ATCO - Atlas Corp

[gary17]

A boardmember pm'd me to ask whether there is a good reason this is so cheap. Here are a few thoughts:

 

1) It's not that cheap on EV/EBITDA, and arguably not even on earnings, given the quality of the industry (poor). If you screen on those metrics it might not stand out. It's only truly cheap on p/FCF, and...

 

2)...I don't think the market has really realised how powerful FCF generation is going to be. Even on today's call one analyst admitted surprise that quarterly free cash annualised out at $500m, said that was too aggressive as a forecast, and asked if they plan to generate FCF in the future and if so whether $200m might be a reasonable figure. This suggests a total misunderstanding of what's happening. Q3 was the first quarter with the full contribution from the GCI acquisitions and the last of the newbuilds (delivered in May). Therefore the next several quarters should look very similar: full cash flow contribution from all vessels and no capex, because they aren't ordering newbuilds any more (note that operating cash flow is after the drydock costs to maintain the existing fleet). So annualised FCF is quite likely to get close to $500m, but it doesn't seem like the market has realised it yet. That's forgivable because...

 

3)...the Seaspan story is complicated. It's been a jam tomorrow story for years, it got overlevered, there's been wholesale management change, and then there's been the FFH warrant dilution to wrap your head around. It's understandable that plenty of people got bored/annoyed and looked away just as the free cash flow tap got turned on.

 

4) Although there's a lot of contracted revenue, contracts do roll over, and people have been panicking that the US/China trade war and possible general economic slowdown would hurt recontracting rates. The call is worth listening to on this but the basic points are that demand is growing, supply is slowing, both the idle fleet and the order book are at multidecade lows, consolidation of container companies has driven better supply discipline, and charter rates are trending gently up. Seaspan signed new contracts and contract extensions on good terms in the quarter and higher charter rates have driven about $20m in incremental revenue YTD, which is significant when you consider only 10% of their revenues are uncontracted.

 

I think this share will do very well over time as people realise the massive change from borrowing to build, to generating FCF and delevering. In addition I expect some smart capital allocation moves. There is one caveat, which is that the FCF is after drydock costs to maintain the existing fleet, but ships do have finite lives (30 years) so the fleet does actually have to be replaced over time. But the fleet is young today so this is not something I'm worried about. If it worries you, value the stock on earnings not FCF. Notably they have said they won't order newbuilds just to extend the life of the fleet, but only if the returns warrant it. They'd rather run the existing fleet off than reinvest the cash flows at subpar rates, which is smart.

 

Incremental positives on the call, for me, were:

- the addition of 2 new customers on "innovative" contracts and the extension of several existing contracts on good terms. Details will apparently be in a 6K later this week.

- Swiber will be debt free when they buy 80% of it for $20m. Apparently the term sheet is public but I can't find it.

- Scrubbers will either be paid for by customers - either customers will fund the capex or Seaspan will earn a return on the capex. I suspected this but wasn't sure.

 

I expect to see quite a lot of debt management activity as they delever, which should result in better maturity laddering and lower debt cost which has the potential to meaningfully juice earnings and FCF. I also expect to see either accretive acquisitions or buybacks once the maturities have been sorted out.

 

Thanks ! 

Do you expect them to raise dividends?  I will listen to the CC after my kid goes to sleep!

[petec]

No, they have clearly stated they will not raise the divi. This thing is about delevering and redeploying intelligently.

 

 

[petec]

https://en.globes.co.il/en/article-hk-shipping-firm-seaspan-raising-nis-450m-debt-in-tel-aviv-1001259153

[petec]

Seaspan has just taken the second tranche of Fairfax’s investment: $250m in warrants, immediately exercised at $6.50 per share, and $250m in debt due 2026.

 

This takes Fairfax’s investment to $1bn in total, split 50/50 debt/equity. They have 36% of the company. Seaspan’s share count goes to 213m for a market cap of $1.9bn and a 25% free cash yield.

 

Seaspan also announced it’s paid off the debt on another 8 ships taking the total to 32.

 

[Scunny Bunny]

Dennis Washington filed on 18 January to sell entire 52.8m share stake (~25% of company). Interesting given share price & willingness to support back in 2009.

