Seaspan: Strong Cash Flows, High Growth, Rapidly Rising Dividends

| About: Seaspan Corporation (SSW)


I have previously written about Seaspan (NYSE:SSW) and its business model and risk (here) so I will not go over that as it hasn't changed.

Recent Developments

SSW has been in the news lately for three reasons. Its decision to enter into a partnership with Carlyle and some of its normal partners being Dennis Washington and Graham Porter. The idea is to place large orders with Asian ship building yards, thereby obtaining favorable terms and ship designs. There is a rather complicated mechanism behind who gets to take over the ships with charters and financing from the new entity, but SSW has a right of first refusal to a large part of them. It at this time is unclear to me what the other partners would do with a container ship but the opportunities are of course many.

Following this, two potential orders have been announced/rumored:

A. 20-22 10.000 TEU ships being built in China at the price of 98 MUSD each with first delivery in January 2014.

B. 10 + 10 in option 14.000 TEU ships being built in Korea at the price of 140 MUSD each with unknown delivery.

This seems like an enormous amount of ships that SSW can't possibly take delivery of so it makes you wonder if it is really going to happen.

Analysis and Assumptions

I decided to test whether SSW can actually take delivery of all 42 vessels itself or if some of the options won't be exercised.

To test it I have updated my discounted cash flow model for SSW to see what the implications are.

I have made the following assumptions:

1. Operational costs will follow the current cost structure for the existing 8500/13100 TEU ships.
2. Delivery of one of each ship size will happen every 45 days starting January 2014.
3. Using the recent Costamare (NYSE:CMRE) deals to price the charter rates on the new buildings.
4. The usual assumptions I use in the model mentioned above. Remember that it is a maximum dividend model which means the company is slowly liquidated.


The very positive result is that not only can SSW handle all the new buildings but it can also grow the dividend at the same time. Below the table shows the key outcomes:

2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017
Operational income mUSD 289 422 517 520 631 830 986 991
Growth in Ops Inc 46% 23% 1% 21% 32% 19% 0%
Quarterly dividend 0.13 0.19 0.28 0.42 0.63 0.70 0.80 0.90
Growth in Div 50% 50% 50% 50% 11% 14% 13%
Yield at PPS 17 2.9% 4.4% 6.6% 9.9% 14.9% 16.5% 18.8% 21.2%

This means that between 2010 and 2016 operational income will grow 240% and the dividend 620% between 2010 and 2017. After this period operational income will slowly start falling and the dividend will increase to 1 USD per quarter and stay at this level until 2024-26 when there will be some very large dividends when the last ships are sold following maturity of the time charters.

This is happening in the context of:
A. Keeping the net debt to ship value at constant to falling levels of about 60-72%
B. Repaying all debt and leases
C. Repaying Common class B shares, Series C cumulative redeemables and converting the preferred class A shares in 2014


The calculated NPV actually doesn't change much from what I have published earlier and now stands at 27 USD per share which is 60%-plus above today's prices. It is very unlikely that SSW will really go for a run down but the above calculation shows just how strong the cash flows and growth prospects are for SSW and how handsomely a patient investor will be compensated with rising dividends.

What is happening now is that SSW is placing large orders while new building prices are cheap and while there isn't much competition from the KG market and other owners, which means it can land attractive time charter rates. SSW is thus acting quickly to benefit from being a financially strong operator in an environment of weak suppliers, financially stretched competitors in a context of rapidly improving industry fundamentals.

Disclosure: I am long SSW.