ATCO - Atlas Corp

[Guest VAL9000]

And it strikes me as imprudent for a leveraged company with negative earnings to be paying dividends based on its lending facility.

Prunes,

 

Are you referring to Seaspan here?

[prunes]

I had been referring to OSG.

[Guest VAL9000]

I had been referring to OSG.

Ok, good.  Otherwise you'd be exposed to a tirade regarding the general misunderstanding of Seaspan's derivative instruments, their function, how they are accounted for, and how they are perceived by the market.  The whole topic makes my blood boil! :)

 

[prunes]

Few questions about SSW...

 

1) Have any of you seriously considered the risk posed by the introduction of new lease accounting rules in 2013. This is a hot issue in the real estate industry right now. Per the 20-F:

 

Our ability to grow may be reduced by the introduction of new accounting rules for leasing.

 

International and U.S. accounting standard-setting organizations have proposed the elimination of operating leases. The proposals are expected to be finalized in 2011 and implemented in 2013 or later. If the proposals are enacted, they would have the effect of bringing most off- balance sheet leases onto a lessee’s balance sheet as liabilities. This proposed change could affect our customers and potential customers and may cause them to breach certain financial covenants. This may make them less likely to enter into time charters for our containerships, which could reduce our growth opportunities.

 

2) How are long-term charter rates typically determined relative to spot rates at the time of the contract being written? What kind of risk reasonably exists for those charters currently operating on 1-year lease options? It seems like SSW is getting a good rate on its new ships being delivered in 2011 - 2012. Were these rates negotiated before the bottom fell out of the market, or do the charterers simply realize that it is a matter of time until prices firm up?

 

3) What drove SSW to $21 in April and what is driving it back down--correlation with the broader market and general pessimism related to the global economy and trade?

 

4) Why is SSW unique in this market niche? I think I saw this question being kicked around here but didn't see a great answer.

 

5) Depreciation in 1Q was $30 MM on cash for distribution of $80 MM. Is this a reasonable estimate of fleet maintenance capex? Management expects cash for distribution to grow about 50% by 2013. Where do you guys expect dividends to be at that time?

[Guest VAL9000]

Prunes, I don't have all of the answers here, but these are my thoughts on your questions:

 

Few questions about SSW...

 

1) Have any of you seriously considered the risk posed by the introduction of new lease accounting rules in 2013. This is a hot issue in the real estate industry right now. Per the 20-F:

 

 

I haven't seriously considered this risk.  I'm not sure how much this mitigates it, but loan covenants aren't bound by whatever the accounting rules du jour are.  For example, debt covenants could be adjusted to exclude leases as part of the asset/liability consideration.  Correct me if I'm wrong, but in the case of a financing lease aren't both the asset and the liability moved to the balance sheet?  This should dull the liability impact on ratio-based covenants.

 

 

2) How are long-term charter rates typically determined relative to spot rates at the time of the contract being written? What kind of risk reasonably exists for those charters currently operating on 1-year lease options? It seems like SSW is getting a good rate on its new ships being delivered in 2011 - 2012. Were these rates negotiated before the bottom fell out of the market, or do the charterers simply realize that it is a matter of time until prices firm up?

 

The rates are set similarly to how you'd set the rates on any contract.  It's a combination of underlying cost, value add, time horizon, risk, and overall commitment.  There's an inherent dampening effect on SSW's rates - for shipping bonanzas, the underlying costs are high and so high operating rates don't result in enormous profits.  For periods where there is a supply overhang, such as now, the cost components are much lower but the expectation is that long-term rates will also be lower.

 

Rechartering risk is important.  So far, all options by charterers have been exercised.  SSW's contracts have something like a 1 year lead time on most/all contracts when it comes to these options not being exercised.  The same principles apply to setting rates on new charters / recharters.  Rechartering is where operational excellence becomes a competitive advantage.

 

3) What drove SSW to $21 in April and what is driving it back down--correlation with the broader market and general pessimism related to the global economy and trade?

General market irrationality?  I don't know why prices move as much as they do.  Seaspan carries a lot of debt, so its price gyrations in the market could be amplified.  The thing is, you could go back in time to 2008 and predict within 5% what Seaspan would earn every quarter for the next 12 quarters based on the information they gave then.  They've executed very well on a long term plan.  So, I fail to comprehend what drives the price up by 50% and then down by 30% over 4-5 months.

 

 

4) Why is SSW unique in this market niche? I think I saw this question being kicked around here but didn't see a great answer.

I don't really know how to answer this because I'm not sure what you're looking for.  Maybe scale is the right answer.

 

5) Depreciation in 1Q was $30 MM on cash for distribution of $80 MM. Is this a reasonable estimate of fleet maintenance capex? Management expects cash for distribution to grow about 50% by 2013. Where do you guys expect dividends to be at that time?

