Seaspan Insider Buys

[SharperDingaan]

 

Re ‘slow-steaming’. Not that long time ago this was called ‘tramping’. The ship had a defined outbound schedule, & a hazy ‘return’ schedule based on whatever available cargo was going in the ships return direction. During the tramping stage it was common practice, once on the ocean, to simply switch off the engines as long as the drift was going in your direction. The ships were small (could get into most ports), derelicts, the crews usually worse, slow steam was often the best they could manage, & owners essentially prayed for the ship to sink.

 

When industry slow steams, a number of things happen.

(1) A small tranche of very modern high capacity ships does the major scheduled routes on a tight time-frame. JIT drives the schedule, & multiple shippers consolidate cargo onto just that days ship. 1 vs 2 ships leaves the port, it goes at 90%+ of capacity, & shippers pay a premium rate for the reliability & speed. The individual ships are incredibly profitable (highest rates + economies of scale + lowest possible operating costs) - but there are few of them. Fewer ships.

(2) A larger tranche of older ships tramps on both an outbound & inbound basis. The bigger ships do the major routes on a slower & more sporadic basis (at a lower cargo rate), the smaller ships do the rest (widest range of ports), & the entire fleet is run down by cutting maintenance/fuel & crew quality. Fewer ships, higher loss of life, & more insurance claims. 

(3) Surplus ships go to the breakers, & regional cargo capacity permanently shrinks….. But when markets improve rates spike up dramatically & stay up, because there is just no capacity - & the few available tramps suddenly become goldmines (available for any route, & have the capacity).   

 

The cargo consolidation of (1) is only just starting to happen, (2) usually follows very soon thereafter. (3) hasn’t really started yet

 

SD

 

[Uccmal]

I am not sure that the discussion about slow steaming is meaningful.  Seaspan leases container ships to several shipping lines but the majority so far are the large Chinese carriers. 

 

Not all of these ships are doing the transoceanic route.  In fact, I will bet that the majority are staying in the Asia-Pacific/Mediterranean region.  If your trip is only a few hundred to a couple of thousand miles there is probably minimal benefit from 'slow steaming' especially if you are expected at port at a certain time on a certain day for loading/unloading. 

 

Other issues with perishable goods are also a concern.  I will also wager that the largest usage of container ships is for food.  You dont want to be sitting around on the Ocean too long with a ship full of New Zealand Apples headed for Europe that are ripening as you go. 

[twacowfca]

WOW!  Many thanks SharperD.  You have given me

the education of a lifetime in a succinct few paragraphs!

[gaf63]

Article from Hellenic shipping news on container shipping, good news about intra Asian trade: 

 

  " there have been bright spots over the past quarter, Mr Kolding said. Among them are the surprising strong growth in imports into Asia from Europe and the rise in intra-Asia trade. The backhaul volumes have been so strong in the third quarter that there has actually been a container deficit on the trade."

You bet correctly Uccmal

 

full article:

 

http://www.hellenicshippingnews.com/index.php?option=com_content&task=view&id=73536&Itemid=79

 

Another on over capacity

 

http://www.hellenicshippingnews.com/index.php?option=com_content&task=view&id=73536&Itemid=79

[lessthaniv]

Gerry Wang was recently on Bloomberg discussing the concept of slow-steaming as it impacts SSW. Some postive words from the CEO and as I orginally suggested it's a way to begin to utilize some of the existing excess capacity. Uccmal, this does effect SSW it terms of long term growth. No new ships are being signed to long term charters at the moment due to the over-supply of container ships. The quicker the ships are utilized (increases with slow steaming) the sooner demand will pick up again.

 

The video can be watched here:

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alqmBXu4WbpI

 

Happy New Year Everyone!

 

<IV

 

 

[lessthaniv]

http://www.lloydslist.com/ll/news/slow-speeds-help-us-all/1260545075150.htm

 

 

Tuesday 15 December 2009

 

CONTAINER lines and their customers, so often at loggerheads, appear to be on the same side as far as slow steaming is concerned.

 

The savings from lowering ship speeds by a few knots are colossal, and yet sailing schedules will not be disrupted much, once initial adjustments have been made.

 

Shippers will have more stock on the high seas at any one time, and ocean carriers are unlikely to share any of the financial benefits, given the huge drop in freight rates over the past year or so. The lines need every cent they can squeeze out of their customers right now.

 

But shippers not only are fully aware of the cost pressures that carriers are under. They can also bask in the fact that slower speeds equate to less pollution. At a time when emissions are top of the agenda as delegates attending the climate change conference in Copenhagen turn their attention to shipping, major industry players are keen to be seen as green.

