Mercator to raise debt, expand fleet

SINGAPORE - Singapore-listed dry bulk shipper Mercator Lines (Singapore) Ltd wants to raise more debt to fund an aggressive fleet expansion plan, but at the same time maintain a high cash flow to pay its shareholders well.


The Indian-owned firm, which has bought two ships since its December 2007 listing in Singapore, plans to spend about US$240 million to buy four more ships in the financial year ending March 2009 and might spend a similar amount the year after.

To fund the expansion, the company, which has shareholder's equity of about US$259 million, would take its debt-to-equity ratio of 1.2 times to around 2 times, chief executive officer Shalabh Mittal told Reuters in an interview on Friday.

'We will be comfortable at 2 times (debt-to-equity ratio),' Mr Mittal said adding that the company so far had seen no problems in funding its requirements despite the stress in global credit markets due to the US sub-prime mortgage crisis.

Mr Mittal said the company, which has a market value of about US$374 million, now owns seven vessels and plans to keep about 70 per cent of its fleet on longer-term, fixed-rate contracts and the rest on the spot market.

'Because 70 per cent of our fleet is on fixed contracts we have a far greater cash flow visibility and banks are happy to lend,' he said.

Despite the aggressive expansion plan, Mr Mittal said he would still want to maintain a payout ratio of 18 per cent, announced to be paid as cash dividend earlier this week when the company reported a four-fold rise in annual net profit.

'We are a company focused on good returns to our shareholders,' said Mr Mittal, son of Harish Mittal who is the chairman of the company and its Indian parent Mercator Lines Ltd, which owns 70 per cent of the Singapore firm.

Mercator reported a 303 per cent surge in net profit to US$52.2 million for the financial year ended March 31, 2008 on Wednesday, sparking a rally in its shares. The stock ended 13.4 per cent higher on Friday at 46.5 Singapore cents.

But the counter is still down about 40 per cent from its IPO price of 76 Singapore cents (US$0.556) amid worries about a global economic slowdown.

Mr Mittal said if the world avoids a full blown recession he expects dry bulk rates to rise from current levels, helped by surging demand, mainly for coal in India and iron ore in China.

The company mostly ships coal, iron ore and grain between India, China and Indonesia, and serves customers like Cargill, Glencore, China's Cosco Group, ArcelorMittal, and India's Reliance Energy and Tata Power.

'Mercator Lines Singapore's profit growth looks higher than the three bulk shipping companies we cover,' Deutsche Bank's Hong Kong-based analyst Joe Liew said who also covers China's Pacific Basin Shipping, Korea's STX Pan Ocean and Thailand's Theorising Thai.

'We expect the company's net profit to double in fiscal 2009 and grow 80 per cent in 2010 due to freight rate increases and capacity addition. The stock provides exposure to India's increasing coal imports for the power sector,' said Mr Liew, who has a buy rating on Mercator and a target price of 65 Singapore cents. -- REUTERS