Mercator Lines Singapore

Mercator reported deterioration of margins as top-line grew while bottom-line sank to US$5.09 million in the face of rapidly declining BDI. 9M 11 Profitability was maintained as US$28.4 million

http://info.sgx.com/webcoranncatth.nsf/V...9007F7B0C/$file/3QTRMERCATOR.PDF?openelement [SGX Announcement]

http://info.sgx.com/webcoranncatth.nsf/V...9007FCE1C/$file/MercatorNewsRelease2011.PDF?openelement [Press Release]

Surprisingly, Mercator declared a 0.73 SG cent interim dividend. Personally, if the company paid semi-annual dividends, more investors might be interested in holding the stock.

(Not Vested)

Sent an email to their IR to ask about the margin fall. My worries are in 3 main areas:

1. The large increase in expenses
2. Negative working capital
3. Giving out dividends when Mercator is spending on capex

Although Mercator Lines Singapore has quite positive cashflow (historically as well) but the recent capex activities may lead to insufficient funds which does not justify the issuance of dividends..

I have a feeling that Mercator Lines Singapore is going to call for a Rights Issue soon.. And if the controlling shareholders do not subscribe to it, then we know who is leeching the minorities..

They've been giving out dividends quite constantly, which I feel is quite shareholder friendly so would assume that they are just following the "SOP" since they are managed to maintain profits.

Don't really see many growth factors for them, just awhile back news awhile back was all about vessel over supply. Yet now ship builders are gaining new contracts for building vessels. Conflicting information makes my head hurt :p

Was vested.

(01-02-2011, 11:27 AM)piggo Wrote: Don't really see many growth factors for them, just awhile back news awhile back was all about vessel over supply. Yet now ship builders are gaining new contracts for building vessels. Conflicting information makes my head hurt :p

Was vested.

I think this is because of the the natural cycle lag in the industry.

When the financial crisis was in its prime, a lot of ships were lay off or converted; some order were scaled down or cancelled.

Now with an upswing in trades, it naturally follows that demand for ships is higher - leading to a new round of fresh order for ships building.

I think the confusing part about shipping is that different segments seem to be performing differently independent of one another. eg. the VLCC market hardly seems to be affected but you dun read/see many news about new tankers being built.

In the recent crisis, container vessels were hit hard and most of the laid up were container vessels. But becos of the demand overhang from China, the bulk carriers were doing better.

With recovery on the way not, its container that is picking up but bulk carrier is taking a hit becos of a the low BDI, and more recently the flooding in Australia. So that may be the overhung on Mercator now as they are a dry bulk vessel operator.

Phillips Research team downgraded Mercator Lines to a 'Hold' with TP of $0.28.

http://www.remisiers.org/cms_images/mercator020211.pdf

The BDI has been sinking rapidly over the past few months. Lets see how the other dry bulkers perform in the upcoming results presentation ! Prospective dry bulk investors may wish to examine Golden Ocean since they do have an attractive distribution policy.

(Not vested in any dry bulk stock)

What crap analysis. E target price is based on revision of 0.8 book value to 0.7 book value. How did they even determine 0.8 or 0.7 in the first place. Sometimes I wonder these analyst are salaried for no value at all. Mercator lines is 70% locked in long term contract and they could not estimate the discounted cashflows of the contracts? It's much simpler to value compared to those shipping firms subjected to freight rates fully.

Anyway, the employee expenses was clarified with the IR due to a change in accounting treatment of recognizing the expenses equally vs recognizing the bonuses on the final quarter of the financial year. Even this point is wrongly mentioned in the analyst report..

Based on simple calculations of shipping contracts total value (undiscounted), I arrive at S$410m worth of revenue and estimated net margin of 25% of approx $0.1/share of earnings. Do note that this only accounts for 70% of revenue as 4 more ships are deployed based on daily rates.

Also the total remaining life of vessels w/o contract is approx 3200 months which leads to approx S$280m undiscounted income (approx $0.23/share) based on a pessimistic estimate of panamax freight rate of US$15000 and net margin of 15%. Including other assets except PPE (e.g. cash) of S$65mil converts to about $0.05/share.

Thus, intrinsic value is about S$0.38/share at minimum and defintely undervalued for now. If panamax freight rates takes a turn for the better to normal values of US$25000 and net margin of 25%, we could reasonably expect intrinsic value to go up to S$0.78/share.

However, when will Mr Market ever recognises this value?

Disclaimer: You may wish to markdown 30% if you include discount rates of 4% for 20 years

Some finer points that I would like to share and remember after my discussion with Mercator team.

1) Fuel cost or bunker cost does not impact Mercator as the charterers are responsible for the fuel costs and not the ship owners. For COA and voyage contracts, the fuel volatility will impact Mercator earnings but to only a certain limit. Above the specified limit would result Mercator to seek compensation for the contract owners. Therefore, fuel cost volatility risk is somewhat mitigated.

2) Impairment of the ships are not likely as there is not a permanent impact to the ship ability to perform shipping. BDI rates only forms part of the ship valuation and the shipping industry do not subject to mark to market conditions.

3) The income statement item on Voyage expenses are only related for COA and CV contracts. Vessel hire belongs to short term charter contracts to maximize revenue and direct operating expenses are related to workers salary, R&M costs and

4) Last ship was purchased fully using cash and thus have not been financed. Loan contracts for the ship have been finalized (up to 70% of the ship value) in case to mitigate any finance risk arising for convertible bond that matures in 2012.

I feel the profitability of Mercator should be the basis of its valuation... i.e it should be based on charter rates. Currently with ship builders experiencing generally good orderbooks, I don't see how charter rates will have any upsides. Any increase will just lead to more building that will reduce the profitability of a business like Mercator.

Don't think they are completely shielded from fuel costs... with newer technology, it may be more viable to buy new ships (designed to save on fuel) than to charter a ship from Mercator. Perhaps the only way to avoid that is to reduce the charter rates?

A ship will not be able to sail indefinitely. That's what the impairment is for isn't it? It should not be discounted or added back to their assets.

Disclaimer:
That's just a general feel of the company, that I'm not digging deeper. Might be quite far from the truth

i like the way the company is managed. they know the highs and lows of shipping, seen from their IPO during the peak and purchase of new vessels after the bubble burst. also, there is a clear succession plan in place that allows for long-term continuity and strategic planning. their focus on securing long-term charters ensures cashflow visibility. mercator is like a shipping trust, but without the debt overruns.

i believe its current share price is supported by its long-term charter contracts. a rising bdi will increase the possibility of mercator renewing its long-term charters at attractive rates, in a few years time. it is unlikely the bdi will rise to its previous highs, but im more favourable towards purchasing depressed cyclical assets. when the bdi was at about 3k last year, mercator was trading about 30+ cents, 50% higher than today.