Fleet maintenance is a tough question.  I've tried to answer it a few times but I can't come up with a satisfactory answer.  It's a challenging question because container ships are illiquid assets that trade in opaque markets and whose intrinsic values depend on things like how well they were maintained and what the going rate for charters is.  If trade picks up and container ships are in demand, SSW will get a nice little NAV bump in the price. 

 

Depreciation on the book value is probably not a good proxy for this metric.

 

I hate revealing my guesses regarding the dividend.  I've guessed unsuccessfully for two years straight.  But whatever, I'm getting used to being wrong.  I think they'll bump it up to $1/year in 2011Q3.  There are 5 large vessels coming online over the next 3 months, so this is a good time to do this.  The next bump could come in 2012Q1 or Q2 when the finish of the current "five year plan".  There should be a nice, steady income stream for the rest of 2012 while we wait for the new 10k TEU vessels to come online.

 

[prunes]

Thanks.. my question #4 was asking, why do other shipping companies tend to stick to the spot markets where they get killed? Why aren't other companies doing long term leases?

 

Regarding #1 - Many companies prefer to lease real estate as opposed to own it because it makes their financial metrics look better. Some large real estate users have said that this new accounting treatment could alter their rent/buy decisions.

 

I don't currently have a position but I'm hoping the shares drop enough amid increasing gloom about the economy to pick them up at $10. *Fingers crossed*

 

--

 

How much stock do you put in SSW's book value? Many shipping companies took write downs on their assets but I don't think SSW did.

 

I had tried, just for fun (I have a sick notion of fun), to back into SSW's carrying value for its ships based on its guidance of what a ship costs per TEU. I assumed straight-line depreciation (15 year useful life; I had seen somewhere that most ships become uneconomic to operate past this point) and a cost of $0.013 MM / TEU. My depreciated cost was $2.7 B compared to PP&E on their books of $4.2 B. The one big missing piece to my analysis that I don't know the answer to though is that SSW's cost guidance is based on a 6,200 TEU ship and most of SSW's ships are smaller than this and therefore would have a higher $/TEU to construct... I just can't make any guess as to how much.

[Guest VAL9000]

Thanks.. my question #4 was asking, why do other shipping companies tend to stick to the spot markets where they get killed? Why aren't other companies doing long term leases?

To tease this apart a bit better, Seaspan's customers are the liners.  The liners are exposed to the spot market because their customers are the shippers.  Shippers, like Wal-Mart, are dependent on customer demand to drive shipping volume, so their interests aren't aligned with long-term contracts.  Liners usually end up making huge profits and huge losses because of this.  You could argue that SSW puts liners at a disadvantage with its long term contracts, but contracting with SSW vs. buying your own vessel present the same economic conundrum around investing in equipment.

 

Regarding #1 - Many companies prefer to lease real estate as opposed to own it because it makes their financial metrics look better. Some large real estate users have said that this new accounting treatment could alter their rent/buy decisions.

Understood - this is more a factor of "how much" as well as how big a deal this is to SSW customers.  It's difficult to forecast, so it's probably something worth keeping in mind.

 

I don't currently have a position but I'm hoping the shares drop enough amid increasing gloom about the economy to pick them up at $10. *Fingers crossed*

If it drops to $10 I'll liquidate everything else and go all in :P

 

How much stock do you put in SSW's book value? Many shipping companies took write downs on their assets but I don't think SSW did.

 

I had tried, just for fun (I have a sick notion of fun), to back into SSW's carrying value for its ships based on its guidance of what a ship costs per TEU. I assumed straight-line depreciation (15 year useful life; I had seen somewhere that most ships become uneconomic to operate past this point) and a cost of $0.013 MM / TEU. My depreciated cost was $2.7 B compared to PP&E on their books of $4.2 B. The one big missing piece to my analysis that I don't know the answer to though is that SSW's cost guidance is based on a 6,200 TEU ship and most of SSW's ships are smaller than this and therefore would have a higher $/TEU to construct... I just can't make any guess as to how much.

Not a lot.  I look more at the contracts as the measure of intrinsic value.  A few things you'll want to adjust:

- 15 years is probably conservative.  SSW has 4 vessels in its fleet that are 22 years old and appear to be renewing for APMM.  The operating expenses are about 30% higher than newer, comparable vessels.

- Don't forget about scrap value or second-hand sale value.

- You can dig through the press releases to get all of the historical costs for the ships.  It's $175mm for 13.1k TEU and $125mm for 8.5k TEU.  The more recent vessels are $100mm for 10k TEU.

 

I consider the NAV to be a price swing amplifier.  In good times, they'll drive the price up, but in bad times they'll drag it down.

