Mercator Lines: Re-rating candidate…
In the last few years, Mercator Lines (MLL) has not only reported a
steady growth in its core business but has also diversified into related
areas. This has not only enabled MLL to scale up its business
significantly but has also reduced the exposure to the volatile shipping
business. MLL operates dry bulk carriers, crude and product carriers,
offshore jack-up rig and dredgers. The company also owns and operates
coal mines in Indonesia. In addition, it also carries out significant
quantity of coal trading. MLL is also entering into new business areas
such as floating production cum storage unit, which would get
operational in FY11. It is well placed to ride the volatility of the shipping
business on account of inherent advantages such as diversified revenue
stream, presence across segments, long-term charter contracts,
comfortable debt-equity ratio and strong management capability. MLL
would be the most likely outperformer among shipping stocks in case of
an upturn in the shipping cycle. The stock is trading at half its FY10 BV
of | 97 and is a likely re-rating candidate.
Diversified operations to insulate MLL from volatile shipping business
FY11 is likely to be a very volatile year for the company as earnings are
likely to be volatile on account of wide fluctuations in freight rates. A
majority of dry bulk revenues is derived from long-term contracts, which
insulate the company from volatile freight rates. However, its tanker fleet
is deployed on medium-term contracts ranging from 6-12 months. This
can drag down the performance as crude and product carrier rates have
been extremely subdued. However, the company is ramping up its coal
trading and mining activities, which would result in an improvement in
the topline and bottomline in FY12.
Valuation
We have valued MLL on a P/BV and P/E multiple basis to arrive at a price
target of | 63 and recommend BUY rating on the stock.
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