ATCO - Atlas Corp

[BG2008]

Anybody look at SSWN?  This is senior debt due in Apr 2019 currently priced at 11.3% YTM.  Thats up from 7.4% just a couple weeks ago.  I hope they are buying back a ton on the open market right now!

 

This is interesting.  Trading at around $20 on $25 par.  I just did a quick look at exchange traded debentures such as Seaspan 2019.  Most of them lose 20% during late 2014.  Are there any good reason for such move late last year?  Just trying to figure why they all uniformly dropped last year. 

[Uccmal]

I suppose people worry what happens when ships come off lease. Maersk just stacked triple-E ship(s). I like Seaspan, but is it cheap? It's dividend is attractive for income seekers but on a valuation basis it doesn't scream bargain - then again, I might value it the wrong way. I know newbuilds are coming online but TTM EBITDA of 450M versus roughly EV of 4.400M. And then there might be a bit of off balance sheet financing as well?

 

It is cheap on a book value basis, and certainly on a dividend yield basis, providing what I said above about it not being a long scale pyramid scheme.

 

In fact, if the business is sustainable, it is beyond insanely cheap.  I have made 64%, lets say 80%,  after compounding, on the dividend alone since I first bought shares in 2009. 

 

It is the China effect rubbing off on Seaspan.

It's trading at a 20 percent discount to book value. But recently return on equity has been sub 5 percent, so why should it trade higher? I see drybulk shipping companies trading at a 80 percent discount to book value. Sure, they're not making money at moment, and I much prefer Seaspan, it's just that I have a hard time getting the numbers to add up. That plus 10 percent dividend yield looks very attractive, but what if it was cut - would it still be cheap? Obviously whether it pays dividends or not shouldn't change ones value of the company since retained earnings (at least in theory) are just as "good" are earnings payed out. I'm just wondering if we'd consider it cheap without the dividend.

 

Okay, I have held SSW since December 2008 - 7 years.  I have bought more as we have gone along.  Until recently it made up 30% of my total holdings by dollar value.  Every year they have raised the dividend.  It is a priority.  I expect them to raise the dividend by 8% again this year.  To me that is a very good value, in an era when treasuries are paying nothing. 

 

The proviso is that they can handle the aging ships without significant end of lease capital losses.  Significant late in lease costs would indicate it is something of a very long term Ponzi scheme.  But, Management is good, and the BOD and management are heavily invested in seeing this work properly. 

This is in fact the only reason I haven't gone even higher in my position. 

 

In today's sideways market there is simply no where else to get returns of 8-10 %.  As Jeast has indicated reaching for yield can often be a bad thing, but I too dont see this as particularly dangerous with SSW.  It my be as simple as the market and analysts dont understand the company, and its lack of leverage to shipping in general. 

 

 

[BG2008]

My concerns about Seaspan

 

1.  The dividends are a return of capital, not a return on capital.  The difference between a REIT and container ships is that they both throw off a cashflow stream over time.  If you own the right kind of RE, the terminal value is worth substantially more than the debt that you put on those properties despite all sorts of GAAP depreciation.  This doesn't mean that you aren't earning a "true" return by Seaspan.  But one needs to look at the business from a life cycle perspective of purchasing ships at X, financing the purchase at Y% WACC, and whether salvage value is higher than depreciated cost.  I think that one needs to look at this over many years and if you can't answer this question then you could very well be in a pyramid scheme and not know it. 

 

2. 5 year average lease term.  Frankly, this worries me as I prefer to see portfolio lease terms that approach 8-10 years.  If December 2015 is the beginning of the burst of the credit bubble, then it could be quite painful as the leases roll off and the market can't absorb the excess capacity.  In the 20-F, they mentioned that the backlog is something like 18% of the worldwide TEU capacity during 2014.  That's kind of scary.  This leads me to my next point, container rates. 

 

3.  No one has mentioned anything about spot shipping rates.  They've falling off significantly.  Now you can say that SSW has long term leases.  But do they?  When the average lease length is 5 years, it's hard to claim that. 