 

So it should come as no surprise that shippers are backing lines’ efforts to slow down.

 

And now we have a prominent boxship owner, Seaspan, also supporting those of its charterers that want to throttle back, even though it will cost the company an estimated $2m a year in terms of engine maintenance, crew overtime and other related expenses.

 

A consensus seems to be emerging along the business chain, from owners to operators and shippers, that super-slow steaming is a winner all round.

 

Whether slow speeds will become a permanent feature of the industry is open to debate. Some experts have already gone on the record to say that liner services will never return to the fast transits of a few years ago, and so therefore it makes sense to build less powerful ships.

 

That is a bit too extreme for others, but more immediately, priority for many container lines is to get through the coming year and shrink bottom line losses. If both their customers and owners from which they charter ships are in agreement on ship speeds, then prospects are that much brighter.

[lessthaniv]

I wouldn’t touch these kinds of companies which are issuing new shares and same time out flowing outrageous dividends. Are there other legitimate reasons, for this kind of activity, than “mystify” yield pigs with hefty dividend yield? 

 

 

HA!

HA! HA!

 

Well, it's best to move on then ....

 

<IV

[Uccmal]

Thanks for the links <IV.

 

I wouldn’t touch these kinds of companies which are issuing new shares and same time out flowing outrageous dividends. Are there other legitimate reasons, for this kind of activity, than “mystify” yield pigs with hefty dividend yield?  

 

VAlue^2..Well, I guess I am glad I am not relying on you for investment advice..Next time please do some research before commenting.

[Uccmal]

Value^2, You still have not done your research I see.

 

If you had you would have discovered that there was a certain order to operations.  You would also have learned that the major shareholders, and controllers of the company, the Washington's were the major buyers of the share issue.  Hardly a Ponzi scheme if they are financing my dividends with their money!  You would also realize that this company has chosen to domicile in the US where accounting is much more stringent rather than in Asia where most of their business lies, and accounting is much looser.

 

Come back when you have something to offer in the way of valuable criticism.

[StubbleJumper]

Thanks for the links <IV.

 

I wouldn’t touch these kinds of companies which are issuing new shares and same time out flowing outrageous dividends. Are there other legitimate reasons, for this kind of activity, than “mystify” yield pigs with hefty dividend yield?  

 

VAlue^2..Well, I guess I am glad I am not relying on you for investment advice..Next time please do some research before commenting.

Could you explain their capital allocation decision? Whats the logic behind all this?

 

Yes i know, they cut finally dividend rate, but still If we look last 2 year, 08 - 09, they have paid dividends 184M and same time raised fresh equity issuing new stock 326M, difference 326M - 184M =  142M, so actual need was less than 142M and they raised 326M. I dont know about you, but as owner i should paid taxes for these 184M unnecessarily.

 

Maybe we are just different type of investors i like buybacks and hate dillution. You focus more on yield, no matter how it is achieved.

 

 

Hmmm...  That also sounds like Prem Watsa.  FFH paid out a divvy last February of roughly $140m and will probably announce another divvy over the next couple of days of roughly $200m ($10 x 20m shares).  As we know, FFH issued $1B in equity last year.  Does that mean that Prem is a bone-head who is just trying to satisfy us yield pigs?

 

SJ

[Uccmal]

Basically I’m not going to waste my modest research resources situations, where just cash flow statement will tell, that investors are not going to get reasonable return for their invested capital. Cash is not precious for them. There is no Eddie Lampert calling the shots.

 

Value^2, I give up.  If you feel you can comment on a stock when you haven't researched it, let alone read the entire thread which goes back months, feel free.  It isn't me who is looking like the patsy here.

[lessthaniv]

Uccmal,

 

If he/she isn't willing to invest any time into researching SSW properly then why would you invest any of you're time trying to educate him/her? I know it's the giving season and all, but ....

 

<IV

 

 

[Uccmal]

Uccmal,

 

If he/she isn't willing to invest any time into researching SSW properly then why would you invest any of you're time trying to educate him/her? I know it's the giving season and all, but ....

 

<IV

 

 

 

Agreed.  A waste of time. 

[twacowfca]

Basically I’m not going to waste my modest research resources situations, where just cash flow statement will tell, that investors are not going to get reasonable return for their invested capital. Cash is not precious for them. There is no Eddie Lampert calling the shots.

 

Value^2, I give up.  If you feel you can comment on a stock when you haven't researched it, let alone read the entire thread which goes back months, feel free.  It isn't me who is looking like the patsy here.

Like i suspect, there is no sound reasoning for these capital allocation desicion, otherwise i would hear explanation, other than just empty rhetoric.

