MPC Container Ships Winning Formula that Produces a Balanced Path to Strong Shareholder Returns
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Highlights from Capital Link’s Corporate Presentation Series
Mr. Moritz Fuhrmann , CFO of MPC Container Ships ASA , (OSLO: MPCC) highlighted the company’s strategy, provided an update on the supply and demand fundamentals of the container market, and offered his outlook on the sector during a recent webinar, which was part of Capital Link’s Corporate Presentation Series.
Highlights:
The full presentation can be accessed here:?
MPC Container Ships (OSLO: MPCC) is one of the world’s leading intra-regional tonnage providers, with a fleet of small- to mid-size container ships deployed across key trade areas in the Americas, Europe, Asia, Africa, and Australia. The company owns and operates a total of 60 vessels, including four new vessels to be delivered this year, and has a total carrying capacity of nearly 135,000 TEU.
Indications of Demand Growth
Although the container market has weakened somewhat since its boom in 2021 and 2022, there are signs of growth in the sector, particularly in terms of macroeconomic factors. The global GDP for the coming years is expected to grow, stated Moritz Fuhrmann, MPCC’s CFO. Historically, such growth has correlated with positive demand for container shipping. While the exact GDP multiplier effect remains uncertain, there is an expectation of continued positive demand growth for container ships.
Additionally, MPCC’s customers, liner companies, have fortified their balance sheets in the last four years, Mr. Fuhrmann noted. Cash positions and equity have increased significantly, while the net debt-to-equity ratio has decreased by approximately 75%. This contrasts starkly with the post-Lehman crisis period, indicating a much more favorable financial situation for MPCC's customers relative to a decade ago. This improved financial health bodes well for their stability and potential demand for container shipping services.
In the freight markets, both freight rates and second-hand values have experienced significant declines, attributed to subdued demand in the latter half of 2022 and 2023 as well as a large vessel order book for which deliveries commenced in 2023. However, despite this downturn, both charter- and freight rate indices have stabilized at levels above pre-COVID and historical averages, which indicates some positive resilience in the market.
Recent statistics from early January 2024 indicate a relatively positive picture for the sector. Presently, there are approximately 121 idle vessels in the global container fleet, including those undergoing dry docking and retrofits, constituting just 1% of the total fleet. This suggests near-full utilization of the world’s container vessels, which is a positive indicator.
Distinct Supply-Demand Fundamentals in Feeder Segment?
In terms of supply, container ship fleet growth is set to outpace demand until 2025, when it is likely to balance, said Mr. Fuhrmann. While the order book for container ships is quite high overall, totaling over 7.3 million TEU, it is heavily skewed towards larger vessel sizes, with 80% being 8,000 TEU or more. MPCC operates in the intra-regional segment, with most of its vessels in the 1,000 to 3,000 TEU and 3,000 to 8,000 TEU segments. The order book for vessels of this size is much smaller, at 10% to 14%, compared to the order book of larger vessels in the 12,000 to 17,000 TEU segment, which is at 55%. This delineation indicates distinct supply and demand fundamentals for larger and smaller vessels.
Not only is the order book for larger vessels much higher than for smaller vessels, but the average age for larger-size vessels is also much younger. This means that the level of scrapping will be lower, reducing the opportunities for tightening the supply of larger vessels by removing older ships from the market. Smaller container ships, however, have a much higher average age. This increased scrapping potential, coupled with a smaller order book, suggests tighter supply fundamentals for the segment in which MPC operates. Considering the expected demand growth and the order book and age distribution of vessels, MPCC is relatively comfortable that the order book for vessels in their segment will be absorbed by the market.
MPCC Has Strong Revenue Backlog, Low Leverage
From a financial standpoint, as of Q3 2023 the company maintains an industry-low leverage of 17% and has 22 vessels unencumbered, Mr. Fuhrmann stated, all while possessing a revenue backlog of around $1 billion. With a low net debt of around $72 million, MPCC pursues a deliberate strategy of maintaining low leverage. This has been accomplished through debt repayment or early accelerated repayment of revolving credit facilities (RCFs). The recent repayment of RCFs and the increase in RCF capacity, along with released collateral, have bolstered the company's liquidity by an additional $100 million, providing additional flexibility heading into 2024 and 2025.
