ATCO - Atlas Corp

[matthew2129]

Price target raises at Citibank, B. Riley, and Jefferies today. Expect consensus '21 estimates to also continue creeping up this week.

[Baz0r-]

Price target raises at Citibank, B. Riley, and Jefferies today. Expect consensus '21 estimates to also continue creeping up this week.

Can you please provide the source?

[ourkid8]

BMO: $17

B. Riley: $18

Citi: $15

 

Price target raises at Citibank, B. Riley, and Jefferies today. Expect consensus '21 estimates to also continue creeping up this week.

Can you please provide the source?

[petec]

I had a play with modelling IRRs - see attached. If you can see any obvious errors let me know. I am trying to be roughly right not precisely wrong!

 

I think there are two ways to get the c.10% difference between high single digit unlevered IRRs and high double digit levered IRRs:

1) Use 75% leverage at the cost of the big revolver (not the weighted average debt cost).

2) Get great terms on timing.

 

By timing, what I mean is that maybe they can:

- Delay injection of equity by getting the shipyards to absorb working capital.

- Delay injection of equity by borrowing against the lease on day 1 and injecting equity later.

- Have a bullet component to the debt so that repayment is back-end loaded and equity gets repaid first.

Ship_IRR.xlsx

[petec]

I should add that the timing thing allows management to game the announced IRR. It's great if the equity concerned can be realised from some other high-return use just in time to be allocated to this one. But if the cash just sits on the BS doing nothing until it is needed, then the IRR on the ship is arguably overstated. To get the right IRR you'd need to include the time the cash sat there waiting to be deployed, but management is unlikely to do this because they like to look clever.

[Xerxes]

I listened to the Q4 conference call. Super interesting and educational. The part where the analyst ask is how Seaspan outperforming taking away from the the whole Atlas diversification. Kind of reminds of Airbus, 10 years ago, that tried so hard to diversify its commercial segment by going after defense really hard. But it couldn't as commercial segment had such a growth that overwhelmed the defense.

 

Everything that they said on the Atlas call makes sense. But my question is the following, wouldn't the steps that they are taking be the same steps that their other peers and competitors would be taking as well. Bing talks about an Integrated Platform and the secret sauce and their focus on quality solutions being a differentiated factor. Can that not be replicated by the peers? so what is the actual Atlas's 'moat' if you will.

 

I get that (1) Bing/Sokol are probably great operators and that (2) Atlas has two long-term oriented large shareholders who will keep a long leash on management. But looking past (1) and (2), what is the real tangible differentiation point. Is this that their balance sheet is more fortified, therefore allowing them to do things other could not. That would make sense. Or is more along the lines that they are few years ahead of their peers, so copy cats will copy them, but they would still lead by a margin, since they started to rationalize earlier.

 

The whole thing about liners moving from market share chasing to profitability is helping the whole industry with the rising tide helping all the boats, so not an Atlas-specific thing.

 

 

 

 

 

[bluedevil]

Xerxes,

 

A few thoughts on potential Seaspan moats:

 

1 - I believe having an organization that is geared toward patient capital allocation is a strategic advantage over other ship companies.  It requires the right incentives and focus and that is what Sokol has brought.  The first thing he did after he came in was go after the old incentives that management had to grow revenue / dividend at expense of profitability.  He deleveraged to create more opportunity to take advantage of good times (he is on record as saying this was the prior management's biggest failing).  It is also the reason he bought APR - to give capital another outlet in times when rates of return are not adequate in shipping.  To the extent the other shipping companies do not share this discipline and flexibility, that is a major advantage for Seaspan.  Similar to a disciplined underwriting culture in insurance.

 

2 - They have scale that other shipowners do not have.  They have pro forma 113 ships over 8500 TEU.  They have IT, seafarer training, ship engineering, etc. etc. that their scale can support that smaller operators cannot support -- particularly the smaller operators that lend out a handful of ships.  This allows them to provide more to customers than other companies.  And the platforms allow them to add ships without much additional infrastructure.

