MC Shipping MCX
October 17, 2005 - 12:23pm EST by
fishbo863
2005 2006
Price: 9.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 86 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Description

MC Shipping’s cash flow is about to explode higher over the next two years as the majority of its contracts get re-priced to 100% higher market rates. With a strong majority owner, selling at a 21% discount to its NAV, yielding a solid 3% dividend and about to pump out free cash flow of per share of almost $6 a share in the next two years, MCX is a fantastic buying opportunity.

MCX Business Description

MC Shipping Inc. fully or partially owns a fleet of 16 vessels, including 10 liquefied petroleum gas (LPG) carriers, 4 container vessels, and 2 small multipurpose/general cargo ships.

They contract short and long-term charter arrangements to hedge against the volatility of the freight markets and to generate “high running yield on its equity.” They also capitalize by buying and selling vessels when advantageous.

The Company's vessels are technically managed by V.Ships, the world’s largest marine services Group.

3 options for employing vessels:

1) Time Charter: MC Shipping receives a fixed charterhire per on-hire day and is
responsible for meeting all the operating expenses of the
vessels, such as crew costs, voyage expenses, insurance, repairs
and maintenance.

2) Bareboat Charter: The company receives a fixed charter-hire per day for the
vessel and the charterer is responsible for all the costs associated with the vessel's operation during the bareboat charter period.

3) Voyage Charters: The vessel is contracted only for a voyage between two
ports: MC Shipping is paid for the tonnage transported and
pays all voyage costs.

In early 2005, the Company re-focused its activities in the LPG sector. The company sold its four container vessels in January, while retaining a 25.6% interest, bought two very large gas carriers from Bergesen and 50% of another one from Shell in April.

Renewals Upcoming

Five of the Company’s six small pressurized LPG vessels are due for renewal between December 2005 and June 2006. The existing charter rates of these vessels are significantly below current market rates.

The average contract rate of these ships coming up for renewal was around $130,000-160,000 per month. The Average rates today are around $225,000-315,000 per month.

Its large vessel contract is locked in until September 2006, but MCX is optimistic they can renegotiate a lucrative contract at that time. Here are the vessels and dates when they are open for new contracts.

Vessel Expected
Redelivery
Auteuil Jul-06
Cheltenham Dec-05
Coniston Jul-06
Deauville Feb-06
Longchamp Jun-06
Malvern Dec-07
La Forge Sep-06
Berge Kobe Apr-10
Berge Flanders Apr-10
Galileo Apr-09

As you can see from above, the ships which come for renewal first are the small LPG tankers, and the VLGCs have the longest-running contracts.

Valuation

Due to the bull market in ship rates, vessel values of the LPG ships have also increased substantially and are currently as a whole in excess of book value. In June 2005, MCX’s fully-owned fleet was valued at approximately $167 million. This excludes the minority and joint venture investments such as the 50% investment in the JV with Petredec (m/v Galileo) and approximately 25% equity investment in the four "Maersk B-type" containerships.

Cantor Fitzgerald estimates that the company’s net asset value is $12 a share, and the company affirms their agreement with that valuation.

Interestingly, a recent IPO, StealthGas (NASDAQ: GASS), has a valuation well in excess of its NAV. GASS’ NAV is very similar to its book value since it just bought all of its ships at the end of 2004. Its book value is $10.04 a share, indicating that it trades at a 1.4 times net asset value. When including debt, MCX would trade at $17 a share with a comparative valuation.

SHIPS

General Info—MC’s three ship types:

An LPG carrier (liquefied petroleum gas) is designed to carry petroleum gases used primarily as low pollution fuels and as feedstock in the petrochemical and fertiliser industries.

A containership is a vessel designed exclusively to carry containers.

A multipurpose seariver vessel is a small vessel capable of carrying general cargo and/or bulk cargo both on rivers and at sea.

Dry Ships:

1) Ankara Type: Cellular gearless container vessel Built: August 1976
2) Bay Trader Type: Single-decker, gearless, sea-river type, boxshaped
Built: Oct 1980
3) Link Trader Type: Single-decker, gearless, sea-river, container carrier, boxshaped Built: Dec 1980
4) Maersk Barcelona Type: Cellular gearless container vessel
Built: December 1975
5) Maersk Belawan Type: Cellular gearless container vessel
Built: August 1983
6) Maersk Brisbane Type: Cellular gearless container vessel
Built: April 1976
Gas Ships:
1) Auteuil Type: Fully pressurized LPG carrier; Built: Oct 1995
2) Berge Flanders Type: LPG; Built: July 1991
3) Berge Kobe Type: LPG; Built: March, 1987
4) Cheltenham Type: Fully pressurized LPG carrier; Built: Dec 1990
5) Coniston Type: Fully pressurized LPG carrier; Built: Jun 1991
6) Deauville Type: Fully pressurized LPG carrier; Built: aug 1995
7) Galileo Type: LPG; Built: 1982 / measured 1983
8) La Forge Type: LPG; Built: November 1981
9) Longchamp Type: Fully pressurized LPG carrier; Built: Dec 1990
10) Malvern Type: Fully pressurized LPG carrier; Built: Jan 1990

The company has no other ships on order.

