Another dry-bulk fleet owner seeks to float

Maritime Capital and a group of pre-IPO shareholders take on the challenging market to raise up to $300 million.
Maritime Capital Shipping has begun bookbuilding its Singapore initial public offering with the aim of raising up to $300 million for the acquisition of new ships. One-third of that money will go to a group of existing shareholders who will be recuperating part of their investments made in the company over the past year.

Set up by former Pacific Basin CEO Mark Harris in April 2007, Maritime Capital owns a fleet of 18 dry-bulk ships which it charters out to ship operators on contracts ranging from six months to five years. It currently has 14 vessels with three more scheduled to be delivered in July and one in March next year. The plan is to expand the fleet to 25 to 30 vessels by the end of 2009. All its ships are of the so called ôMarCap Handysizeö type, which refers to sizes between 18,000 and 29,999 deadweight tonnes û a segment which the company believes has the most attractive supply/demand dynamics with the bulk shipping industry. Smaller ships like these are typically used to transport products like cement, sand, timber, copper and soft commodities such as sugar and wheat.

The company charters its ships out primarily on a bareboat basis, which takes a lot of the risks away from the owner since the charterer is responsible for all operational costs, including maintenance. Some of the ships are leased out on a time charter basis. The aim is to have at least 50% of its available operating days for the next 12 months covered by fixed-rate charters and hedging contracts to achieve greater stability to its top-line income and good visibility on forward earnings and cash flows.

Indeed, part of the attraction of this company lies in it being a bit of a yield play. According to the prospectus, it intends to pay at least 50% of its net income as dividends. Based on the IPO price range and the companyÆs own projection that the net profit for this year will amount to $77.25 million, it is offering a dividend yield of between 9.9% and 11.1%.

With an operating history of less than 12 months û its first two ships were delivered and started operations in October 2007 û Maritime Capital has no track record to speak of, although it did generate a net profit of $5.8 million in 2007 and another $15.2 million in the three months to March, which represented a net margin of 63% and 57% respectively. Investors can also take comfort in the fact that the company has already secured fixed-rate contracts for 87% of its revenue days in 2008 and for 44% in 2009.

Essentially though, they will primarily be buying into the reputation and expertise of its founder, who is well respected within the industry and was instrumental in the build-up of Pacific Basin and its listing on the Hong Kong stock exchange in 2004. The fact that he has been able to grow Maritime Capital from zero to 18 ships in less than a year is a clear testament to his skills. Aside from his vast knowledge of the dry bulk charter business, one industry insider also notes HarrisÆs ability to raise capital and adds that he has ôall the contactsö. At his side, Harris has a former head of ship finance at HSBC in the form of Russell Shields who is the chairman of the board.

Team Harris and Shields has quite a few challenges to overcome, however. Not least the fact that many industry watchers believe there will be a downturn in freight rates from next year. Earlier this month, small-scale ship-owner Wah Kwong Maritime Transport Holdings, which is also active in the dry-bulk market, withdrew its Hong Kong IPO after failing to attract enough interest from investors. The general market conditions also remain highly volatile and the majority of the companies that have gone public over that past few weeks have traded down significantly, thus reducing the willingness of investors to commit money to other newcomers. Or, they may simply decline to take part in the IPO on the assumption that they will be able to buy the shares at a cheaper price in the secondary market once the company starts trading.

If they are willing to look beyond that, the medium-term prospects for the shipping industry does look quite promising, however û at least if you believe that Asia will continue to grow as the correlation between economic growth and bulk shipping demand is, according to one source, ôalmost perfect.ö

ôYes, it is possible that we will see an overhang of bulk shipping capacity beyond 2009 and that (freight) rates will come down, but China isnÆt going to stop growing,ö says the industry insider and points to the fact that most analyst forecasts missed the sheer size of the demand for bulk commodities from China over the past couple of years.

The other things for investors to consider are whether they believe that the current supply/demand imbalance will persist and whether Maritime CapitalÆs management will be able to spend their money wisely.

Not surprisingly, the company itself is optimistic about the outlook for the sector and notes in the prospectus that it believes the current period of ôstrong demand and cargo growth will continue for a number of years and, when set against a relatively benign supply picture, will provide the MarCap Handysize segment with an extended period of healthy charter rates and firm asset valuesö.

The favourable supply outlook is backed up by a report from HSBC Shipping Services, which notes that while the new capacity on order represents 62% of the worldÆs dry bulk fleet as a whole, the new capacity on order within the MarCap Handysize segement is only 7%. Part of the reason for this is that most shipyards have full order books and prefer to build larger or more sophisticated ships which are more profitable.

Maritime Capital should also be in a slightly better position than Wah Kwong in terms of attracting large investors simply because of the greater deal size (Wah Kwong was seeking to raise only $125 million at the low end of the range) and larger free-float. Large funds are less likely to take the time to look into companies if they donÆt think they can get a meaningful allocation and the larger free-float also means that it is easier to get out should the need arise û something which has become a key criteria for many investors amid the current credit crunch.

Maritime Capital will have a free-float of 45% after the IPO, assuming the 15% greenshoe is exercised. The base deal amounts to $261 million, of which about $200 million is primary capital. Including the shoe, which is made up of all secondary shares, the maximum proceeds can increase to $300 million. The number of shares on offer will depend on the final price, but 5% of the deal will be set aside for retail investors.

The price range has been set at S$1.24 to S$1.46, which according to a source translates into 4.5 to 5 times its projects 2009 earnings. At the bottom of the range, this represents a discount of about 25% to Hong Kong-listed Pacific Basin, which is currently trading at a 2009 P/E of around six times. Pacific Basin has been quite volatile this year with lows below HK$10 in January and March and peaks at around HK$13 and HK$15 in February and early May respectively. Yesterday it closed at HK$11.20, or 39% below the October high of HK$18.40.

The final price for Maritime Capital is expected to be determined on July 2 and the trading debut is scheduled for July 11. UBS is the sole bookrunner, but UOB is arranging the retail offering.
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