 

I would note that Seaspan appears to be where the liners have turned for this big splurge on newbuilds.  Yes, others have announced deals but it certainly appears Seaspan has gotten a disproportionate share.  Seaspan does not appear to be doing this by offering low rates.  Based on what was disclosed, the return seems attractive ("very high single digits unlevered"), for contracts that can be levered given the certain, contractual cash flows.  In other words, the recent activity provides market evidence that Seaspan is giving liner customers something that other companies are having trouble replicating.

 

 

[petec]

Somewhat related, the last couple of Aercap calls have interesting comments on the moats that can be built in leasing. Obviously the markets are different but I found them interesting.

[Xerxes]

Thanks guy,

The moat might be as easy as actually "walking the talk" of doing all the things they said they will do, as oppose to peers that might be more "talking the walk" of doing all the things that a business ought to be doing.

[petec]

I think that’s exactly right. I’d add that management making good decisions leading to relatively small advantages in efficiency, safety, customer service, capital allocation, cost of capital etc...in a highly levered cyclical business all this adds up to the difference between compounding at a reasonable rate and going bankrupt.

[drzola]

Article on a new type of Seaspan joint venture boat proposal here fyi.

 

https://www.lngcanada.ca/news/special-vessels/

 

[WneverLOSE]

Article on a new type of Seaspan joint venture boat proposal here fyi.

 

https://www.lngcanada.ca/news/special-vessels/

 

Not the same Seaspan  ::) Although the confusion is very understandable, name and logo almost identical, adjacent businesses and common major shareholders.

 

[Xerxes]

Any opinion on the rates with the current situation in the Suez and shipping companies taking the long way around the Cape of Good Hope. Must get a bump one might think.

 

I was thinking though if that specific size of ship will get a red flag in the future. The biggest they have in the operating fleet are the 14,000 TEU, where as Gloden-class is up to 20,000 TEUs.

 

https://www.seaspancorp.com/fleet-summary/operating-fleet/?class=14000#list

 

https://en.wikipedia.org/wiki/Golden-class_container_ship 

 

Cool live update on Seaspan location of its ships in the globe; a few near Suez, but mostly Asia

https://www.seaspancorp.com/fleet-summary/fleet-map/

 

 

 

"To put things in perspective, if you were to put the entire 20,000 containers on the Ever Given [on a plane], you’d need 2,500 [boeing] 747 air freighters,” said Tim Huxley, chairman of Hong Kong-based Mandarin Shipping Ltd.

 

Mr. Yang, the exporter, said the cost to ship a 40-foot container box from China to Hamburg, Germany, was around $2,000 before the pandemic hit. It has more than tripled to over $7,400 in recent months. The price for sending the container via rail is around $8,100 now, he said. He predicted that rail freight rates might go up if more buyers divert from sea shipments."

Source: WSJ

[Xerxes]

Any opinion on the rates with the current situation in the Suez and shipping companies taking the long way around the Cape of Good Hope. Must get a bump one might think.

I was thinking though if that specific size of ship will get a red flag in the future. The biggest they have in the operating fleet are the 14,000 TEU, where as Gloden-class is up to 20,000 TEUs.

https://www.seaspancorp.com/fleet-summary/operating-fleet/?class=14000#list

https://en.wikipedia.org/wiki/Golden-class_container_ship 

Cool live update on Seaspan location of its ships in the globe; a few near Suez, but mostly Asia
https://www.seaspancorp.com/fleet-summary/fleet-map/



"To put things in perspective, if you were to put the entire 20,000 containers on the Ever Given [on a plane], you’d need 2,500 [Boeing] 747 air freighters,” said Tim Huxley, chairman of Hong Kong-based Mandarin Shipping Ltd.

