By Eric Uhlfelder, Barron’s
Cargo shippers are in the tank, thanks to slowing global economic growth and oversupplies of dry-bulk ships, which transport iron ore, coal and grains, and of tankers, which transport crude oil and petroleum products.
The one segment of ocean-going vessels that remains afloat is container ships. Douglas Mavrinac, who heads the maritime group at Jeffries, the global investment bank, notes that container ships enjoy a far better balance between supply and demand than the other fleet types.
An attractive play in the container group is Hong Kong-based Seaspan, which trades on the New York Stock Exchange under the ticker SSW. Seaspan owns 65 cargo ships, which are fully leased to major shipping lines at fixed rates. The average time remaining on contracts is seven years. The company’s shares, however, have been torpedoed along with the rest of the oceangoing group. They are down 40% from their April high, recently trading at $12.94. The stock could rebound to $18 in a year or two. It yields 5.8%.
Like all big ship owners, six-year-old Seaspan has financed its growth with debt—$3.0 billion as of June 30. Sales and Ebitda (earnings before interest, taxes, depreciation and amortization) have grown apace. This year Seaspan is expected to generate $409 million in Ebitda—rising to $514 million in 2012—on $563 million in sales. Analysts forecast net income at $64.7 million, or $1.08 a share.
What distinguishes container ships from the rest of the industry is that orders are based on the demand expectations of the liner companies. Long-term container-ship demand has grown at an average annual rate of 9%, with only one down year, 2009. New builds of tankers and dry bulk ships, by contrast, are based on speculation about commodity demand, which is far more volatile.
Seaspan owns a young fleet of the very largest container ships, the sweet spot of client demand. The firm has another seven new vessels slated to come online by 2014, all of which are already leased at durations of 10 to 12 years.
One potential risk is that giant Chinese shipper Cosco accounts for nearly 52% of sales. While acknowledging concentration risk, Wells Fargo shipping analyst Michael Webber sees a plus in this strategic long-term partnership. “While counterparty risk in the sector continues to rise, we continue to view Cosco as a preferred customer,” he says.
Merrill Lynch’s Ken Hoexter expects Seaspan to trade flat over the near term. While he thinks supply and demand of container ships will stay in balance, he’s worried about slowing “global GDP growth, weakening box rates.”
Negative trading sentiment has pushed share prices to 7.2 times 2012 enterprise value/Ebitda, well below its average of 13.5. At a multiple of 10, the stock would be worth $18, though that could take a while to play out.
Investors are also concerned about the soundness of Seaspan’s dividend. During the 2008-2009 credit crisis, the company cut the payout by more than 75% to preserve cash for expansion. Since then, management has diversified its capital structure to include preferred stock, debt and lease facilities. And in March, the company announced a $5 billion joint venture with the Carlyle Group, which is building its own fleet. Economies of scale between the two firms could drive down costs for building new ships.
With its financing now more secure, the company says it intends to push the dividend back up. Wells Fargo’s Webber expects the annual disbursement to rise next year to $1 from 75 cents, which would push the yield to 7.7%, based on the current price.
INVESTORS LOOKING FOR YIELD might also consider Seaspan’s 9.5% cumulative preferred C shares, which are traded on the New York Stock Exchange under the ticker SSW PR C. The shares recently traded at $25.79, a slight premium to their par value of $25. The current yield is 9.2%.
The preferred dividend, like the common, is taxable at 15%, at least for now, and the cumulative status means the company must pay all missed dividends before paying a dividend on the common. The issue is callable at par in January 2016. The yield to call is 9.2%.
– Dow Jones & Company