 

https://ycharts.com/indicators/container_shipping_rate_for_4250_teu_vessels

http://www.maerskline.com/en-ca/shipping-services/rates-and-pricing

http://wolfstreet.com/2015/06/22/container-shipping-rates-from-china-to-the-us-europe-totally-collapse-ccfi-scfi/

 

4.  Just trying to be creative in imagining what could go wrong.  If SSW can't induce shippers to enter into more long term contracts.  The average lease length can quickly go from 5 years to 3 years.  At that point, SSW is in essence in the spot market.  From my experience, you never want to be a spot market shipper.   

 

5. Does anyone know what happened to SSW from 2007 to 2009.  There was a 70-80% loss in share price.  Also, distribution per share collapsed from 47.5 cents per quarter to 10 cents a quarter and have not recovered back to 47.5.  I don't know if we are going into a 2009.  But I stress test my investment under those kind of scenarios. 

 

 

[JEast]

Yes, risk is present in this equity.  If you already own it, more selling pressure will probably persist so the question is can you tolerate the pain until the tide turns?  Always a tough call but also gives one the potential opportunity.  As one of this board’s heroes indicates – this investing stuff is not supposed to be easy.  Put my comments in the camp of daring to look foolish.

 

#1 – Valid point about a potential appreciating asset versus a depreciating asset and return of capital.  I used the REIT analogy as potential investors are more familiar with REITs more so than the aircraft leasing model where you do have a depreciating asset with an ending salvage value (i.e. AIG’s previous International Lease Finance Corp.).  For the most part, with either aircraft or ships they are depreciated over a 25-year life and are useful for about 30 years.

 

#2 – As a company in this space grows larger, just the mathematics of the business forces the average lease term to shrink since you are looking for 8-12 year leases that are only booked over the cycle.  However, that does not imply that the cashflow will shrink because of the overall shorter lease term relative to earlier years.

 

#3 – Spot rates have come down considerably and the reason SSW will most likely see an asset impairment in the 2nd quarter of 2016, or earlier.  Spot rates obviously play a roll when parties enter into a 10-year deal, but both parties are looking at more than just 6-12 month rates alone.

 

#4 – SSW does not have to enter into deals that are not rewarding.  If there are no long-term deals available, just sit and run the business until a deal arrives.  The biggest risk is counter party risk of not paying leases.  However and due to maritime law, in essence the ship owner has ownership of all cargo until the ship enters port.  For reference, the cargo is worth 10X or more than the lease payment and partially the reason no lease payment has lapsed in the company’s history – at least to my knowledge.  Side note: shipping has many very unique aspects to it across all the shipping sectors.  For example, in the oil tanker business you never want to have leases but instead always want to be in the spot market (counter intuitive).

 

#5 – In ’07-’09 there was a liquidity crisis as many will recall and the thought at the time was that many counter parties would not pay their bills (or in SSW’s case, pay their leases).  During this timeframe, the bulk of SSW’s counter party risk was indirectly tied to the Chinese government and I had a belief then that the Chinese government would not want to default on leases which turned out to be correct.  (Will this continue?)  Anyway, SSW cut the dividend back then just in case and to build cash levels to fund growth as they did not know if their bankers would be around or even survive.  As such, the funding avenues for SSW’s growth have expanded considerably over the last six years as they have done a number of different types of financing deals versus just based on the banks.

 

 

[Uccmal]

As an aside.  Why the sudden onset of analyst coverage of SSW?  This is partly why the stock is down.  WFC, and JPM have both initiated negative coverage on SSW, for the first time.  It was ignored by the major investment firms before.

[fareastwarriors]

I have the JPM report attached here if people are interested.

Seaspan_-_JPM_Initiation.pdf

[Uccmal]

Thanks for the JPM report Fareast.  It enlightened me to analyst thinking around SSW.  An exhaustive review of the containership business, an acknowledgement that SSW operates on different metrics, and then an estimate for SSW based on prevailing containership spot rates.  Analysts dont want to step out on this one.  And SSW doesn't fit their spreadsheet templates.  The limited imagination of the bureaucratic mindset. 

 

They acknowledge the 10%+ dividend rate and its stability, and then they promptly lowball the price.  Where else are you going to get a safe, 10 % dividend, growing at 8% per year? 

[JEast]

Spreadsheet templates -- ha ha. 

 

Brokerages don't have the people power they used to have to differentiate shipping sectors so they mostly lump them together as mentioned in a previous post.  Noticed that part of the calculation in the JPM report uses utilization rates (his buddy's spreadsheet) from drybulk ships (i.e. ton-mile demand / dwt*mile).