Mr. Yang, the exporter, said the cost to ship a 40-foot container box from China to Hamburg, Germany, was around $2,000 before the pandemic hit. It has more than tripled to over $7,400 in recent months. The price for sending the container via rail is around $8,100 now, he said. He predicted that rail freight rates might go up if more buyers divert from sea shipments."
Source: WSJ

[ourkid8]

Another six newbuild orders  :) I am getting giddy inside.

https://finance.yahoo.com/news/seaspan-announces-newbuild-order-six-124900598.html

[ourkid8]

Another 2 more 

https://finance.yahoo.com/news/seaspan-continues-execute-growth-opportunities-120000419.html

[ValuePadawan]

https://www.newswire.ca/news-releases/atlas-corp-announces-exchange-offer-for-seaspan-s-7-125-notes-due-2027-889848141.html Crafting the capital structure a bit more.

[Xerxes]

Container Ship Operators Are Betting on China’s Factory Resurgence - WSJ 

Not sure why they call Seaspan as a Hong Kong based-firm but otherwise good article.

On ATLAS 2021 investor's day, few weeks ago, there was a question: "what stops Atlas being a $20 billion market cap", question was directed to Sokol, but Bing answered as Sokol had connection issues. I couldn't make sense of Bing' answer, but he largely gave a hedged-type of answer.

On the FFH AGM, Prem i think literally mentioned that he expects the Atlas' earnings to double. Not surprisingly, he referred to Atlas, as basically a containership company

[gfp]

1 hour ago, Xerxes said:

Container Ship Operators Are Betting on China’s Factory Resurgence - WSJ 

Not sure why they call Seaspan as a Hong Kong based-firm but otherwise good article.

While Seaspan is incorporated in the Marshall Islands, the principal corporate offices and CEO are in Hong Kong. The CFO of Atlas is now in London 

[bluedevil]

I can’t see this full article, but this suggests Seaspan is considering another order for 20 7k TEU ships. 
 

https://www.tradewindsnews.com/containerships/seaspan-corp-mulls-extending-containership-order-spree-by-another-1-46bn/2-1-1002287

[petec]

11 hours ago, bluedevil said:

I can’t see this full article, but this suggests Seaspan is considering another order for 20 7k TEU ships. 
 

https://www.tradewindsnews.com/containerships/seaspan-corp-mulls-extending-containership-order-spree-by-another-1-46bn/2-1-1002287

That’s fascinating. They’ve said their core focus is the kind of 10-15k TEU range. But this middle market is just incredibly strong now, so they might get some good contracts. 

[bluedevil]

On the Q1 conference call yesterday, Bing was specific about some of the re-chartering opportunities currently available in the market.  Noting that the have 10 more 4250 ships coming off charter this year, and another 30 next year, he noted they are fixing 4250 for durations of five years at $27k per day (see below).  These were the ships that they essentially had on the spot market last year, presumably because of less desire on the part of the liners to charter these older, smaller ships for longer periods.  He said they expect to contract these out by the end of the year.

APR also won two contracts recently.

 

...for example, for 4,250, currently, what we've been signing is between three to five years. At five years at the rate about $27,000 per day. So this is what the rates we've been signing and also the duration. One of the questions you might ask is that, OK, you might probably haven't seen a huge spike in the Q1 revenue in consideration of the current market rate. But really, what we have been -- our approach has been really taking a long-term approach in the sense that if you compare a 5-year $27,000 per day the contract versus a two year or three year, $30,000 or $32,000 per day. You will see a short-term -- will see a short-term spike on the revenue. But after one or two years, your vessel will be for uncertainty versus what we have taken is for a longer period of time. So we are actually seeing the next three, four, five years a very stable cash flow. And also on a total cash flow basis, for example, if looking at 4,250 on $27,000 a day, you get close to $40 million of contracted cash flow. So overall, I think for us, we're taking the current benefit over a stable, sustainable period of time, that is also consistent with our long-term cash -- long-term contract business model.

[petec]

Notes on the call below.

