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Wednesday, October 27, 2010

Big Runs for Gobal Ship Lease (GSL) and Seaspan (SSW) - Time to Sell?

Our asset-heavy container shipping companies Global Ship Lease (GSL) and Seaspan (SSW) (click for prior post) have had large, upward stock moves in recent weeks. A one-month chart from Google Finance (GOOG) comparing performance to the S&P 500 shows the index up only 3% versus GSL up 54% and SSW up 20% (click to enlarge):

Does this mean it's time to sell? While a short-term retrenchment is possible and even likely (happening today) as traders take profits, we continue to take a long-term view and believe the answer is no.

Both companies are moving higher on company-specific developments -
  • Seaspan: sale leaseback financing to remove all future funding commitments for the company's large new-build order book to be delivered over the next two years.
Also, note that Seaspan reported 3Q10 earnings today that again illustrate the strength of the company's stable, consistent business model.

Why keep holding? In both cases, fair values remain meaningfully higher than current trading levels based on excess cash generation and stable business models that adequately support high levels of leverage (debt). Our February post on Seaspan largely provides the answer for SSW, but we'll come back with more commentary in the near future, including discussion on Global Ship Lease.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long GSL, SSW.
© 2010 Jeffrey Walkenhorst
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  1. Jeff -

    In looking at the company's presentations, it appears that they're targeting annual distributable cash flow of $300MM in 2013, and an increased share count of 90.1MM in Q4'12.

    Taking the estimates at face value, I get a dividend distribution per share of $3.33, for a yield of 24% on today's price.

    Now, if we assume that investors are looking for a yield of ~10% (my guess; could be higher/lower) on their SSW holding in 2013, then I get a share price of $33. This is an admittedly rough calculation - but is this approach how you're looking at the stock over the long-term?


  2. Hi Anonymous,
    Thank you for your comment. Management noted on today's conference call (and we should assume) that Seaspan will never pay out the full amount of distributable cash flow as a dividend. The company will retain some cash flow to reinvest in the business (new ships, acquisitions) and to repay debt. However, the company should certainly have the capacity to materially increase the dividend over time, potentially putting the payout meaningfully higher than than current 50c per share annually by 2012-13.

    Although we can use several measures, I primarily value the business by applying an 8x to 10x multiple to estimated 2012 distributable cash flow of approximately $3.00 = $24-30 fair value.



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