 

[gaf63]

Probably being too basic here, but not building ships on spec, and only with long term liner contract in hand sets SSW apart, also the bunker costs are the liners responsibility

[gaf63]

Well the first 13 K ship has been delivered, absolutely no mention of the new contract in the press release tho

 

 

HONG KONG, CHINA -- (MARKET WIRE) -- 06/10/11 -- Seaspan Corporation (NYSE: SSW) announced today that it accepted delivery of its first 13,100 TEU containership, the COSCO Glory. The new containership, which was constructed by Hyundai Heavy Industries Co., Ltd., is Seaspan's sixth delivery in 2011 and expands the Company's operating fleet to 61 vessels.

 

The COSCO Glory is on charter to COSCO Container Lines Co., Ltd. ("COSCON") under a twelve-year, fixed-rate time charter. The ship is the eleventh of a total of eighteen vessels to be chartered by Seaspan to COSCON.

 

Gerry Wang, Chief Executive Officer, Co-Chairman and Co-Founder of Seaspan, commented, "We are pleased to achieve this latest milestone, as we take delivery the first of eight 13100 TEU vessels. The COSCO Glory is the largest vessel in our fleet and a flagship vessel in the COSCON containership fleet. We look forward to taking delivery of the remaining seven vessels in this class and further strengthening our deep relationship with COSCON."

 

[Uccmal]

It's very clear that the market doesn't understand SSS very well.  It's trading at a dividend of 5% and they are adding continuous capacity that is working immediately out of the yard.  Fine by me.  I just keep slowly getting more shares on the downturns.  A.

[prunes]

Somewhat off topic:

 

Diana Shipping (DSX) did a spin off at the beginning of the year of its containership business, Diana Containership (DCIX). Simply put, it was a very unattractive spinoff for most shareholders.

 

-Market cap at the time of spinoff was around $91 MM

-Distribution ratio of 1:30.7

-DCIX's assets were comprised of cash and two containerships

-DCIX also kicks management fees of around $1.3 MM back to DSX

 

To make matters worse, DCIX did a secondary IPO this past week, selling 14 MM shares (on 6 MM outstanding) at $7.50. Shares now trade at $7.15. Concurrently, DCIX did a $20 MM private placement of 2.67 MM shares to DSX.

 

Interestingly, the CEO, Director and President, EVP and Secretary, CFO and Treasurer, collectively agreed to purchase 1.625 MM shares at the IPO price (link). (That there is promise in the spinoff is also demonstrated by DSX's participation in the above private placement.)

 

More info - http://dollarwisefl.wordpress.com/2011/01/16/diana-containerships-dcix-a-spin-off-with-the-right-kind-of-problems/

 

More more info - http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/44106

 

Investor presentation - http://www.sec.gov/Archives/edgar/data/1481241/000091957411000115/d1162153_ex99-1.htm

[vinod1]

I do not have much experience with Seaspan and wanted to check if my understanding is correct via a simple conceptual model of how this company works. I always think in terms of owner earnings and am trying to visualize Seaspan's owner earnings instead of the distributable cash flow management seems to focus upon.

 

Assuming a simple model of Seaspan consisting of only a single ship for charter purchased with $100 in total financed with debt/equity of 75/25.

 

Equity          $25

Debt            $75 (Long term debt is about 55% with about 20% in other long term liability)

---------------------

Assets        $100

 

 

Revenue              $10 (~10% of assets)

Op-Expenses      $3  (~30% of revenue)

Interest Ex          $3.5 (Assuming about 6% interest on LTD with other financed at low cost)

 

Earnings before D&A    $3.5

 

If we assume that a new ship is needed after 30 years and that a new ship costs increases at about inflation + 1% or about 3x the original price. Since that ship is also financed at 25% equity we need to provide for only that amount. In addition we need to pay off the debt at the end of 30 years.

 

$300 for new ship ($75 equity) + $75 to pay off old loan = $150 needed after 30 years

Scarp value of ship = 10% of initial cost and grows with inflation ~ $20 after 30 years

 

Total Outlay needed to replace with a new ship and with a new loan. Essentially start the cycle over again. This is about $130.

 

If you put about a $1 each year for 30 years in a lock box that grows at about 8%, this gives you the $130 needed to replace ship. Thus $1 is your maintainance Capex. I selected 8% because the $1 is in reality invested by Seaspan and earns about its ROIC.

 

Thus, Owner's earnings are $2.5 or earning about 10% ROE.

 

If the above is totally nuts, please let me know! I much rather be wrong than lose capital on an investment I do not understand.

 

Thanks

 

Vinod

 

 

[vinod1]

I know there are lots of assumptions and simplifications involved but the depreciation expense is fairly robust at about 1%, +/- 30 bps for a fairly wide range of assumptions on the replacement costs of the ship.

