Owner-Oriented Investment Research and Commentary - Have a private comment or question? Email us at commonstocksense@gmail.com

Sunday, March 21, 2010

Fedex and Global Shipping, Plus a Bit More on Seaspan (Still at 3-4x 2012E Cash Flow)

As a brief follow-up to our mention of Seaspan's (SSW) results last week, we share a few items:
  • Seemingly all shipping companies rallied strongly Friday, including our Seaspan and Global Ship Lease (GSL). Although the move occurred late in the day, part of the surge might be related to positive results and commentary from Fedex (FDX) the day before.
  • Fedex relayed that "a recovery is well under way" and raised its outlook. Please see this WSJ article for more details. One point related to container shipping mentioned in the article that is helping Fedex (plus UPS and others in the air freight business):
  • "Air-freight service is booming at the companies amid a reduction in the amount of space that is available on container ships that travel between Asia and the U.S. Container-ship carriers have mothballed vessels to combat historic losses incurred during 2009."
  • Interesting, sensible benefit to Fedex et al. from last year's supply reduction. We note that some ships are now being brought back into service.
  • Separately, we mentioned we're seeing positive data points from various sources, including industry trade rags -- from Lloyds last week (3/16/10): "Bullish outlook for bigger boxships" - "POSITIVE trends in container shipping could lead to a return to full employment of all ships over 6,000 teu by the end of next year...."
  • Of course, positive data points are sometimes met by tempered views - see Orient Overseas' results on Friday. The below is sourced from The Journal of Commerce (JOC) -

  • “The recovery in the global economy and the pick-up in OECD consumer demand are likely to be sluggish,” Tung said. “On the supply side, there continues to be an excess of capacity in the form of outstanding new-build orders and laid-up vessels that will need to be absorbed over the next three to four years. An imprudent re-introduction of capacity currently idling or laid-up, if mismatched to demand, could see fresh rounds of rate cutting.”

    Tung said the industry’s challenge between short-term cash flow and longer-term stability will test the market’s capacity discipline over the next couple of years until trade growth eventually absorbs the surplus capacity.

  • We concur that the industry continues to have troubles and highlighted them in our earlier Seaspan post. However, you could also say that many other industries -- real estate, banking, etc. -- also have and/or face plenty of challenges (yet, share prices have still gone wild following the arguably irrational lows of one year ago). As in the other sectors, we suspect the strong will survive and get stronger. In the shipping arena, those companies with long-term contracts in place (e.g. 8, 10, 12 year leases) with strong, viable ocean liner companies (counterparties) will survive and prosper as the economy chugs slowly ahead. Ultimately, we expect the supply/demand imbalance will normalize and the world will need more ships.
  • Finally, Seaspan noted in results last week that fully diluted shares outstanding are near 96 million assuming full conversion of Series A Preferred Shares at $15 in 2014 with the liquidation preference increasing at 12% per year, compounded quarterly (e.g. non-cash interest expense compounding each year and ultimately converting into more shares). Seaspan's Annual Report Form 20-F includes more details on page 59. Fortunately, management seemed confident that additional financing will be secured to reduce/eliminate potential additional equity dilution to fund the company's remaining newbuild program. The 96 million share count is close to what we previously assumed and implies distributable cash flow of around $3 per share in 2012 once the full Seaspan fleet is delivered and in service under previously committed long-term contracts.
  • We continue to believe that container shipping companies such as Seaspan represent a very favorable risk/reward opportunity for patient investors. We would be extremely surprised if Seaspan trades at only 3-4 times distributable cash flow in 2012 (e.g. in two years).
Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.