ATCO - Atlas Corp

[Parsad]

I'm genuinely impressed by this quarter from Atlas.

 

In (probably) the steepest recession in history, when idle ships as a % of the fleet hit an all time high, they basically emerged unscathed. They did not have ships idled and their customers paid. You wouldn't know coronavirus happened looking at their cash flows. It is just possible that some of the company has been right to argue that 1) they are creating a competitive advantage through flexibility and service, and 2) the industry is becoming more rational as it consolidates. I have previously been sceptical on both points, but now I'm thinking maybe.

 

Annualised FFO came in at $644m, and run rate FFO is probably a few tens of millions higher (allowing for ships acquired recently and the full impact of the Mexicali deployment at APR). FFO is a flawed metric, because it doesn't include depreciation, and these assets definitely depreciate. But in the context of a $2.1bn market cap, $650-700m of FFO seems a bit silly. Some of the best capital allocators in history can redeploy cash flows equal to the entire market cap in three years.

 

The new data on ebitda/cost for acquisitions is also flawed (I am no fan of ebitda) but one can play with assumptions and come up with contracted, levered ROE's over 20%.

 

Also, my guess is coronavirus has delayed demand by a year or so but may have delayed supply (which was low anyway) by longer, simply because demand can spring back faster than deliveries can. There might well be a demand shock and a spike in dayrates in 12-24 months, and Seaspan would have quite a bit of exposure to this as short term leases roll. I would not pay much for this optionality, but I don't think I have to.

 

As impressive as the quarter was in terms of Seaspan, how they've integrated APR so quickly and found efficiencies is as amazing!  The more I listen to Bing, the more I'm impressed with his abilities.  They are building out management, looking for opportunity, but pointed out that near-term cash flows will be spent on buybacks as long as valuations are where they are. 

 

I would be quite happy if Fairfax allocated more capital to Sokol and Chen, rather than ideas like Blackberry.  Another $2-3B in Atlas Corp's hands would make me thrilled as a Fairfax shareholder!  Cheers!

[petec]

I'm genuinely impressed by this quarter from Atlas.

 

In (probably) the steepest recession in history, when idle ships as a % of the fleet hit an all time high, they basically emerged unscathed. They did not have ships idled and their customers paid. You wouldn't know coronavirus happened looking at their cash flows. It is just possible that some of the company has been right to argue that 1) they are creating a competitive advantage through flexibility and service, and 2) the industry is becoming more rational as it consolidates. I have previously been sceptical on both points, but now I'm thinking maybe.

 

Annualised FFO came in at $644m, and run rate FFO is probably a few tens of millions higher (allowing for ships acquired recently and the full impact of the Mexicali deployment at APR). FFO is a flawed metric, because it doesn't include depreciation, and these assets definitely depreciate. But in the context of a $2.1bn market cap, $650-700m of FFO seems a bit silly. Some of the best capital allocators in history can redeploy cash flows equal to the entire market cap in three years.

 

The new data on ebitda/cost for acquisitions is also flawed (I am no fan of ebitda) but one can play with assumptions and come up with contracted, levered ROE's over 20%.

 

Also, my guess is coronavirus has delayed demand by a year or so but may have delayed supply (which was low anyway) by longer, simply because demand can spring back faster than deliveries can. There might well be a demand shock and a spike in dayrates in 12-24 months, and Seaspan would have quite a bit of exposure to this as short term leases roll. I would not pay much for this optionality, but I don't think I have to.

 

As impressive as the quarter was in terms of Seaspan, how they've integrated APR so quickly and found efficiencies is as amazing!  The more I listen to Bing, the more I'm impressed with his abilities.  They are building out management, looking for opportunity, but pointed out that near-term cash flows will be spent on buybacks as long as valuations are where they are. 

 

I would be quite happy if Fairfax allocated more capital to Sokol and Chen, rather than ideas like Blackberry.  Another $2-3B in Atlas Corp's hands would make me thrilled as a Fairfax shareholder!  Cheers!

 

I agree with all but your last. Over-concentrating in a levered entity is never a good risk-adjusted idea in my view.

 

On APR - what makes you think they have found efficiencies fast? Ebitda guidance has not changed since the deal closed, and the major impact to ebitda growth has been Mexicali which was in place before the deal closed. I think it will be a great deal, but I don't see evidence that Atlas has made a big difference yet. Am I wrong?

