on its medium to large LPG vessels. Now they fully own eight LPG vessels: three 70,000+ cubic meter (considered VLGCs), three 15-20,000 cbm (considered Midsize Gas Carriers, or MGCs), and two 5000 cbms. MCX also has a 50% stake in another 70,000 cbm vessel and a 25% stake in four container carriers.
|
Vessel |
|
|
Year built |
Age |
CBM |
Contract |
% ownership |
|
Barnes Bridge (formerly Tycho Brahe) |
1982 |
24 |
15,370 |
Jul-08 |
100% |
|
Blackfriars Bridge (formerly Dorothea Shulte) |
1981 |
25 |
5,647 |
Mar-07 |
100% |
|
Chelsea Bridge (formerly Berge Kobe) |
1987 |
19 |
77,749 |
Apr-10 |
100% |
|
Galileo (formerly Isomeria) |
1983 |
23 |
59,725 |
Apr-10 |
50% |
|
Kew Bridge (formerly Immanuel Kant) |
1983 |
23 |
15,364 |
Jul-08 |
100% |
|
La Forge |
|
|
1981 |
25 |
70,793 |
Nov-06 |
100% |
|
London Bridge (formerly Hermann Shulte) |
1980 |
26 |
5,673 |
Mar-07 |
100% |
|
Maersk Houston (formerly Hans Maersk) |
1993 |
13 |
20,700 |
Jul-11 |
100% |
|
Tower Bridge (formerly Berge Flanders) |
1991 |
15 |
75,353 |
Apr-10 |
100% |
|
|
|
|
Average |
21 |
|
|
|
MCX asset value
When the company purchased their last vessel in July 2006, they announced their total fleet appraisal value at $257 m against book value of the vessels of $200 m (28% premium). The recent sale of 6 small LPG vessels for $52 m, against BV of $32.8 m as of September 2006, implies a 58% premium. So, the transaction has unlocked some value.
Per the company, NAV of the fully owned fleet after the transaction is about $115 m (market value of vessels, less debt plus cash), or $12.0 per share. If we add Galileo (value of about $9 m) and other container ships (value of about $9 m), another $1.9 per share is added to the NAV. That implies a net asset value of $13.9 per share (54% upside), if MCX were to close today, sell its vessels at market prices, pay off debt and return capital to shareholders.
The discount to NAV makes MCX an interesting acquisition candidate. Furthermore, with cash in hand from the recent transaction and rising FCF (see below), MCX management should be able to grow the NAV.
MCX earnings power
Earnings have been depressed in 2006 due to higher than expected dry-docking. In the 9 months ending September 2006, CFO was depressed by $4.4 m of off-hire expenses and $6.4 m for dry-docking, in addition to about $5 m in lost net revenues from Galileo and La Forge. La Forge came out of dry-dock in 3Q06 and is now trading in the spot market (it will be chartered soon). Galileo was in dry-dock during 2Q06 and 3Q06 and is on a long-term charter. Chelsea Bridge was dry-docked in 2Q06 and will be dry-docked in 1Q07 at a cost of about $1.75 m. MCX does not foresee any other major dry-docking in 2007. Without the excess dry-docking costs, MCX should able to capitalize on its vessels and considerably improve earnings and free cash flow in 2007.
The excess costs were not acceptable to MCX. As a result, the company replaced the technical managers V.Ships for nine vessels. All MCX vessels now use Anglo Eastern, Hanseatic or Wallem. It was the company’s first change in technical managers in 18 years.
MCX has not provided guidance for 2007. Furthermore, the company does not disclose contract rates for its vessels. Given the lack of guidance, the lack of disclosure and the considerable change in the fleet over the last year, it is difficult to estimate F07 EBITDA. For the fully owned vessels, we estimate F07 EBITDA of $33 m. We take $10,000 day rates for the two 5,600 vessels (per company; both vessels should be renewed in mid-2007 for one year at this rate), $20,000 day rates for the three 15-20,000 vessels (per company) and $22,600 for the three 70,000+ vessels (consistent with long-term charter rates in 2005 when purchased; 2 operating for 12 months and 1 operating for 10 months due to dry-docking), which implies revenues of $52 m. With vessel operating expenses of $16.5 m and G&A of $2.5 m, that implies EBITDA of $33 m. In addition to the fully owned vessels, MCX will also record revenues from chartering back the 6 small LPGs. At the rate of $7,500 a day, that’s $16 m in revenues. Charter hire expenses could reach about $15 m, which implies an EBITDA contribution of about $1 m (not meaningful). That means total F07 EBITDA of $34 m.
