TMM Grupo Tmm S.A. American Depositary Shares

Ken Nagy, CFA

Grupo TMM sees Sequential Growth on the Top-Line

Grupo TMM (TMM) is one of the largest integrated logistics and transportation companies in Mexico. The firm, through its subsidiaries provides maritime services, land transportation services, integrated logistics services, and ports and terminals management to international and domestic clients throughout Mexico.  As part of its five-year growth strategy, the firm is committed to modernizing its fleet and increasing its penetration in Mexican Ports, which will in turn maximize margins. TMM’s offshore and product tanker fleet generally work with long and medium-term contracts which has the effect of predictable cash flows.


On July 27, 2011 Grupo TMM reported stronger sequential results. Despite a challenging shipping marketplace, including the global reduction of tariffs for offshore vessels and product tankers, Maritime’s operational results and fleet utilization improved from the first quarter of this year.  Maritime’s revenue and operating profit in the second quarter of 2011 improved from the first quarter of this year. Offshore fleet utilization improved to 87.5% in the second quarter of 2011 over the second quarter of 2010, and also improved from 74.7% in the first quarter of 2011.  Product tanker fleet utilization decreased to 95.2% over the second quarter of 2010, due to one vessel in dry dock. However, utilization improved from 91.7% in the first quarter of 2011.

Ports and Terminals remains a bright spot for the company largely the result of Automotive and Auto handling. In the first half of 2011 Ports and Terminals revenue came in at $14.078 million compared to $11.885 million in the first half of 2010. This represents 18.5% growth rate. Looking deeper at the segment, revenue at the automotive segment increased 66.7% to $4 million, compared to the first half of last year, mainly attributable to higher volumes at the Volkswagen yard at Puebla. At Acapulco, auto handling revenue increased 52.8% to $1.9 million in the first half of 2011 compared to the same period of last year, due to increased exports to South America and Asia. Rounding out the segment, the maintenance and repair segment revenue increased 14.3% to $4 million in the first half comparison due mainly to higher volumes at the Manzanillo depot and to the addition of a new client at Altamira in the second quarter.

Turning to Logistics which excludes $6.7 million of revenue from the sale of assets in April 2010, revenue increased 7.6% in the first half of 2011 over the same period of last year, mainly due to a 46.6% revenue increase at auto hauling.

Strength in Utilization and New Opportunities
Several Factors point to a stronger second half.  In the Maritime segment, TMM added one additional leased product tanker in the second quarter. This brings the number to seven vessels working with contracts through year end, solidifying utilization through 2011. At the offshore segment, one vessel previously working in the spot market began a 3-year contract in the second quarter, which will contribute to results going forward. The company anticipates the car handling segment at Acapulco will continue to grow, as exports from this Port continue to be in high demand. Also, two additional cruise lines began operation at this Port in July. Further, at the firm’s automotive business in Puebla and Saltillo, volumes for value-added logistics services are expected to continue to grow.

Debt Pay Down
TMM’s total debt was $892 million. Trust Certificates debt was impacted by $43.3 million from the appreciation of the peso versus the dollar in the first half of 2011. In the first half of 2011, the Company made two important payments. In February TMM made a payment of $44.5 million of Trust Certificates debt, including a capital prepayment of $8.4 million. In May, TMM paid the remaining balance of the securitization facility with Deutsche Bank for approximately $9.1 million. Both transactions show the firm’s ability to use its free cash flow to make prepayments.

For investors with a time frame of several quarters this may be the best entry point in years as the firm is set to embark on a growth strategy that will improve the capital structure, (now highly leveraged) continue impressive margin growth, and provide above average return on assets. When looking at several metrics (EV/EBITDA, P/B, P/S) the firm looks undervalued. From an operational standpoint the firm has made impressive strides. 2010 EBITDA and EBITDA margin were the highest in the last five years, despite a global recessionary economic climate. Grupo exits 2010 having grown its EBITDA for the 5th consecutive year.  EBITDA grew at a lofty 182% or a compounded yearly growth rate (CYGR) of 29.6%. The firm was also Free Cash Flow positive for the year 2010 and Net Cash from Operating Activities was $14.6 million in the second quarter of 2011.  

The firm’s five-year growth plan includes two projects. The first project consists of the development of a container and liquids terminal at the Port of Tuxpan, Veracruz. The container terminal will meet increasing demand for capacity in the Gulf of Mexico, taking advantage of organic growth in the Mexican market. The liquids terminal will address current and projected increased demand for imported gasoline and diesel fuel through the construction of a pipeline and a berthing position. Investors should be aware that the development of the facility could take up to two years.

Container and Liquids Terminal at Port of Tuxpan

•     Address increasing demand for capacity in Gulf of Mexico
•     Alleviate existing congestion at Veracruz and Altamira container terminals taking advantage of organic growth
•     Liquids terminal will replace existing buoy system through construction of pipeline and berthing position
•     Concession to operate and environmental permits in place

The second project consists of adding specialized offshore vessels to the Company’s fleet to meet the increasing demand for deep water exploration in Mexico.

Add specialized offshore vessels to TMM’s fleet
 

•     PEMEX business plan anticipates spending $29b annually over next several years to develop deepwater identified reserves
•     Approximately 78% of these investments will be allocated to deep water exploration

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