[petec]

Dennis Washington filed on 18 January to sell entire 52.8m share stake (~25% of company). Interesting given share price & willingness to support back in 2009.

 

Yes, saw that. It’s a shelf filing so it will be interesting to see what they actually sell. I e no idea why (unless they’re just pissed at being diluted at silly prices by Fairfax!) Will be interesting to see if SSW can comment on the call. I wonder if Fairfax will be able to restrain themselves...

[Saluki]

I'm a SSW shareholder and fan of David Sokol, so I don't know how I missed this interview being posted, but here it is....enjoy!

 

[Parsad]

I'm a SSW shareholder and fan of David Sokol, so I don't know how I missed this interview being posted, but here it is....enjoy!

 

 

You should come to the Fairfax AGM...we had terrific access to David for a couple of days.  He's becoming one of the highlights of the week each year now!  Cheers!

[Saluki]

Parsad, A couple of years ago I went to the Value Investing Conference as a reward to myself for hitting accredited investor status. I wanted to meet Arnold Van Dem Berg and Mohnish Pabrai both of whom I greatly admire.  It was there that I heard about COBF and the Fairfax AGM (Yes, I didn't know the Fairfax meeting was the following day and I was scheduled to fly out that morning, that's how naive I was).  I went back last year and had a blast though. 

 

I was going to go this year, but I dislike travelling too much and I have to go to NYC next week and Chicago next month and Baltimore the month after that, so I decided to skip this year, unfortunately.  I plan to attend next year again though :)

[walkie518]

Figured this should have its own thread since ppl are discussing elsewhere

 

Seaspan posted earnings...good numbers!

SSW_1Q19_Earnings_Presentation_201904_V00F.pdf

Seaspan_Corporation_Seaspan_Reports_First_Quarter_2019_Results.pdf

[petec]

It already does! Could you post there?

[gfp]

Threads can be hard to find without google.  I'll help:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ssw-seaspan/500/

[Parsad]

Threads can be hard to find without google.  I'll help:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ssw-seaspan/500/

 

For the "Investment" Board, finding topics are easy, that's why we have the titles exactly the same.  Click on "Subject" and it will put everything in "Investments" into numerical first, then alphabetical order...simply go to the ticker by clicking on the page number.  Cheers!

[petec]

The next stage in equity value creation has begun: $1bn secured financing facility just announced, part term loan, part revolved, and expandable to $2bn if needed. Replaces 12 existing secured facilities at a "meaningfully lower rate". 

[Saluki]

This is big news.  Their priority has been restructuring the debt and getting themselves to an investment grade credit rating so they can expand or take advantage of opportunistic acquisitions when they come up.  If this trade war nonsense continues, some other shippers may be willing to unload assets to whoever is sitting around with access to cash.

[petec]

Agreed. I'm not sure the annual interest savings will be huge in the context of the cash flow the company is generating, but the bigger point is the direction of travel is superb and the capital availability if they see opportunities is rising.

[walkie518]

up nearly 5% on no news other than one new ship? 

 

not complaining but is there something I'm missing?

[Liberty]

up nearly 5% on no news other than one new ship? 

 

not complaining but is there something I'm missing?

 

Might be because of the rotation going on right now. Anything that has done well in the past year (factor: momentum) is down and most of the things that have done badly (factor: value) are up today.

[kab60]

up nearly 5% on no news other than one new ship? 

 

not complaining but is there something I'm missing?

 

Might be because of the rotation going on right now. Anything that has done well in the past year (factor: momentum) is down and most of the things that have done badly (factor: value) are up today.

That would explain why my portfolio is (finally) having a blast!

[gary17]

peanuts compare to fnma LOL

[Parsad]

up nearly 5% on no news other than one new ship? 

 

not complaining but is there something I'm missing?

 

Might be because of the rotation going on right now. Anything that has done well in the past year (factor: momentum) is down and most of the things that have done badly (factor: value) are up today.

 

Absolutely!  It had to happen eventually and value stocks are benefiting today.  Hopefully, this is a longer-term prognosis!  Cheers!

[Viking]

Seaspan reported Q3 results this morning and they were...... perfectly boring. A few take-aways:

1.) industry consolidation: there has been considerable consolidation (currently 10 participants carry 90% of global container trade down from 150 participants) and existing players are acting much more rationally. (I think investors are missing this point :-)

2.) currently very favourable demand/supply dynamics set to continue into 2020: supply is constrained (especially for larger vessels) and order book for new vessels is at historic lows. This bodes well for pricing moving forward (higher :-).