With F07 $34 m EBITDA:
Minus $14 D&A (D&A was $4.5 m for 3Q06 with about $1 m related to 6 smaller vessels, which implies D&A of about $3.5 per quarter for 2007)
Minus $7 INT (INT of $2.1 m for 3Q06 with average cost of debt of 5.4% and to pay down $22 m in debt in 4Q06)
No taxes (based in Bermuda)
Implies NI of $13 m
Implies EPS of $1.35 with 9.6 m FDS (14% earnings yield)
Add back $14 m D&A
Subtract Maintenance Capex of $1.75 m (dry-docking, per company)
Implies FCF of $25.3 m, or FCF of $2.6 per share (29% FCF yield)
As a check, MCX CEO confirmed that the company should do at least $34 m in EBITDA in 2007 (higher than Street estimates of $27 m EBITDA from two small banks, which we believe are overly pessimistic). A multiple of 6.5 times F07 EBITDA of $34 m plus cash of $10.6 m (at end of 3Q06) plus $24.4 m cash from recent transaction plus $18 m for non-fully owned vessels plus $5.4 m in equity stake minus debt of $133.5 m ($155.7 m minus $22.2 in debt pay down), with 9.6 m FDS, implies a target price of $15.2 (68% upside).
Halt in LPG exports from Arabian Gulf: temporary decline in VLGC spot rates
In early December, rates for 70,000 cbm vessels (VLGCs) plunged about 35% due to the Saudi Arabia (the largest exporter of LPG) announcement that it will not ship spot LPG in the month of December. As a result, competitor Bergesen put five of its VLGCs on “semi-lay-up” (i.e. off the market) to save on crew costs. The immediate decline in VLGC rates has caused some alarm among investors and depressed the shares of LPG vessel operators: MCX, StealthGass (GASS) and Bergesen Worldwide (GAS NO).
In the case of MCX, we think the sell-of is overdone. Two of MCX’s three VLGCs are on long-term contracts (expiring in 2010) and are not subject to the volatile movements in spot rates; only one vessel (La Forge) is subject to the weakness in spot rates. In addition, both MCX management and industry sources feel that this situation is a short-term event that will dissipate in early 2007 as Saudi Arabia recommences LPG spot shipments and rates pick up during the seasonally strong winter period. The fact that rates for medium and smaller sized LPG vessels remain firm indicates that it is likely a one-time and short-term event and not related to a downturn in worldwide LPG supply. Historically (since 1995), VLGC rates have been very volatile, with lows under $10,000 a day and highs above $40,000 a day. However, the average VLGC rate since 1995 has been quite constant, at around $27,000 a day, which bodes well for long-term VLGC charters.
Meanwhile, supply of seaborne LPG (which equates to demand for LPG vessels) continues to rise about 8% a year. About 25% of global LPG demand requires sea transportation. Importantly, demand for sea transportation of LPG should continue to rise over time due to: 1) Kyoto treaty (which places restrictions on LPG flaring); 2) High cost of storing LPG locally and 3) Increase in LNG output (LPG is a by-product).
By comparison, the supply of LPG vessels (before retirements) will increase about 6% in 2007 and 15% in 2008. This new supply will be partially offset by retirements of old vessels. Overall, the increase in LPG supply (demand for LPG vessels) appears to be roughly in-line with the expected increase in LPG vessels over the next 2-3 years, which should support current day rates.
RISKS:
1. No direct public comparable; LPG vessels are a niche industry (fewer than 1,000 vessels, which is less than 2% of worldwide vessels); StealthGas (GASS) owns LPG vessels but has a different vessel profile (smaller vessels); Bergesen Worldwide (GAS NO) owns both LPG and LNG vessels and has considerable spot LPG exposure;
2. MCX fleet on the older side (21 years on average, with a typical useful life of 30-35 years)
3. Thinly traded; Navalmar (U.K. company that owns a fleet of drybulk carriers and acquired 20% of MCX from V.Ships at $9 per share) owns 47%
CATALYSTS:
1. Higher EPS and FCF in 2007 (partly due to less dry-docking)
2. Significant discount to NAV, which is growing due to cash generation
3. Acquisition candidate
4. More transparency in future earnings releases (breakdowns by vessel category)
5. Further accretive transactions
6. Increased dividends