 

The next six months should be full of uncertainty in the shipping sector as well as for SSW too.  However, an expected announcement of a new contract or a new payout announcement should steady the waters a little.

[kab60]

According to that JPM analyst it's trading at 10.4 x FY2015E Ebitda. Any of you guys have a fair value? It doesn't exactly scream cheap considering how it's a capital intensive business, there's a good chunk of debt plus a good chance of an impairment in 2016. I like the company but I'm interested how you guys value it.

[Uccmal]

According to that JPM analyst it's trading at 10.4 x FY2015E Ebitda. Any of you guys have a fair value? It doesn't exactly scream cheap considering how it's a capital intensive business, there's a good chunk of debt plus a good chance of an impairment in 2016. I like the company but I'm interested how you guys value it.

 

By the dividend.  My aggregate purchase price in some of my non- taxable accounts is around $15.00. 

Since I have held it, it has paid me back 6.40 per share.  Nothing is that clear cut mind you.  I have sold shares at much higher prices, and bought them at higher prices than today, and originally at much lower prices.  The original shares I have held have probably been turned over a couple of times since 2008/09.  I have watched for years and read all their reports along the way. 

 

IMHO the dividend is safe and likely to grow.  In todays environment that gives you an automatic return of > 8%.  If you can beat 8% in a zero interest rate environment without having to overly worry about it, good luck.  The annual returns posted this year by board members are going to be low.  The US big banks have done nothing for years, tech. stocks with notable exceptions are sort of neutral, and oil related stuff, well thats another thing. 10.4% doubles your money in 7 years, with no capital gains. 

 

I am not sure how else to value SSW since it really has no comparables - maybe Aercap, or divisions of the former GE capital (their auto/truck fleet services was never reported as a separate division but they were the largest fleet owner in the US for two decades). 

 

As I have mentioned over and over, my only worry is that there is some ship left at the end of the lease, or that the lease profits completely cover a ships cost.  Otherwise it is not sustainable.  The write downs James is referring too, if they materialize, will be telling.  However, if they get re-leases, or can sell used ships at a price that exceeds payouts plus capex for the ships in aggregate, then it will work well, and the stock will pop. 

 

It is a capital instensive business, but unlike a mining operation, or a large plant, it instantly generates cash.  We dont know if Tesla's battery plant will generate cash, whereas every SSW ship generates cash when it leaves the ship yard. 

[Uccmal]

I will add that if you cant get comfotable with it, amd some cant, then stay away.  I have followed it for 7 years, and trust management as much as any other company out there, except Buffett.  They have made a couple of minor blunders along the way, but nothing like the horrible gaffs of other much loved companies on this board. 

[Uccmal]

One more thing that applies to almost all the stocks I hold this year.  There is tax loss selling going on!

[kab60]

Thanks for the reply, Uccmal. Much appreciated. I get what you're saying but guess I'm just not comfortable valuing a business on it's dividend yield.

[siddharth18]

Has anyone looked at Singapore Shipping Corp? Smart owners from Singapore operating in the PCTC (Pure Car/Truck Carrier) niche with average lease terms that are MUCH longer than SSW -

 

http://quinzedix.blogspot.in/2015/11/singapore-shipping-corporation-pure-car.html

 

 

Not to derail the SSW discussion but I think Singapore shipping corp is worthy of a look if you find SSW attractive.

[goldfinger]

2015 Results were quite strong. Any idea what the market is looking for?

[Uccmal]

2015 Results were quite strong. Any idea what the market is looking for?

 

I suspect the lack of a dividend increase has thrown people off.  Also, the warnings of greater Op. ex. without a number attached to them.  I find it strange they didn't raise the payout given that there is a significant amount going straight back in with the Drip, anyway.  I think management wants to get the stock price up by retaining more earnings, FWIW. 

 

I listened to the Q&A.  The Ceo is quite the chatterbox, but there was nothing particularly enlightening.  Steady as it goes. 

[goldfinger]

It seems to be that they are conserving cash to increase buybacks...  ;D

[Uccmal]

Now that I have had a coupke of days to review the conference call, and the numbers, I am getting a better idea what is going on, and why the dividend wasn't raised this year. 