3.) Seaspan has executed on its plan to significantly pay down debt and increase equity (hit debt to equity target of 1X). It has also implemented a $1.5 billion portfolio financing program (to repay five secured credit facilities, for general corporate purposes, and may be used in part to finance the acquisition of vessels). It would not surprise me to see Seaspan get more aggressive on the acquisition front over the next year (but in a very disciplined way).

 

This is Fairfax's largest investment (shares, warrants, debt). It has been a great investment so far and could be another home run. Lot's of nice tailwinds. They also have an Investor Day planned for Nov 22... will be interesting to see what they have planned.

 

Q3 Results: https://www.seaspancorp.com/events-presentations/

 

A few quotes from the call:

 

Bing Chen (Seaspan President and Chief Executive Officer): "...We also announced the acquisition of a 9600 TEU vessel which will be put on a 3-year time charter with our partner ONE delivered. We are happy to continue to grow our fleet and pursuing accretive acquisitions. We see increasing attractive opportunities among our network of partners and remain very focused on fee growth at the right price. We see growing opportunities to broaden and deepen our customer partnership as our sector stabilizes into a new normal marked by consolidation and we expect our momentum to continue throughout the remainder of the year.

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

Ari Rosa (Bank of America): Hi, good morning guys. So I wanted to ask with the order book (for new vessels) at historically low levels and I thought that was a really helpful chart. How long do you think it can stay there given what you described is a pretty tight supply environment.

 

Peter Curtis (Seaspan Executive Vice President): That's a good question thanks very much. I think really what has changed over the years is the fact that they have -- there's been a maturation in the market in the container market. We have come from over 150 participants to a situation where the top 10 carry 90% of global container trade. Through the last 10 years there's been a very much increased degree of discipline among our customers not only among the customers but they work in primarily alliances. We are in the forecasting and determination of new tonnage is -- against the background of the projected needs. So the world of speculative construction and ordering I think is something that is relatively one that has gone by.

[Parsad]

Seaspan enters the energy business, and possibly asset management business.  Diversifying into energy, with one of the best energy executives in the last 50 years and changing its name to Atlas Corp:

 

https://finance.yahoo.com/news/seaspan-announces-proposed-holding-company-120000393.html

 

Bing Chen will remain CEO and David will remain Chairman. 

 

I know that David was investing alot of his family capital through his family holding company, but I think this will be the main vessel (pardon the pun) now.

Imagine what Berkshire might have looked like if Sokol had been given the reins eventually instead of being terminated!  Cheers!

[ValuePadawan]

This is what I've been patiently waiting for, Mid-American 2.0 here we come!

 

Hopefully tomorrow we get a lot more detail but this should help reduce the cyclicality of the business as well as tie in nicely if they ever get the Swiber deal to go through.

[wondering]

Seaspan enters the energy business, and possibly asset management business.  Diversifying into energy, with one of the best energy executives in the last 50 years and changing its name to Atlas Corp:

 

https://finance.yahoo.com/news/seaspan-announces-proposed-holding-company-120000393.html

 

Bing Chen will remain CEO and David will remain Chairman. 

 

I know that David was investing alot of his family capital through his family holding company, but I think this will be the main vessel (pardon the pun) now.

Imagine what Berkshire might have looked like if Sokol had been given the reins eventually instead of being terminated!  Cheers!

 

Perhaps this the proposed disposition that Paul Rivett was hinting at in the last few conference calls.

 

I have a question that will reveal my ignorance

 

The deal is that APR is purchased by Atlas in an "all-stock transaction valued at $750 million including the assumption of debt, for an expected equity value at closing of approximately $425 million"

 

According to the FFH 2018 annual report, in Prem's letter, APR had a cost of $340m.

 

Is Fairfax's gain on disposition of APR

 

a) $410m (750 - 340)

b) $85m (425 -340)

c) unknown or maybe no gain at all?

 

And since this is a non-cash transaction, I would imagine that the offsetting accounting entry would be that Fairfax's investment in Seaspan would increase by the capital gain.