 

 

 

 

If he/she isn't willing to invest any time into researching SSW properly then why would you invest any of you're time trying to educate him/her? I know it's the giving season and all, but ....

There is thousands companies where they will allocate capital like i want and i understand. I'm not going to waste my modest research resources for companies where most vital decisions are without sound reasoning, just to lure some yield pigs for owners and to keep them happy.

 

And like you may know, this way to allocate capital is what the short seller giants (Chanos etc)  like most. Maguire Properties (MPG), Allied Capital (ALD) (you name it...). Companies which are issuing fresh equity and paying huge dividends.  

 

Cheers

 

 

 

 

Value^2, you have a good point. There are cos that pay otherwise unsustainable dividends and repair their balance sheets by issuing new common shares.  Then there are other cos with CEO's that are willing to inject their own money into their cos to help them through a very rough patch to enable them to continue paying a dividend that they are well able to pay in normal business conditions.  Some of the most astute analysts on this board have concluded that Seaspan is in the latter category and not the former.

[mranski]

I have not researched Seaspan in detail, but i'd like to give you my thoughts based on a cursory look.  I am bothered by the inconsistency of this company's thesis versus it's reality. It's business model is to be insulated from the credit, freight & shipbuild markets by signing lucrative long term leases in advance with solid customers and pay a sustainable dividend.  But in reality it seems to be severely affected by the very credit,  freight & shipbuild markets it is modeled to be insulated from, as evidence by huge dividend cut, costs to extend build dates,  pressure to reduce lease rates from customers, availability of cheap ships in the used market, reduced future lease rates, shareholder silution at realtively low stock prices, and a beaten up stock price.

 

There has to be better buys or maybe i've totally missed the boat here.

 

 

[Cardboard]

I own some Seaspan and I am likely going to take some profits with this new fiscal year to reinvest in more undervalued companies. IMO, the upside is limited with the $200 million in preferreds due to their convertibility at $15, the need to issue shares to maintain the debt to equity ratio with receipt of new ships and the state of the economy looking due for a slow recovery.

 

Regarding capital allocation, it seems ok to me. Cutting the dividend to $0 would have helped more paying for the new ships, but they would have lost all income oriented investors. You have to pay some attention to who owns your company. So with equity capital raising activities coming, it does not seem like a bad idea to support your share price somehow.

 

Cardboard

[JEast]

Maybe many of the dissenters are correct and I am out to lunch so to speak, but I see Seaspan presently in the same light as Fairfax was back in the 2000-2003 period. That is they are currently in the middle of a storm with sharks circling in almost all aspects of the business and the institutions have moved elsewhere.

 

As for the business model, if one looks at it seriously, management has done a wonderful job over the past 18 months. From managing the balance sheet to managing the crisis with the shipyards, the banks, and charters. They are coming out of a pre-crisis equity capital raising requirement of nearly $600-900M and now that requirement is under $200M and will possibly be zero with a few more delayed deliveries as cashflow has been building. This all the while when turmoil was very abundant, sound familiar?

 

I could go on about the reward and risk scenarios, but the company is still undervalued and with a brighter future ahead, but not as much undervalued back when it was in the $4-$6 area. I would not be selling unless of course one finds an even more value proposition.

 

 

Cheers

JEast

[Uccmal]

I have not researched Seaspan in detail, but i'd like to give you my thoughts based on a cursory look.  I am bothered by the inconsistency of this company's thesis versus it's reality. It's business model is to be insulated from the credit, freight & shipbuild markets by signing lucrative long term leases in advance with solid customers and pay a sustainable dividend.  But in reality it seems to be severely affected by the very credit,  freight & shipbuild markets it is modeled to be insulated from, as evidence by huge dividend cut, costs to extend build dates,  pressure to reduce lease rates from customers, availability of cheap ships in the used market, reduced future lease rates, shareholder silution at realtively low stock prices, and a beaten up stock price.

 

 

Mranski, These are more legitimate criticisms than the Yield Pigs commentary of Value^2. 

 

I agree that their business model took a bit of a hit.  I also concur with JEast that they are doing their best to survive the storm.  They had always intended on issuing shares to finance the new ships but I dont think this was intended to be done at such low prices.  I bought my shares under $8 and am happy enough holding them for now.  As always, for me, this is done on a risk adjusted basis, as per my knowledge of the company, its players, its business, etc. - I have about a dozen similar size positions that together add up to my total investment in Fairfax. 

 

This could be an incredible recovery story where one easily triples their money and gets a huge dividend into the foreseeable future, or it could break even.  The chance of total loss seems remote.  At the moment it pays more than the 10 year bond and has significantly more upside potential than the 10 year bond.

