The United States of America Maritime company under consideration is the company Matson, Inc. The most important companies of maritime transport of the world have headquarters outside the United States of America. A.P. Moller-Maersk is the most important company in the world according to its annual transport capacity of 2.8 million twenty-foot containers, its headquarters are in Copenhagen, Denmark. The second company is Mediterranean Shipping Company from Geneva, Switzerland with a capacity of 2.4 million twenty-foot containers. The third company is CMA CGM from Paris, France with a capacity of 1.6 million twenty-foot containers (Moggomcom, 2015).
Matson Inc. is a small company compared with the biggest maritime companies of the world with a capacity of 41335 twenty-foot containers capacity. The company was founded in 1882 by William Matson, Swedish immigrants who came to San Francisco with his family and started a transport business of plantation products from Hawaii to continental United States of America (Kable Intelligence Limited, 2015).
The company diversified its sources of revenues in 1920 when it started to offer touristic cruises to Hawaii from San Francisco and Los Angeles. The company invested in resorts to complement the tourism services of sea transport and land. The beginning of commercial flights to the island reduced the traffic to the island by sea, but the company concentrated operation in freight transport in Hawaii and the United States West Coast (Matson Inc, 2016).
The operations of the company from 1970 include container shipping transport and touristic services in the Pacific. The company serves several regions like China, Guam, Micronesia, Alaska, South Pacific and the West Coast of United States of America.
The Alaska Service comprises service transport between the ports of Tacoma, Washington; Anchorage and other locations of Alaska. The transport includes small vessels and 20-feet containers vessels (World Maritime News, 2015).
The China Service comprises service transport between several ports of China as Xiamen, Shanghai and Ningbo and the west coast of United States of America. The transport may take stops in Guam and Honolulu for technical and scale economy reasons. The service transports primary merchandise from China to United States West Coast (Yahoo Finance, 2016).
The Guam Service attends the North Pacific area including the Mariana Islands.
The Micronesia Service includes container transport and freight service between the United States west coast; the Micronesia States, Palau and Marshall Islands.
South Pacific Service includes container transport and freight service between New Zealand, East Cost of Australia and other islands of South Pacific (Matson Inc, 2016).
Debt structure of the company:
The company has a mixed debt structure composed of long-term debt of thirty years maturity and short-term debt for work capital composed of standby credits and commercial letters.
The long-term debt includes Term Loans and Title XI Bonds. Those are long-term debts with a maturity of 30 years with interest rates from 3.92% to 5.79%. The current Term Loans have capital payments from 2020 to 2045, and the Title XI Bonds are payable in 2028 and 2029. Both the Term Loans and Title XI Bonds pay interests every six months. According to 2015 Annual Report of the company, the company increased the long term is 709.5 million dollars in 2015, thanks to the emission of the "2015 Notes" in October 2015 for 75 million dollars and an interest rate of 3.92%.
The short term debt includes a Credit Facility of 358 million dollars for a payment period of five years. The Credit Facility is used by the company for working capital and investment opportunities. The short-term debt has an interest rate higher than the interest rates on long-term debt, and it is given by commercial banks of Hawaii and the continental United States of America. The current liabilities of the company are 200.6 million dollars.
The total liabilities of the company are 910.1 million dollars. The ratio between long-term and current liabilities is 3.54 times.
Equity Analysis of the company: The equity of the company is represented by the number of shares of common stocks of Matson, Inc. under negotiation in the Nasdaq Stock Exchange. The number of stocks is 43,935,493 according to the Annual Report. The 84% of the common stocks of the company are under the control of institutional investors. The most important are: BLACKROCK FUND ADVISORS with 3,274,315 shares, VANGUARD GROUP INC with 3,208,572 shares, DIMENSIONAL FUND ADVISORS LP with 3,106,597 shares, LONDON CO OF VIRGINIA with 2,493,278 shares and HOTCHKIS & WILEY CAPITAL MANAGEMENT LLC with 1,499,141 shares (Nasdaq, 2016). Those are mutual funds and investment corporations that do not have experience in the shipping business, giving to the company independence in their growth strategy and technical approaches. The total shareholders' equity, according to the Annual Report is 338.2 million dollars.
Relation between debt and equity:
In summary, the total liabilities of the company are 910.1 million dollars, and the equity is 338.2 million dollars. The ratio between liabilities and equity is 2.69 times or 73% of the total assets of the company. Considering the transport industry with average ratio liabilities over assets of 65%, the company is considered highly leveraged. In a short analysis, the best recommendation for the company is to reduce its liabilities but is necessary to remember that most of the liabilities of the company are long-term. That condition reduces the risk of the company to have liquidity problems, in fact; the low interests of the long-term debt generate low expenses due to debt service. The use of the long-term debt to investments in new vessels (Manulani, Manukai, and Moku Pohu) and the overhauling of the Hawaii Terminal in 2014.