MCX has a joint venture of 50% investment with Petredec (m/v Galileo) and approximately a 25% equity investment in the four "Maersk B-type" containerships. Management anticipates that the net results of the Joint Venture (JV) with Petredec return into "the black" in the first quarter 2006.

IR Contact

The company is based in Bermuda, but headquartered in Monaco. The Company’s largest shareholders are the Navalmar Group and V.Ships. Cantor Fitzgerald covers the company with a Buy rating. The IR contact in the U.S. doesn’t work with them anymore so to contact the company, you must contact them in Monaco:

Investor Relations
Contact: Alexander Gorchakov (Monaco)
Phone: 011 377 92 05 10 03
Email: contact@mcshipping.com

Industry Dynamics

In 2004, charter rates increased substantially for the small pressurised LPG sector. Management feels that market strength will remain strong for at least the next twelve months. The Company owns six small fully pressurized LPG carriers. The market for VLGC (very large gas carrier) was also quite strong in 2004. Remember that MCX’s very large LPG carrier is fixed on a long-term charter until September 2006.

From GASS’ filings:

“The LPG sector is smaller than other shipping sectors. As of June 2005, the worldwide fleet of LPG carriers had only 934 ships with the larger fleets in the sector having approximately 20 to 25 vessels, and the largest fleet consisting of 47 vessels. We believe the relatively small number of LPG carriers in the world fleet coupled with the increasing demand for LPG products will support the growth of our fleet through acquisitions of second hand vessels and newbuildings.”

An important point for LPG, which distinguishes it from LNG (Liquid Natural Gas) is how easily deliverable LPG is. You do not need a developed infrastructure. This makes it very easy to get ammonia from Africa and send it for use in the U.S. in fertilizer.

Paradoxically, growing LNG demand and production is a positive for LPG and for MCX. LPG is a by-product of LNG and increased production of LPG will mean more ships to transport it.

There are 934 ships in the LPG industry as of June of 2005 and there are expected to be an additional 129 ships new-building ships to be delivered from now until the end of 2008. That 13% increase in the number of ships compares to an estimated 36% total and 8% annualized increase, or 17.3 million tons, in worldwide LPG capacity in 2005-2007.

Offsetting that increase is the fact that 35% of the existing ship capacity in LPG is over 20 years. Several industry analysts foresee a good portion of these ships be sent to the scrap yard.

ECONOMIC (and real) LIFE OF VESSELS

As the current age profile of the world LPG tanker fleet suggests, these ships can usefully trade until the age of 30 years and even beyond.

Scrapping of tonnage has not historically contributed to significant reduction of the fleet because seaborne gas transportation is a relatively new industry and the vessels are designed to last over 30 years with proper maintenance. In addition, technically complex vessels combined with stringent safety and operational requirements have created a high barrier of entry and an excellent safety record. Thus, age alone has not been a disqualifying factor. However, gas carriers have been faced with increased requirements from regulatory bodies, port states and charterers alike. Whereas 30 years used to be a fair economic life of a gas carrier, ships older than 20 years are now more frequently rejected by charterers and port authorities on account of age. Consequently, for the future it is expected that forced scrapping will affect the supply-side more significantly than it has in the past.

Long Term Debt

Long term debt is 71% of total capital, or $83 million in debt.

Concentrated shareholder base

Navalmar owns 51.4%, and management and directors own 1.9%. This company is essentially a holding company subsidiary for Navalmar. I estimate that the float on the stock is a little over 3 million shares.

Earnings Estimates

Cantor Fitzgerald estimates that MCX will earn $1.97 in earnings for 2006 on sales of $42.3 million and it will earn $2.47 in earnings on revenue of $46.2 million in 2007. Personally, I think those numbers are low as the company has tremendous operating leverage with such a fixed cost business.

Summary

With a substantial free cash flow ahead of it, MCX will be rolling in money. With a free cash yield of almost 30%, MCX represents tremendous value at current levels. I expect MCX to trade to a valuation of 1.2 to NAV (still a discount to GASS’ 1.4 NAV), MCX will rise 50%. I expect this valuation change to happen in the next six months as investors see the contracts it locks down and realize the safety of the earnings for the next three years. The 3% dividend on top of a 50% rise should be just the cherry on top.

Catalyst

1) New LPG contract terms signed
2) Earnings explosion next year
3) Dividend increase or buyback
4) VLGC contract renewal next year
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