My concerns are that while the company has locked in a ton of latent growth, the market is sceptical about the earnings power embedded in that growth. I saw a note from Stifel suggesting that EPS won't grow because of increased depreciation and finance costs. My guess is management are smarter than that, but it's possible the market will wait for the ships to be delivered before pricing in any growth. The debt packages being negotiated might be key catalysts - if they look attractive analysts might start modelling EPS growth.

• Results basically in-line.
• No ships rolled off-lease in q1, but they have 10 in 2H, 30 in 2022, and 23 in 2023. They are focussing on duration rather than rate when leases roll, so we will see the hard market turn up in larger contracted cash flows rather than in higher current profits. 
  • Seaspan could have contracted these ships already - multiple customers are looking for the same vessels - but they are working on a new leasing model that might allow them to serve all their customers' needs without significantly adding to the fleet. I wonder if this mirrors the loan facility - i.e. in return for longer commitments, customers lease total tonnage and the exact ships can change, creating a more flexible solution in return for more committed cash flow.
  • For example they can lease a 4250 for 5 years at 27k/day, or 2-3 years at 32-30k/day. Net of 5.5k/day operating costs, 27k for 5 years comes to $30m in cash flows (weird - I get $39m). Probably 25 years old at the end of that lease, and if you scrapped it for $5-7m you're still well ahead of the current second-hand price of $28-30m. Will keep monitoring this though and vessel sales could be a source of capital.
• Newbuilds
  • They moved fast to secure shipyard slots when prices were still cheap. Now, slots only come available in late 2024 and 2025, and commodities are pushing prices up, so the economics are looking less favourable.
  • No speculative building and total order book is still roughly in balance with normal scrappage over 3-4 years, so they think the market is healthy.
  • Liners could go to shipyards themselves - oozing cash - but value Seaspan's ability to help with design, getting slots, financing, operations etc.
• Funding the growth
  • Capex schedule will come out in a 6K imminently.
  • $800m in cash and $1.1bn in unencumbered vessels.
  • Majority of newbuilds will be debt funded with LTVs of 75-100%. 30-40% of this might pay out during construction but there is an equity component which might be financed and recycled when the ship is delivered. Working on $1.4bn for 13 newbuilds in q2 and the rest - $2.9bn for 24 newbuilds - in q3. Have experienced a "dramatic increase" in access to capital so it's about assembling the right portfolio and pushing out duration.
• Talking to S&P/Fitch about a first corporate rating in q3, and will then shuffle the pieces around to get to investment grade in c.2 years.

[Viking]

It looks like Atlas is looking to build a utility type of container shipping company. A company that is little affected by the cyclical nature of the containership industry. We saw this during the pandemic when their business held up better then expected. We are also seeing it now; spot container shipping rates are through the roof and Seaspan current year results are benefitting only modestly. The challenge for Atlas is timing... when will Mr Market get it (the strategy), like it, and pay up? Will it take another couple of years?

The analyst community seems to be taking a wait and see approach for now. (The APR acquisition confused analysts and did not help management’s reputation.) 

in the near term how they finance they the new builds, especially over the next 12-24 months, will be important. I would think they will need to issue some equity given their desire to get to a better credit rating over the next 24 months.

 

[petec]

26 minutes ago, Viking said:

It looks like Atlas is looking to build a utility type of container shipping company. A company that is little affected by the cyclical nature of the containership industry. We saw this during the pandemic when their business held up better then expected. We are also seeing it now; spot container shipping rates are through the roof and Seaspan current year results are benefitting only modestly. The challenge for Atlas is timing... when will Mr Market get it (the strategy), like it, and pay up? Will it take another couple of years?

The analyst community seems to be taking a wait and see approach for now. (The APR acquisition confused analysts and did not help management’s reputation.) 

in the near term how they finance they the new builds, especially over the next 12-24 months, will be important. I would think they will need to issue some equity given their desire to get to a better credit rating over the next 24 months.

 

I’m hoping they don’t issue - cash flows after the capex is done will be spectacular and one has to assume the market will weaken so they won’t have capex. That’s the time to go for investment grade, not now.