Capital Link 2nd Annual Shipping Conference, Part Three: Navios Maritime Holdings Inc. (NM)

This is the third in a series of articles on presentations made at the recent Capital Link Shipping Conference.

Ted Petrone, President, presented for Navios Maritime Holdings Inc. (NYSE: NM) in the absence of Angeliki Frangou, CEO.

Navios Maritime is much more than a dry bulk shipper that owns and charters vessels. Navios Maritime does own 14 vessels directly, all built since 2000, and three more from its acquisition of Kleimar. It has 8 capesize newbuilds, 6 of which will be delivered in 2009. But it also has 10 vessels chartered in, 4 of which have purchase options, and another 11 vessels chartered in long term through Kleimar, 2 of which have purchase options. It has another 16 long-term chartered-in vessels on order, 10 of which have purchase options.

Counting its newbuilds it controls 62 vessels: 25 owned and 37 long term chartered in, with 21 purchase options. I particularly like the purchase options because it gives the company upside without tying up capital. Including Navios Partners, NM controls 71 vessels and 6.8 million DWT. That is a lot of steel.

Navios Maritime has a flexible business model. It supplements its secure cash flow in four ways. First, Navios Maritime supplements this core fleet by chartering in 10 to 40 more vessels on short term leases. It enters into forward freight Agreements (FFAs) to capitalize on real time market intelligence and Contracts of Affreightment (as opposed to simple charters) where appropriate. Finally, it has strategic joint ventures with Navios Maritime Partners LP (of which it owns about 42%) and its South American port operations which it manages under the name Navios South American Logistics.

The only downside to this complex structure is that it is much more difficult for an investor to calculate future profits. While the ship earnings can be calculated, the income from the port, FFAs and COAs is much more difficult to determine. The logistics business involves both an upriver barge port and downriver port and a barge business that conveys bulk products downstream from Brazil and Argentine customers through a river system as big as the Mississippi.

Another issue for the investor is the determination of possible dilution from some outstanding warrants. There are 106.4 million shares outstanding and 7.8 million warrants. But even figuring in the dilution of the warrants, NM is a winner.

Navios Maritime has an inhouse management team that frequently makes repairs while ships are underway. As a result its operating expenses are 14% less than the industry average ($3,879/day in 2007). It does insure all its charters, although other dry bulk operators have told me there is little if any risk in a charter breach.

The 2008 spread between its charter in cost and charter out income is over $15,000/day.

Navios Maritime claims to have $547,567,000 in liquidity, consisting of over $400 million in cash and its credit facility. It does have about $734 million in debt compared to $769,204 million in book value equity, but importantly, NM does not include the value of its in the money options on its balance sheet, and I suspect these are considerable.

Its current annualized dividend of $.36/share provides a 4% yield. Even accounting for full dilution of the warrants, it has a 2008 EV/EBITDA of 4.69. This compares favorably with Norden, which has an EV/EBITDA of 5.15, and Genco, which has a ratio of 5.05.

I discount its debt burden because of the lack of accounting for the value of its 21 purchase options which are deep in the money, because of its considerable cash reserves, and the fact that it has contracted 98% of its revenue for 2008, 53% in 2009, and 28% in 2010.

Because of its long history and the experience of senior management, Navios Maritime has long term relationships with Japanese shipyards as well as the top charter parties. Finally, Navios Maritime has implemented a share repurchase program of up to $50 million of shares on the open market. Navios Maritime gives the investor good exposure to future opportunity without tying up lots of capital. This leverage, coupled with its contacts and expertise, should serve it well in both up and down markets.