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Mr. Fuhrmann outlined the company's capital allocation principles, which include a strong commitment to returning capital to shareholders, reducing leverage, and selectively optimizing its fleet. Over the past 24 months, MPCC has distributed significant dividends to its shareholders, totaling close to $730 million. The company has also balanced shareholder distributions with investments into fleet renewal. MPCC has ordered four new vessels with long-term contracts, which will be delivered this year, as well as five modern Eco-design vessels, which were acquired last summer. While these newbuilds incur slightly higher leverage, the vessels are supported by existing long-term contracts and covered by the company’s projected revenue backlog. In addition, MPCC will invest significantly into its trading fleet through retrofit measures, some of which will be carried out in cooperation with existing customers. In some instances, these measures are expected to lower the vessels‘ carbon footprint by up to 20%.
Despite fluctuations in the container market, MPCC's share price has demonstrated resilience since the commencement of dividend payments approximately two years ago, with relatively stable performance, particularly evident during the continued market challenges in 2023. MPCC has committed to distributing 75% of adjusted net profits to shareholders, with the flexibility to pay additional event-driven distributions from non-recurring proceeds, such as from vessel sales. The company's dividend yield has remained remarkably strong, reaching close to 50% in 2022 and around 43% in 2023.
As much of the company’s fleet is secured with long-term time charters, MPCC can project its future financial standing with a degree of clarity, the company’s CFO noted. As of Q3 2023, the average duration of its contracts was 1.7 years, offering a high level of earnings visibility. Its revenue backlog from 2024 to 2025 is quite strong, with around 67% covered for 2024and 25% of 2025 already covered. These figures translate to a total backlog of $1 billion for the company, as well as a projected EBITDA backlog of $0.7 billion. This estimate is quite dependable, Mr. Fuhrmann stated, as 85% of the backlog is covered by the top 10 liner companies and cargo-backed operators.
In terms of company valuation, MPCC’s current enterprise value of $684 million is covered by the projected backlog, with an excess value of 110%, even excluding net sales proceeds from the sale of vessels. This valuation is conservative, as it doesn't include the steel value of the fleet, MPCC’s CFO noted. Even considering just the recycling value, he continued, which is not the most accurate measure given the fleet's average age of around 16 years, there's an excess value of over $300 million on the core company valuation. This indicates a strong position and potential upside despite market challenges.
Looking ahead to 2024 and 2025, MPCC has conducted sensitivities on fleet open days using historical charter rates, particularly focusing on a 10-year average. Based on these analyses, operating revenue and net profit are projected to remain at healthy levels. While acknowledging the container market's decline from the peak levels of 2021 and 2022, Mr. Fuhrmann highlighted MPCC’s ability to navigate through different points in the market cycle and deliver resilient returns.
The company adheres to clear and rational capital allocation principles, prioritizing shareholder distributions while maintaining low leverage and optimizing the fleet with modern assets. With a strong revenue backlog providing earnings visibility despite market fluctuations, MPCC is well-positioned to capitalize on opportunities, optimize its fleet, and generate attractive shareholder returns.
Red Sea Attacks
Attacks on ships in the Red Sea have had a major impact on the shipping industry, as many vessels have chosen to reroute – opting for the longer trip around the Cape of Good Hope rather than taking the risk of transiting the Suez Canal, which can add 10 to 17 days to voyages between Europe and Asia.
This rerouting is absorbing 6 to 7% of the global container vessel capacity, creating capacity mismatches, Mr. Fuhrmann explained. The impact extends to vessel arrivals in Asia before the peak season leading up to Chinese New Year, as well as shortages of empty containers, leading to an increase in freight rates.
Since a number of liner companies announced that they will avoid the Red Sea, box freight rates have increased by around 73%. Despite potential short-term upticks in charter rates, the sustainability of this situation remains uncertain, particularly given ongoing military actions in the region involving naval vessels from various nations, he continued. If the situation were to persist, however, it could have a lasting impact on rates. In order to avoid delays, charterers have offered premiums to those willing to transit through the Red Sea. However, Mr. Fuhrmann said that MPCC prioritizes the safety of its seafarers and has chosen not to travel through the region.
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