The participation of the liabilities as a way to increase wealth to the shareholders is thanks to the difference between the paid interest rates and the opportunity costs of the shareholders. The other consideration is the tax shield that the paid interests represent for the average cost of capital of the company. The previous consideration is related to the calculation of Weighted Average Cost of Capital:
WACC = Ke*E/(E+L)+Kl*(1-t)*L/(E+L) Ke is the cost of capital or opportunity cost for shareholders, Kl an average cost or interest rates of liabilities, t the average tax over the company, E is equity and L are liabilities.
Capital Construction Fund and finance available to the US listed maritime companies.
Matson, Inc as a maritime company of the United States of America is under observance of the Merchant Marine Act of 1936. It created the Capital Construction Fund under the surveillance of the US Department of Transportation where all the companies deposit a percentage of their annual revenues The goal of the Capital Construction Fund is to support the United States Flag Operators in the modernization and acquisition of equipment, terminals, and vessels.
The deposits are tax deductible, giving to the company tax benefits in the financial statements. The company has 176 million dollars in 2015 in the Capital Construction Fund and is considered an Account Receivable in the Company's Consolidated Balance Sheet of the company.
Direct competitors of Matson Inc.
There are two direct competitors of Matson Inc. that are traded on the New York Stock Exchange: Horizon Lines Inc (HRZL) and Hub Group Inc. (HUBG). The Horizon Lines Inc. has a relation of equity to assets of 80% but with the difference that the company has liquidity problems because the relation between current and long-term liabilities is higher than Matson Inc. Hub Group Inc. has a financial structure similar to Matson Inc. The ratio of liabilities to assets is 59%, and almost all the liabilities of the company (89%) are long-term liabilities having a better financial position than Matson Inc (Yahoo Finance, 2016).
Recommendations in the current scenario.
The year 2016 is a year with a potential reduction in the demand of merchandise and raw material from China. Due that the Pacific is the main market of Matson Inc. the company is highly exposed to the downturn of the economy in 2016. The reduction of sales and the freight price will affect the returns of the company and the competition of other super shippers as A.P. Moller-Maersk and CMA CGM with worldwide operations and the capacity to relocate resources to other markets. Matson Inc. has not the possibility of relocating resources to other markets, because the company has only one market with its main hub terminal in Hawaii. The cost reduction is the main strategy of the company, and the exploration of new markets by alliances is the best recommendation for the company in the current scenario (Kruk & Bradley C., 2007).
Vessels ownership
The vessel ownership has two natures: the flag and the property of the vessel. The flag is the nationality of the vessel; that is the country where the vessel is registered having the vessel to accomplish all the national legislations of the country in security, design, and work schedule. There is no obligation in the industry to have the same flag as the headquarter location of the company. For example, Moller-Maersk is a multinational company with its headquarters in Copenhagen, Denmark but the company use vessels of Panama, Hong Kong, Singapore, Germany, South Africa and others. Matson Inc owns twenty-one vessels for its operations; seventeen have United States flag, and four are from Marshall Islands (United States Maritime Administration, 2016).
The consequence of using United States flag vessels is that the vessels must meet the United States Guard Coast rules and the Classification Society requirements including two dry-docking inspections in a five-year period. The non-US flag vessels meet the international standards and the national legislation of the third country that have more relaxed legislation and costs than the US rules (Postrel, 2006).
The other nature of ownership is the property of the vessel. The vessel may be an asset of the company or have a long-term lease. The maritime industry, similar to the air industry, uses a combination of owned and leased vessels according to the offer and demand of transport services. Matson Inc owns eighteen vessels and three leased vessels. The owned vessels have a linear depreciation period of ten years, different to the leased vessels, where the company pays a third company the leasing with a cost registered in the financial statements (Postrel, 2006).
Matson Inc. risk factors analysis
Change in the economic conditions of the United States of America, China, and the Pacific. A downturn in the economic activity in the manufacturing industry in the United States of America and mainland China impact negatively in the merchandise and material traffic in the Pacific Ocean affecting the service demand of the company, reducing the cash flow and revenues of the company (Matson Inc, 2016).