[SharperDingaan]

 

There's nothing wrong with the business model. The reality is that any kind of lease is only as good as the lessees credit, & a 1:100 year global credit event is bound to have an adverse impact. They've done well to date, & there's little reason to believe that it will not continue for the forseeable future.

 

For ALL lessors (in this environment) the crux is what can you do with the returned assets. A material problem if its shipping or large passenger aircraft (one-off big ticket items), but much less so if its heavy construction (or tar sands) equipment where infrastructure spending is creating a demand for it (used vs new).

 

For the next 12-18 months the European & Asian equivalents to NA's 'Caterpillar' make a lot more sense & at a relatively lower risk.

 

SD 

[mranski]

It is good knowledgeable management in a medicore business.  What does buffett say, the business prevails.

I think mgmt implied a superior business model, that hasn't proven out. 

Probably a decent return from $10 stock, not from $35 ever.

 

[lessthaniv]

I think SD has the risk assessment correct. Eventually, SSW will have ships coming off charters and will have to either; re-charter those ships profitably; send to scrap; sell. With the current oversupply of container ships in the market place charter rates have dropped materially.

 

But have a look at the next 5 years...

 

SSW has done an excellent job of staggering their lease maturities which has given them stability through a very trying time. Here is what they are faced with:

 

2010:  They don't have any renewals in 2010.

2011:  2 ships leased to CSCL enter their option period; 2 ships leased to MSC enter their option period; 2 ships leased to Maersk enter their option period. Of the 6 ships, 4 (the later) are the oldest ships in SSW's fleet with only a few more years of useful life. There is a good chance these would be scrapped.

2012:  3 ships leased to CSCL enter their option period

2013: 2 ships leased to CSCL mature. These ships have a useful life extending too 2026 at least.

2014: 3 ships leased to CSCL mature. These ships have a useful life extending too 2026 at least.

 

So, in the next 5 years SSW will be faced with 14 ships that come to maturity and need to be dealt with in some fashion. At the same time however, SSW also has contracted lease agreement on 26 new ships all signed and agreed to when charter rates were much higher.  In 5 years time SSW will have increased their operating fleet by at least 12 (26-14) ships all with attractive charter rates. Any renewals they are able to re-negotiate will be gravy. (Page 74 of the AR has the details of the new builds).

 

In other words, SSW has the ability to weather the storm and to keep the cash flowing for a number of years. The difficult part is factoring in dilution. But if I make conservative estimates on dilution, including both the preferred and the new money needed for new builds and measure this against the distributable cash flow in the coming years .... it stock appears cheap.

 

Let's say a normalized yield on this company should be 8%. A $9 stock price would imply Seaspan can only create distributable cash of only $.72/annum per share. Let's test that:

 

Prior to the dividend cut, the company had distributable cash of $1.90/share annually. With 67M shares out that equates to about $125M in distributable cash.  Over the next 5 years, SSW will add another 12 ships (net) to their operating fleet. See above.

 

On the other hand, dilution will occur. Let's say we crystallize the stock price at $9 today. In 2014, the preferreds will convert at $15 but SSW will be required to pay 115% of the difference between $15 and $9 ($6) in cash. That's roughly $90M. Let's assume they don't have the cash and have to raise equity at $9 increasing dilution to about 23M shares. They also need another $200M for the new builds. Let's assume they dilute again at $9/share increasing the share count by another 22M. In total, they would have increased there share count by 45M. Add that to the 67M already outstanding and you get about 112M shares.

 

Now if I take the estimate of 112M shares outstanding and multiply that with $.72/annum I get an implied level of $80M in distributable cash which seems ridiculous. They had $127M in distributable cash prior to this mess and will add another 12 profitable charters in the next 5 years. I would guess distributable cash will rise closer to $200M minimally or roughly $1.80/diluted share. That would imply a price of $22.50/share after all is said an done.

 

*** I note that Sai Chu has suggested that Seaspan will have about $300M in distributable cash once all ships are operating.*** So, obviously the company feels they would be able to either extend leases on options, or re-lease the maturities favorably.

 

Even with the most dire of expectations, the shares seems undervalved to me.

 

 

 

 

 

 

 

 

 

 

 

 

 

[JEast]

First, take a look at the new exceptional Seaspan website with GPS tracking.

 

Second, do not forget about the incentives of management. As lessthaniv points out, a worst case proposition would still potentially have an opportunity to distribute $1.90 in the future. Management is heavily incentivized when the dividend moves above the $1.94 mark.

 

 

Cheers

JEast

[mranski]

Lessthaniv, good analysis.

Curious, how do you adjust or account for depreciation in this business in your analysis.