23 August 2011

Navios Reports Higher Second-Quarter Profits:

On Monday, Navios Maritime Holdings NM reported second-quarter results that came in above our expectations. We're maintaining our fair value estimate of $4 per share. The firm continued to generate strong cash flows from its solidly locked-in contract base and profitable charters. For the 3-month period ended June 30, 2011, the company reported top-line revenues (excluding Navios Acquisition NNA ) of $165.4 million, largely unchanged from the comparable prior-year quarter, and adjusted EBITDA of $64.9 million, a 9.2% decrease from the comparable prior year quarter.

Excluding the gain on the sale from two company owned vessels ($38.8 million), Navios reported adjusted earnings per share of $0.12, down from $0.26 for second-quarter 2010. Navios concluded the second quarter with strong liquidity ($342 million in unrestricted cash), no further capital expenditure obligations, and minimal debt maturities until 2017.

The company has secured fixed contracts on 95.2%, 55.9%, and 37.9% for its total available days in 2011, 2012, and 2013, respectively, with EU AA+ backed insurance. We think the strong forward coverage on the company's fleet, with projected break-even levels to remain about the same for 2011 and 2012, will allow Navios to continue generating positive free cash flows and quarterly dividend payments that yield 6% to our fair value estimate. Moreover, the company acquired four independent purchase options (through ordering a Panamax ship for $35.5 million in the quarter) to pursue additional fleet expansion that would need to be exercised by mid-2012.

During the conference call, management highlighted its strong liquidity position and substantial cash flow cushion on its forward fixed-contract base, which we think is a testament to management's recent decision making. The company experienced stronger growth in its port, barge, and logistics business (which grew 6% year-on-year and represented 33% of consolidated revenues for the second quarter).

We think Navios Logistics will help mitigate prolonged weakness in shipping and we expect this segment to be a key growth driver to the firm's overall business. Additionally, management provided an update on its outlook for the dry-bulk market and continues to be encouraged by growth rates in the emerging economies.

Despite the fact that the IMF recently decreased its 2011 world economic growth forecast to 4.3% from 4.4% in June, we think dry-bulk demand fundamentals remain quite strong, mainly due to the industrialization of China and India. July Chinese steel production reached 412 million tons year to date, representing a 10% year-over-year increase, and is expected to hit all-time highs of about 700 million tons in 2011 (according to the China Iron & Steel Association). With the urban population of India expected to increase by 11.5 million people per year during the next two decades, 2011 Indian coal imports are projected to grow in line with its historical 25% CAGR since 2006.

Also on the call, management briefly commented on the supply side of the equation and mentioned higher demolition potential in 2012 due to a major Chinese recycling facility scheduled to commence service. We agree with management that scrapping and slippage rates look encouraging, but remain concerned with delivery delays prolonging the inevitable inflow of new capacity.

As such, we project scrapping and slippages to conclude 2011 at current run rates. Overall, we think Navios is well-positioned to navigate the current dry-bulk market. The company remains one of the better operators on our coverage list, partly due to its ability to achieve low operating expenses and favorable charter spreads, and continues to pay dividends. Although we see Navios' current trading price as an opportunity for a share buyback, we don’t refute with management's decision in keeping its cash on hand to weather any additional downturns in shipping.

Source: The Morning Star. By Paul Choi. 22 August 2011

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