[petec]

Actually - I will check this - I think they explicitly said that near term cash flows would *not* be used for buybacks. The immediate priority is investment grade. Buybacks follow, if the stock is still cheap.

[Parsad]

Actually - I will check this - I think they explicitly said that near term cash flows would *not* be used for buybacks. The immediate priority is investment grade. Buybacks follow, if the stock is still cheap.

 

Seaspan was raised to investment grade August 10th.  They said on the call...specifically David said...that dividend increases were not on the horizon, and while they are always looking at opportunities, buybacks would be more likely if valuations stay low and they maintain their current level of liquidity.  Cheers!

[petec]

Actually - I will check this - I think they explicitly said that near term cash flows would *not* be used for buybacks. The immediate priority is investment grade. Buybacks follow, if the stock is still cheap.

 

Seaspan was raised to investment grade August 10th.  They said on the call...specifically David said...that dividend increases were not on the horizon, and while they are always looking at opportunities, buybacks would be more likely if valuations stay low and they maintain their current level of liquidity.  Cheers!

 

He’s referring to stock liquidity, not balance sheet liquidity. In that context he says buybacks are more likely than issuances unless they find an acquisition where they get more than they give, but that “maintaining our capital and continuing to grow the business” would be the priority and share repurchases would “probably be well into the future”.

 

Seaspan was raised to IG by one agency, but the impression I have is they want it for the holdco also. Could be wrong.

[bluedevil]

Seaspan was not raised to investment grade, though the press release gave that impression.  One of Seaspan's credit facilities - their most important one - was raised to investment grade by Kroll.  The corporate credit rating is still a rung below investment grade.  It is definitely the company's stated goal to secure a corporate investment grade rating and to issue unsecured investment grade debt.

 

Atlas should be a very steady performer through the next 18 months - more than 85% of their revenue is locked in during that period.  The biggest variable for Atlas is what will charter rates look like in 2022-2025, when they have almost 600m of annual revenue coming off long-term charters and will need to re-charter the ships.  I think that is the risk that causes the stock to trade at cheap multiples.

 

   

[petec]

Seaspan was not raised to investment grade, though the press release gave that impression.  One of Seaspan's credit facilities - their most important one - was raised to investment grade by Kroll.  The corporate credit rating is still a rung below investment grade.  It is definitely the company's stated goal to secure a corporate investment grade rating and to issue unsecured investment grade debt.

 

Atlas should be a very steady performer through the next 18 months - more than 85% of their revenue is locked in during that period.  The biggest variable for Atlas is what will charter rates look like in 2022-2025, when they have almost 600m of annual revenue coming off long-term charters and will need to re-charter the ships.  I think that is the risk that causes the stock to trade at cheap multiples.

 

 

 

You’re right on both.

[Xerxes]

I would be quite happy if Fairfax allocated more capital to Sokol and Chen, rather than ideas like Blackberry.  Another $2-3B in Atlas Corp's hands would make me thrilled as a Fairfax shareholder!  Cheers!

 

Parsad, i am happy with that too, however with a market value of $2.1 billion, that would be a lot of equity issuance and warrants to get $2 billion injected into Atlas.

 

Fairfax would have more than just a concentrated position, it will be close to wholly owned with the Washington family that didn't participate in the issuance as shrunken minority. It will probably be consolidated from an accounting point of view, and for all intent and purpose, it will its "second" business next to insurance.

 

Even with APR folded in, the bulk of revenues come from Seaspan line of business. $1.2 billion sales vs. $220 million for APR.

A lot of more diversification needs to happen, before for FFH to take a bigger chunk.

 

 

 

[gary17]

does anyone know if the rates are getting better.  I read some anecdotal report in a mandarin news article that the virus and continued lock down on flights means shipping rates are better... not sure if this translates to something positive for Seaspan.

thanks!

Gary

[ValuePadawan]

does anyone know if the rates are getting better.  I read some anecdotal report in a mandarin news article that the virus and continued lock down on flights means shipping rates are better... not sure if this translates to something positive for Seaspan.

thanks!

Gary

The vast majority of their revenues are long term charters I doubt this will affect them in the short term but as contracts roll off in the next few years the spot rate will be important in pricing for renewing long term charters.

[petec]

Short answer is yes. It varies by route and ship size though.