 

Vinod

[Uccmal]

Vinod, that makes sense to me.  I would probably use 25 years for ship life.  Capex probably rises at a certain point.  This can easily be balanced in your equation by raising the vault to 1.10 per year or so.  It's all in the realm of error. 

 

When you look at SSWs income statements and clean out the noise from the incoming ships, and the derivative fluctuations, it is a remarkably consistent model.  Now hopefully, it doesn't turn out to be a fraud  ::)

[vinod1]

Vinod, that makes sense to me.  I would probably use 25 years for ship life.  Capex probably rises at a certain point.  This can easily be balanced in your equation by raising the vault to 1.10 per year or so.  It's all in the realm of error. 

 

When you look at SSWs income statements and clean out the noise from the incoming ships, and the derivative fluctuations, it is a remarkably consistent model.  Now hopefully, it doesn't turn out to be a fraud  ::)

 

Thanks!

[JEast]

No official announcement for SSW, but noticed the following analyst comments that a deal with Hanjin Shipping for several of the newly contracted TEU-10.000 newbuildings and showing some interest in 18,000-teu vessels.

 

http://www.glgroup.com/News/Seaspan-aiming-for-another-giant-containership-order-54464.html

 

Recent company presentation:

http://files.shareholder.com/downloads/SSW/1096615012x0x476891/42ac0ab5-5ac0-43ed-b657-2a5a8c10e17a/Presentation%20-%2016-June-2011%20for%20DB%20Conference.pdf

 

 

Cheers

JEast

 

[libor.plus1]

I read the ABC Funds write-up on these guys. Can someone shine some light as to why their dividends have slipped? and how are they able to support their dividend without NI or FCF?

[Uccmal]

libor.plus, I wish I had one of those Eidetic memories. 

 

You probably need to read the most recent AR to get a good feel.  Irwin is a little out of date on his summaries.  He bought the IPO incidentally. 

 

The dividend was reduced when the financial crisis hit.  They ran into trouble getting financing for the newbuilds and had to conserve cash.

 

To get a good feel for SSW you need to mentally split it up into the continuing operations and the newbuild, because the newbuild is so significant relative to continuing operations.  The continuing operations are profitable and produce cash. 

[Myth465]

Growth just because isnt looking too bright....

 

http://www.bloomberg.com/news/2011-07-27/container-vessel-rates-plunge-signaling-slowdown-in-u-s-freight-markets.html

[JEast]

On a recent trip to Europe, I spoke to an individual well connected in the shipping industry.  However his expertise was more in the bulker business.  Nevertheless and in essence, his comments were that the KGs out of Germany have been in trouble and will stay in trouble.  In addition, European banks have been strong-armed to keep sour shipping loans on the books until 2013.  These loans will or should start clearing probably late next year.  Until then there will be more shakeout in the industry.

 

On the other hand, even with dire opinion back in the marketplace this individual was quite bullish in the ship purchase market.  Maybe Fairfax is seeing the same thing as well as Seaspan.  I would not worry too much about headline charter rates, as these are always short-term rates of 6-24 month averages and not the 72-120 month charters Seaspan has and will enter into.

 

As a value investor, one must recognize that shipping is a volatile and a cyclical business.  As such, I took some off the top after the significant run up in Seaspan earlier this year, but am back in at recent prices.

 

 

Cheers

JEast

 

[gaf63]

Cosco’s arrogance could be catching

Monday 22 August 2011, 17:24 FINANCEBack to Lloyd's List Asia

THE announcement by Cosco that it is unilaterally reneging on its chartering commitments sends a terrible message to the shipping industry.It has been widely known that Cosco was seeking...  (full article not available to me)

 

Be nice to have some info/clarification from SSW  on this news  from Cosco, if true , not good for SSW  and its shareholders

[gaf63]

Looks like it is Cosco bulk shipping that is having charter disputes , could find nothing on container ship charters,

 

even at low spot rates of $1525/feu HK to LA and bunker costs looks like Cosco would make $7 mil/ trip on a full ship, maybe not their best op margin , but wouldnt think they would disrupt charters at that level

[finetrader]

http://www.theglobeandmail.com/report-on-business/international-news/global-exchange/financial-times/cosco-warned-of-worldwide-ship-seizures/article2139851/

 

 

[gaf63]

COSCO settles charter disputes, and it was apparently it was only in the bulk charters

 

http://www.joc.com/container-lines/cosco-loses-432-million-settles-charter-disputes

[Uccmal]

The bulk business isn't doing to well. 

 

FYI, I recall Cosco trying to pull the same stunt in early 2009 with Seaspan and Gerry told them to take a hike.  Since then they have signed more charters so I think they fall into the valuable but difficult customer category.