Competition of other companies: Matson Inc. is a relatively small company against the big players of container transport in the world. The big players in the container transport business in the world have more resources than Matson Inc. to compete with the company in the ocean pacific routes between China, Singapore, Australia, New Zealand on the west side of the Pacific and the United States West Coast, Mexico, Panama and South America West Coast. The company must concentrate its efforts on maintaining the quality of services and prices with its strategic hub in Hawaii.
Fuel costs: The fuel costs represent a double side risk for the company. Higher fuel costs represent an increase in the operation costs of the company that will be translated to the client, but high fuel costs occur when the economy is booming increasing the demand for transport services on both sides of the Pacific Ocean. A low fuel costs, the similar scenario at the end of 2015 and beginning of 2016, where low fuel costs reduce the operation costs, but the global economy slows its activity reducing the demand for container transport services (National Academy of Engineering, 2008).
Labor disruptions in related industries: The Company depends on the labor peace in the company itself and all the contracted and subcontracted companies that have an influence on the operations of transport. Terminal staffs, customs, security personnel are not under the control of the company, but they may affect the operations of the company causing delays and extra costs to the company. The labor conflicts with unions depending or not on the company cause delays and extra costs of the operations. The company and its Public Relations Units around the world must have a fluent communication with all the stakeholders of the business to take provisions and avoid conflict.
Weather and natural disasters: The Company must work with the meteorological services of United States, China, and United Nations to take provisions in the transport routes. The typhoons and tsunamis are natural phenomena very common in South East Asia where the company has frequent operations. The use of the meteorological services and the scheduling of the routes may reduce the impact of the weather and natural disaster in the operations and cash flow of the company.
Rate regulation of the maritime transport business:
The rates that Matson Inc. can apply to its clients are under the observance of the Surface Transportation Board of the United States of America. The rule says that the company cannot decrease its rates no more than ten percent and increase no more than 7.5% of the average of the United States of America Producer Price Index. For the previous reason, the fare, similar to the air transport industry discriminates the fuel charge and the transport cost to accomplish with the Transportation Board Rule.
Seasonality of the business:
The business depends on the demand of merchandise from the United States of America and the offer of China. The peak in consumption of goods and merchandise in the United States of America is in the fourth and first quarter of the year is causing a peak in container transportation in the second and third quarter of the year. According to the Annual Report of the company, the company does not have any problems to adapt to the seasonality of the business.
References
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Kruk, C. B. & Bradley C., J., 2007. The World Bank. [Online] Available at: http://siteresources.worldbank.org/INTTRANSPORT/Resources/336291-1171658979314/3465102-1176214969011/20070324stateoftheportsectorpresentation.pdf[Accessed: 01 March 2016].
Matson Inc, 2016. Matson Form 10-K Annual Report. [Online] Available at: http://investor.matson.com/secfiling.cfm?filingID=1104659-14-14819[Accessed: 01 March 2016].
Moggomcom, 2015. TOP 30 CONTAINER SHIPPING LINES IN THE WORLD. [Online] Available at: http://www.moggom.com/top-30-container-shipping-lines-in-the-world[Accessed: 01 March 2016].
Nasdaq , 2016. MATX Ownership Summary. [Online] Available at: http://www.nasdaq.com/es/symbol/matx/ownership-summary[Accessed: 01 March 2016].
National Academy of Engineering, 2008. https://www.nae.edu/File.aspx?id=7420. [Online] Available at: https://www.nae.edu/File.aspx?id=7420[Accessed: 01 March 2016].
Postrel, V., 2006. The Container That Changed the World. [Online] Available at: http://www.nytimes.com/2006/03/23/business/23scene.html?_r=0[Accessed: 01 March 2016].
United States Maritime Administration, 2016. MARAD Open Data Portal | Maritime Data & Statistics. [Online] Available at: http://www.marad.dot.gov/resources/data-statistics/[Accessed: 01 March 2016].
World Maritime News, 2015. Matson Borrows More. [Online] Available at: https://worldmaritimenews.com/archives/168070/matson-borrows-more/[Accessed: 01 March 2016].
World Maritime News, 2015. Matson Overhauling Its Alaska Operations. [Online] Available at: https://worldmaritimenews.com/archives/167812/matson-overhauling-its-alaska-operations/[Accessed: 01 March 2016].
Yahoo Finance, 2016. Yahoo Finance. [Online] Available at: http://finance.yahoo.com/q;_ylt=AqbTLKFuj6o.xlAH3ZFKuTQnv7gF?uhb=uhb2&fr=uh3_finance_vert_gs&type=2button&s=MATX%2C[Accessed: 01 March 2016].
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