 

True they’re largely on long term contracts. But they have a decent chunk (especially in smaller, older ships) on shorter term contracts. And they also have a small number of long term contracts at spot, an innovation they patted themselves on the back for last year.

[Parsad]

Article on ATCO/Seaspan from Business in Vancouver.  Cheers!

 

https://biv.com/article/2020/09/shippings-new-imperative-continual-crisis-management?utm_source=BIV+Newsletters%2C+effective+July+1%2C+2017&utm_campaign=3f4283fe83-EMAIL_CAMPAIGN_2020_09_08_06_20_COPY_01&utm_medium=email&utm_term=0_c5e00a74ef-3f4283fe83-211177161

[ValuePadawan]

https://seekingalpha.com/pr/18003000-atlas-corp-announces-departure-of-chief-financial-officer

 

Not sure what to make of this. Any thoughts?

[gfp]

I assume he will move on to another venture of Sokol's but I don't know.  Ryan has been with Sokol from the MidAmerican days, checking out BYD for MidAmerican, working with Sokol at NetJets, working at the spirits company Sokol just sold to Diageo (the Aviation Gin parent Davos) and Seaspan / Atlas.  After all that, you would assume he sticks with Teton / Sokol but who knows.  Its quite the resume for a young guy so far.  Fluent in Mandarin as well.

 

edit - he did part ways with Sokol for a few years at Falcon Edge Capital I see.

[WneverLOSE]

From his LinkedIn :

A heartfelt thank you to all of those who have been a part of the Atlas/Seaspan journey.

 

Since the beginning of 2018, we have transformed Seaspan’s balance sheet raising over $4bn of capital, executed on over $3bn of acquisitions, and reorganized Seaspan into the global asset manager, Atlas Corp. The Atlas team behind these achievements is incredibly talented — it was a privilege to work with and learn from all of you.

 

While I will miss the team and the organization we built, I am excited to pursue my next adventure. Stay tuned for more details with the upcoming announcement as our family makes the move to Seattle!

 

He is definitely a very talented individual, will be very interesting to see what the future holds for him.

[petec]

From his LinkedIn :

A heartfelt thank you to all of those who have been a part of the Atlas/Seaspan journey.

 

Since the beginning of 2018, we have transformed Seaspan’s balance sheet raising over $4bn of capital, executed on over $3bn of acquisitions, and reorganized Seaspan into the global asset manager, Atlas Corp. The Atlas team behind these achievements is incredibly talented — it was a privilege to work with and learn from all of you.

 

While I will miss the team and the organization we built, I am excited to pursue my next adventure. Stay tuned for more details with the upcoming announcement as our family makes the move to Seattle!

 

He is definitely a very talented individual, will be very interesting to see what the future holds for him.

 

Yes. My guess is the early days at Seaspan were fascinating as a CFO but it’s now rather more mundane. Surprised it’s so fast though.

[ValuePadawan]

From his LinkedIn :

A heartfelt thank you to all of those who have been a part of the Atlas/Seaspan journey.

 

Since the beginning of 2018, we have transformed Seaspan’s balance sheet raising over $4bn of capital, executed on over $3bn of acquisitions, and reorganized Seaspan into the global asset manager, Atlas Corp. The Atlas team behind these achievements is incredibly talented — it was a privilege to work with and learn from all of you.

 

While I will miss the team and the organization we built, I am excited to pursue my next adventure. Stay tuned for more details with the upcoming announcement as our family makes the move to Seattle!

 

He is definitely a very talented individual, will be very interesting to see what the future holds for him.

 

Yes. My guess is the early days at Seaspan were fascinating as a CFO but it’s now rather more mundane. Surprised it’s so fast though.

I suppose it must have been exciting at the beginning to plug the leaks but now that it's ship shape maybe container shipping is too mundane for such a motivated and talented individual. I thought he would stick around for the capital allocation and the deal making but perhaps he realizes it will all flow through Bing. Pure speculation but I will be interested to follow him and what he does.

[Saluki]

Seaspan acquires two more containerships operating under long term charters:

 

https://finance.yahoo.com/news/seaspan-announces-continued-growth-acquiring-112800776.html

 

Expected to add $20mm to 2020 ebitda.  Not groundbreaking news, but the kind of consistent blocking and tackling and slowly moving the ball forward that I like to see :)

[petec]

Yes, it's interesting. This brings them to $690m of cash deployed this year (not counting deals announced in 2019 but closed in 2020). That's substantiallly all of 2020 operating cash flows, so cash is being deployed at a prodigious rate.

