SeaCube IPO: No One Really Wanted What Fortress Was Selling

Includes: BOX-OLD, FIG
by: Bill Simpson

This analysis of SeaCube (NYSE:BOX-OLD) was provided to TradingIPOs subscribers in advance of its Wednesday , Oct. 27, IPO. The company sold 9.5 million shares for $10 each, a sharp 41% discount to its initially proposed $16-$18 range.

SeaCube (BOX-OLD) - Net debt will remain the same at $700 million even with the slash in pricing. It appears that Fortress (NYSE:FIG) will not take out money from BOX pre-IPO as planned. Sharecount increases by a shade under 1 million, so EPS estimates are closer to $1.40-$1.45 for 2010.

A quick look at BOX and the two direct competitors trading against it:

SeaCube (BOX-OLD) - $223 million market cap, trading 1.6 X's revenues, 7 1/2 X's 2010 estimates and yielding 7.3%. $700 million net debt.

TAL International Group (NYSE:TAL)
- $817 million cap, 2.3 X's revenues, 14 1/2 X's earnings..$1.4 billion in net debt. Yielding an annualized 6% based on increased divvy announced today.

Textainer Group Holdings (NYSE:TGH)- $1.22 billion cap, trading 4 X's revenues, 10 1/2 X's earnings. $615 million in net debt. yielding 4.2%.

All of these companies are doing essentially the exact same thing in the exact same space. BOX appears to be very well run based on profit margins through economic trough, so no management discount and/or premium here compared to other two. Pretty straightforward, either TAL/TGH are coming way back in, or BOX is going to rise. It's got to be one or the other.

In this market, you just don't often see a dislocation in valuation this large and this is not a 'better mousetrap' type of sector at all. It's really rare to see an obvious valuation differential this large, with the only explanation being no one wanted what Fortress was trying to sell them unless it was at rock bottom prices. This should take care of itself in the market sooner rather than later and with TAL reporting strong today, I doubt we'll see a TAL/TGH sell-off hard in the short run to match BOX valuation metrics. I believe we will see BOX at $15+ sooner than later. I am not the only one that sees this big of a valuation differential.

Original pre-IPO piece based on $16-$18 range:

BOX - SeaCube Container Leasing plans on offering 8.7 million shares (assuming over-allotments) at a range of $16-$18. Insiders will be selling 5.75 million shares in the deal. JP Morgan (NYSE:JPM), Citi (NYSE:C), Deutsche Bank (NYSE:DB) and Wells Fargo (NYSE:WFC) are leading the deal. Credit Suisse (CS, Dahlman Rose, DnB, DVB and Nomura are co-managing. Post-IPO BOX will have 19.3 million shares outstanding for a market cap of $328 million on a pricing of $17. IPO proceeds will be used to repay debt.

Private equity firm Fortress (FIG) will own 52% of BOX post-IPO. Fortress is the selling shareholder here. Note that Fortress attempted to bring their container properties public in early 2008 under the name SeaCastle. The market cap at the time was to be over $2 billion. Thankfully, it got shelved as that market cap would have been under hefty pressure from the get go. SeaCastle would have had over $3 billion in debt on IPO, brought on by leveraging containers as well as via the leveraged buyout nature of Fortress acquisitions. Post-IPO, BOX will have $700 million in net debt.

BOX does plan on paying a quarterly dividend. Initial quarterly dividend will be $0.20. At an annualized $0.80, BOX would yield 4.7% annually on a pricing of $17.

From the prospectus: 'We are one of the world's largest container leasing companies based on total assets.'

International shipping containers used on ships, rail and trucks. BOX acquires containers with the intention of leasing them and eventually selling a portion of them in up markets. Leases are generally under long term leases of 5 to 8 years to shipping companies. 58% of leases are directly financed to own by BOX. Average length left on leases of all containers are 3.8 years.

BOX owns and/or manages 507,013 units, representing 795,039 TEU's (twenty foot equivalent containers).

BOX is the world's largest lessor of refrigerated containers with a 28% market share. 53% of assets are refrigerated units with 44% dry containers.

As far as total containers, BOX is the 6th largest in the world.

Capacity utilization of 98% as of 6/30/10. In a tough 2009 environment, BOX managed a 96.5% utilization rate. Pretty impressive.

Net writeoff of just 0.44% of billings over the past 6 1/2 years. When combined with strong capacity utilization rates, this looks to be a very well run operation.

Customers - 160 shipping lines, including all of the world's top 20. Largest customers include APL, CMA-CGM, CSAV, Hanjin, MSC and Maersk Line (OTCPK:AMKAF). CSAV accounts for 16% of revenues, Mediterranean Shipping 15%.

Majority of business for BOX containers is transporting goods from Asia for use in the US.

Growth plans
- BOX has been growing aggressively acquiring $1.9 billion in containers since 2004. While pretty solidly leveraged post-IPO, BOX still has access to over $300 million in credit lines going forward. This sector works quite a bit like the REIT IPOs we have seen. Instead of leveraging property mortgages to increase cash flows, BOX leverages on containers which provide cash flows on top of debt taken on. In addition to continuing to leverage to increase containers owned, BOX does plan to pursue acquisitions.

- 2009 was the only year in the past 30 in which worldwide container trade did not grow. The worlds fleet of containers has shrunk 4% since the beginning of 2009. BOX believes this brings about an opportunity for them as demand increases. 45% of worldwide containers are leased.

While capacity utilization has been strong for BOX, leasing rates ebb/flow based on supply and demand. Very cyclical sector overall, highly dependent on the US consumer.


$700 million in net debt post-IPO.

Revenues have been in decline. As noted above, while capacity utilization has remained strong, pricing has been weak. In addition in 2008, BOX sold approximately 8% of their container inventory.

Revenues were $239 million in 2008, $142 million in 2009 and should decline again in 2010.

2010 - $140 million, a slight decrease from 2009. 54% operating margins. Debt servicing will eat up 60% of operating earnings. The debt definitely hinders BOX. This is a sector that always has substantial debt as they tend to leverage their containers to improve cash flows. However some of this debt was laid on by Fortress while acquiring assets. In addition, Fortress is making up the bulk of selling in this deal, taking away money that BOX could use to pay down debt. Lastly, Fortress paid themselves $60 million in 2009, money that could have gone to reduce debt. The selling of containers in '09 has reduced debt, however it also negatively impacted revenues.

BOX will have little in taxes post-IPO. Net margins of 22%. EPS of $1.60. On a pricing of $17, BOX would trade 11 X's 2010 estimates.

Conclusion - I typically avoid highly leveraged sectors such as this. It does appear as if the underwriting group and Fortress are bringing this one public at a pretty attractive valuation. The market cap here appears to be a bit low for BOX revenue and cash flow base when put beside the competition. Also, the sector has been in a solid uptrend stock wise since the March '09 market bottom. Not my cup of tea, but range here looks priced to work over time. Do not expect much short term however.