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JPMorgan, Citi and others recently took SeaCube Container Leasing (NYSE:BOX-OLD) public with the bulk of the proceeds going to the selling shareholder Fortress. The IPO was initially indicated to price at $14 to $16 per share, but after their road show the deal was priced at $10.

BOX is one of the largest container leasing companies in the world and competes in the refrigerated and dry container market. Based on demand BOX acquires containers and in-turn leases them via long-term contracts to some of the largest shipping companies in the world.

Select Financial Data

$, in millions

2008

2009

2010E

1H10

2H10E

Sales

$239

$142

$140

$67

$72

Adj EBITDA

313

206

215

105

110

Adj Income

39

17

37

17

20

Est Shares Out

20.1

20.1

20.1

20.1

20.1

EPS

1.94

0.85

1.84

P/E

6.12

14.05

6.45

Note: P/E based on 11/9/10 closing price of $11.88

What peaked our interest in BOX:

  • BOX seems to be trading at a significant discount to its peers, Textainer Group Holdings (NYSE:TGH) and TAL International Group (NYSE:TAL), trading 9.7x and 11.9x next year's EPS estimates respectively. Based on our assumptions, BOX looks to be trading less than 7x 2010.
  • We expect the company to start a quarterly dividend in January of 2011 at $0.20 per share that will likely provide an estimated dividend yield of 10% based on 11/10/11 closing price of $11.82. We believe earnings growth should result in a higher dividend payout throughout the year, thus we are looking for a 10% yield when the dust settles.
  • We believe recent trends and demand should provide BOX favorable P&L results going into the next earnings call, which is this Friday.
  • BOX is the market leader in the refrigerated container industry and seems to fair better in macro downturns.
  • We believe industry demand due to lack of supply in 2009 will lead to rebound for the second half of 2010 and into 2011.
  • BOX is under followed as a newly listed company and believe a moderate IR effort will increase visibility with institutional investors.

We believe the timing of a leveraged container leasing company coming to market on top of skeptics of Fortress still holding a +40% position in the company after the IPO may have been excuses for the below range pricing. We hope that Fortress is looking to generate a higher return on their remaining equity based on the timing of bringing this asset to the public market and leaving ample upside based on the industry recovery.

Market:

BOX manages 507,013 containers and generator sets or 795,039 TEUs. The mix of refrigerated and dry containers are 75,752 and 424,229 respectively. BOX also has 7,032 generator sets which are diesel fuel generators for refrigerated containers that are transported by trucks.

BOX has 28% of the Refrigerated Container market, which is the number one player in this space. GE SeaCo is the second largest player at 23% share and the Triton and TAL follow with each at 13% and 12% respectively. Considering the financial status of GE SeaCo, BOX is clearly in a powerful position, in our opinion.

Historically the demand for containers has grown at an annual rate of 8% over the last 30 years. Over the last decade this growth rate accelerated due to the China factor and in 2009 the industry finally took a step back, declining 7%. New production in containers was minimal last year, which resulted in a growing shortage of containers as retailers and consumer product companies began to ramp up inventory starting in the Spring of 2010. This dynamic caused a shortage and thus provides a snapback dynamic that should carry through the remainder of 2010 and into 2011.

We view 2009 as a blip. Comments from industry experts and our checks suggest demand is all ready back to historical growth rates. Color from management on Friday's earnings call will hopefully confirm that the industry is back to normalize demand.

Business Model:

BOX leases containers to major shipping lines. The majority of the leases are structured via Operating Leases, which is 31% of the Net Book Value, and Direct Finance Leases, which is 58% of the Net Book Value. The operating leases are typically 5-8 year agreements and the Direct Finance Leases are typically long-term leases that provides a buy out option.

By having +90% of the business under longer term triple net leases, there seems to be a level of predictability in the business. The risk seems to be defaults and while BOX carries insurance on their containers for damage or loss, it does not cover loss of business. We also like that lease agreements can have early termination fees that typically make customer think twice before breaking their contract. We view lease cancellations as a low risk based on the historical trend BOX has seen.

Defaults have historically been low, which we believe are under 0.5% with recovery rates around 98%. So going forward we will want to monitor the quality of A/R and the movement in 90 day+ outstanding movements between quarters.

BOX has historical maintained a high utilization rate. Over the last 2 years the rate has dipped to 96.1% and it has recently recovered to 98.0%. This rate is an important metric to keep an eye on as we go forward and simply shows the percentage of the container fleet that is leased out (aka "on hire") with the exception of inventory that is being conditioned for sale or inventory being built at the factory.

We are looking for BOX to start off on a good foot Friday and are interested in seeing 2011 provide ample earnings growth and expectations the that the market will provide a reasonable valuation, which the company is currently not receiving.

Disclosure: Author is long BOX

Source: SeaCube Container Leasing: Picking Up Private Equity Leftovers