 

The last two deals involve four ships, built in 2011, 2012, 2018, and 2018, purchased for a total of $322m. Both deals generate a current run rate of $20m in ebitda, for $40m in total. Without knowing the lease details we can't calculate an IRR, but:

- If you assume 70% debt financing at 5% and a 20% tax rate (well above the corporate average) you get an ROE of 24% at the current run rate. If these flows are maintained for 4 years, equity is repaid.

- Total contracted revenues for the two deals are about $320. Assuming Seaspan's corporate average ebitda margin of 63% (using low end of 2020 guidance range) that's $200m in ebitda, or 5 years at the current run rate, acquired for $176m.

 

 

[Parsad]

Yes, it's interesting. This brings them to $690m of cash deployed this year (not counting deals announced in 2019 but closed in 2020). That's substantiallly all of 2020 operating cash flows, so cash is being deployed at a prodigious rate.

 

The last two deals involve four ships, built in 2011, 2012, 2018, and 2018, purchased for a total of $322m. Both deals generate a current run rate of $20m in ebitda, for $40m in total. Without knowing the lease details we can't calculate an IRR, but:

- If you assume 70% debt financing at 5% and a 20% tax rate (well above the corporate average) you get an ROE of 24% at the current run rate. If these flows are maintained for 4 years, equity is repaid.

- Total contracted revenues for the two deals are about $320. Assuming Seaspan's corporate average ebitda margin of 63% (using low end of 2020 guidance range) that's $200m in ebitda, or 5 years at the current run rate, acquired for $176m.

 

Sokol grew Mid-American at a 23% ROE for about 20 years.  His strength is capital-intensive businesses and making them very efficient.  Bing is no slouch either!  Cheers!

[petec]

Yes, it's interesting. This brings them to $690m of cash deployed this year (not counting deals announced in 2019 but closed in 2020). That's substantiallly all of 2020 operating cash flows, so cash is being deployed at a prodigious rate.

 

The last two deals involve four ships, built in 2011, 2012, 2018, and 2018, purchased for a total of $322m. Both deals generate a current run rate of $20m in ebitda, for $40m in total. Without knowing the lease details we can't calculate an IRR, but:

- If you assume 70% debt financing at 5% and a 20% tax rate (well above the corporate average) you get an ROE of 24% at the current run rate. If these flows are maintained for 4 years, equity is repaid.

- Total contracted revenues for the two deals are about $320. Assuming Seaspan's corporate average ebitda margin of 63% (using low end of 2020 guidance range) that's $200m in ebitda, or 5 years at the current run rate, acquired for $176m.

 

Sokol grew Mid-American at a 23% ROE for about 20 years.  His strength is capital-intensive businesses and making them very efficient.  Bing is no slouch either!  Cheers!

 

Yes. I’ve never really trusted that number because my source is Prem and I think he can be a bit sloppy with figures. But Sokol is definitely one of my big reasons for owning Atlas.

[Parsad]

Yes, it's interesting. This brings them to $690m of cash deployed this year (not counting deals announced in 2019 but closed in 2020). That's substantiallly all of 2020 operating cash flows, so cash is being deployed at a prodigious rate.

 

The last two deals involve four ships, built in 2011, 2012, 2018, and 2018, purchased for a total of $322m. Both deals generate a current run rate of $20m in ebitda, for $40m in total. Without knowing the lease details we can't calculate an IRR, but:

- If you assume 70% debt financing at 5% and a 20% tax rate (well above the corporate average) you get an ROE of 24% at the current run rate. If these flows are maintained for 4 years, equity is repaid.

- Total contracted revenues for the two deals are about $320. Assuming Seaspan's corporate average ebitda margin of 63% (using low end of 2020 guidance range) that's $200m in ebitda, or 5 years at the current run rate, acquired for $176m.

 

Sokol grew Mid-American at a 23% ROE for about 20 years.  His strength is capital-intensive businesses and making them very efficient.  Bing is no slouch either!  Cheers!

 

Yes. I’ve never really trusted that number because my source is Prem and I think he can be a bit sloppy with figures. But Sokol is definitely one of my big reasons for owning Atlas.