 

Highlights:

- they have 30 or so ships coming up for release over 2016/2017.  They are holding out to see what rates they can get.

- they are intending to buy in the partnership with Carlisle Group

- other PE firms are rumbling about exiting deals in the space and SSW is looking to pick up some assets there.

- planning on getting into container leasing as well? 

- they are buying in the Series C preferreds.  I think Gerry Wang wants to work toward cheaper financing by strengthening the blaance sheet. 

- Gerry has indicated that alot of 80s and 90s container ships are headed for scrap - it is more expensive to retrofit for new  environmental regulations than scrap and buy new. 

 

I have pared my position to about 25% lower, just because it was too big.  If the stock dips into the sub $14 range I will be a buyer again. 

[JEast]

Back in December I mentioned that the next six months should be full of uncertainty in the shipping sector turned out to be somewhat of an understatement.  Still some choppy water ahead, but as all the new liner alliances get their grounding and as the liners figure which routes they want with the new panama canal lock opening, then we shall see.

 

Looks like SSW is preparing for such with the new financing deal just announced.  Plus, CGI paid part of their loan back, $50m of the $230m.

http://seaspan.mwnewsroom.com/Files/2e/2e07b25e-63a4-42bc-aba3-dbacea0c6013.pdf

[xtreeq]

Seaspan Announces Pricing of 5,000,000 Class A Common Share Public Offering at $14.70 per share

https://www.sec.gov/Archives/edgar/data/1332639/000119312516599959/d365107dex99i.htm

 

[Uccmal]

Seaspan Announces Pricing of 5,000,000 Class A Common Share Public Offering at $14.70 per share

https://www.sec.gov/Archives/edgar/data/1332639/000119312516599959/d365107dex99i.htm

 

They are actively raising capital to buy in Carlyle Group's share of the partnership.  Prefs last week, common today.  The rate on the Prefs. was the best yet for Seaspan, not a pref. buyer. 

[kab60]

Looking at the rates at Maersk as well as CMA and their current operations I'm surprised SSW is still trading at these levels. I'm a little late with the bear warning, but I think it could get really ugly when they need to renew contracts and at these levels I still don't figure how anyone think it's cheap. I think people would value if differently without the divy which is silly.

[Uccmal]

Looking at the rates at Maersk as well as CMA and their current operations I'm surprised SSW is still trading at these levels. I'm a little late with the bear warning, but I think it could get really ugly when they need to renew contracts and at these levels I still don't figure how anyone think it's cheap. I think people would value if differently without the divy which is silly.

 

So far, this is rechartering is not a significant concern.  Over the next couple of years only 5-6% of the fleet is up for recharter.  The new boats are chartering in advance of construction for 8 to 17 years.  It is unknown if future recharter rates will be the same, lower, or perhaps higher. 

 

If there was no dividend they would be adding 150 m to the balance sheet every year.  That is a 10 % growth rate in and of itself - take your pick.  But, you are right: the dividend is expected, and priced into the shares. Since 2008 I have been paid around $8.00 per share

[gurpaul88]

Curious to what level you think this would be a buy, tia.

[JEast]

Cheap or not cheap?  If one believes that inflation is 3-5 years out, then SSW is definitely not cheap.  On the other hand, what is a (semi) double-net-lease worth in a very extended 1% environment?

 

If we remain in a non-inflationary period for the next decade then a few characteristics may stand out.  1) SSW’s all-in capital costs are approaching one-third less then what they were just 5 years ago, 2) as such, renewal rates going forward do not need to be what they where in the past, and 3) alternatives for capital light options to the major liners has contracted significantly (i.e. major liners would like to use SSW’s balance sheet to fund a portion of their capital projects going forward as banks have pulled in their horns). 

 

So the open question seems to be is SSW adding value to the shipping industry, or not?  For the present, they seem to be providing value to their customers and have demonstrated to be honest brokers.  Once this current tsunami in the container shipping alliances and new trade routes settle down and capital plans come together for the major liners, things may look quite different in 12-18 months.  This is not a three-bagger but just seems more like quality with a limited downside from these levels.

 

As a guy from Omaha has indicated, if governmental policies remain benign for a protracted period of time than many things are very inexpensive today that do not appear to be so on the surface.

 

New Panama Canal Lock Opening