 

Actually, all you have to do is look at what Mid-American was earning when Berkshire acquired it in 1999 ($104M) and what it was making in 2010, shortly before Sokol left...$1,131M.  That's about 26% annualized over 10 years in earnings growth.  He essentially did the same thing 10 years earlier growing earnings from $10M to $104M.  Cheers!

[ourkid8]

Why is Atlas Corp even paying a dividend when David can allocate capital at such a high rate of return? It makes no sense...

 

Yes, it's interesting. This brings them to $690m of cash deployed this year (not counting deals announced in 2019 but closed in 2020). That's substantiallly all of 2020 operating cash flows, so cash is being deployed at a prodigious rate.

 

The last two deals involve four ships, built in 2011, 2012, 2018, and 2018, purchased for a total of $322m. Both deals generate a current run rate of $20m in ebitda, for $40m in total. Without knowing the lease details we can't calculate an IRR, but:

- If you assume 70% debt financing at 5% and a 20% tax rate (well above the corporate average) you get an ROE of 24% at the current run rate. If these flows are maintained for 4 years, equity is repaid.

- Total contracted revenues for the two deals are about $320. Assuming Seaspan's corporate average ebitda margin of 63% (using low end of 2020 guidance range) that's $200m in ebitda, or 5 years at the current run rate, acquired for $176m.

[Parsad]

Why is Atlas Corp even paying a dividend when David can allocate capital at such a high rate of return? It makes no sense...

 

Yes, it's interesting. This brings them to $690m of cash deployed this year (not counting deals announced in 2019 but closed in 2020). That's substantiallly all of 2020 operating cash flows, so cash is being deployed at a prodigious rate.

 

The last two deals involve four ships, built in 2011, 2012, 2018, and 2018, purchased for a total of $322m. Both deals generate a current run rate of $20m in ebitda, for $40m in total. Without knowing the lease details we can't calculate an IRR, but:

- If you assume 70% debt financing at 5% and a 20% tax rate (well above the corporate average) you get an ROE of 24% at the current run rate. If these flows are maintained for 4 years, equity is repaid.

- Total contracted revenues for the two deals are about $320. Assuming Seaspan's corporate average ebitda margin of 63% (using low end of 2020 guidance range) that's $200m in ebitda, or 5 years at the current run rate, acquired for $176m.

 

I agree!  Probably two reasons for the dividend...legacy dividend from Seaspan...Washington family may want an income stream without selling any more equity.  Fat dividend now, but I suspect it will grow slowly in the future, and will probably drop to about 2.5-3% as the stock hits fair value...$14-15.  Cheers!

[petec]

Yes, it's interesting. This brings them to $690m of cash deployed this year (not counting deals announced in 2019 but closed in 2020). That's substantiallly all of 2020 operating cash flows, so cash is being deployed at a prodigious rate.

 

The last two deals involve four ships, built in 2011, 2012, 2018, and 2018, purchased for a total of $322m. Both deals generate a current run rate of $20m in ebitda, for $40m in total. Without knowing the lease details we can't calculate an IRR, but:

- If you assume 70% debt financing at 5% and a 20% tax rate (well above the corporate average) you get an ROE of 24% at the current run rate. If these flows are maintained for 4 years, equity is repaid.

- Total contracted revenues for the two deals are about $320. Assuming Seaspan's corporate average ebitda margin of 63% (using low end of 2020 guidance range) that's $200m in ebitda, or 5 years at the current run rate, acquired for $176m.

 

Sokol grew Mid-American at a 23% ROE for about 20 years.  His strength is capital-intensive businesses and making them very efficient.  Bing is no slouch either!  Cheers!

 

Yes. I’ve never really trusted that number because my source is Prem and I think he can be a bit sloppy with figures. But Sokol is definitely one of my big reasons for owning Atlas.

 

Actually, all you have to do is look at what Mid-American was earning when Berkshire acquired it in 1999 ($104M) and what it was making in 2010, shortly before Sokol left...$1,131M.  That's about 26% annualized over 10 years in earnings growth.  He essentially did the same thing 10 years earlier growing earnings from $10M to $104M.  Cheers!

 

Well, no. You also have to look at whether Berkshire contributed capital during that time. I’m sure you and others know the answer, but I don’t, which is why I take the CAGR as unproven!