Seaspan Corporation (NYSE: SSW) is the largest independent charter owner and manager of containerships which it fixes to long-term fixed-rate charters with the major container liner companies. Seaspan operates 89 containerships and expects to take delivery of another eight newbuilding containerships.
We have evaluated certain financial aspects of the company in the following points and we expect that the stock price is very likely to be lower in 2017 than the current level of $7.63, as of the closing on February 23, 2016. Hence, we propose a SELL trade on SSW.
The internet links for the Reference Documents (Ref. Doc) that we have used are at the end of the article.
A. Long live the leverage, but it cannot live for ever
Seaspan has been using its capital expenditure for newbuilding vessels and the attached long term charters, as well as its existing fleet in order to leverage up its balance sheet. The financing for certain vessels was more than the value of the shipbuilding contract or the vessel itself. It has practically been monetizing in advance some value from the future charter contracts. The following indicative transactions serve as a support to this argument.
1) In July 2013, it signed a new building contract for 5x14,000 TEU vessels for $550 million (i.e. $110 million per vessel) (Ref. Doc 1, Page 47). Then, in March 2015, it raised $115 million for a 14,000 TEU vessel (Ref. Doc 3, Page 49). More interestingly, for the same vessel size, Seaspan raised $144 million in October 2015 and $140 million in May 2016 (Ref. Doc 3, Page 49 and Ref. Doc 4, Page 3).
2) In December 2014 and April 2015, Seaspan signed new building contracts for 4x10,000 TEU vessels at an average cost of $93 million per vessel (Ref. Doc 2, Page 48 and (Ref. Doc 3, Page 49). In 2014, it has respectively arranged the financing of 4x10,000 TEU vessels with proceeds being $110 million per vessel (Ref. Doc 2, Page 49).
3) It is even more interesting to note that Seaspan has arranged financing for Panamax vessels in 2015 that were far above the market value of these vessels. Specifically, in March 2015, Seaspan raised $150 million for 3 Panamaxes and it also raised $90 million for 4 Panamaxes in December 2015 (Ref. Doc 3, Page 49). Hence, a total of $240 million was raised about a year and a half ago for vessels that today have a market value of approximately $50-60 million.
Needless to say, that this is an evidence of the good relationships that the company has built throughout the years with its charterers and financiers. However, we firmly believe that this ability is not going to be available in the long run.
B. Dividend Yield
We were attracted by the current dividend yield of about 18.4%. So, we ran the numbers and we realized that dividends to common and preferred shareholders were 63.6% of the operating cash flow in the 9-month period ending on September 30, 2016 (Ref. Doc 5, Page 8). This is expected to scale up to more than 65% in Q4-2016, following the additional issuance of preferred shares in 2016. We argue that this is not sustainable for Seaspan, which has significant leverage. We expect a dividend cut for the common shares which may already be priced in to the stock to an extent.
C. Operating Cash Flow Generation
It was interesting to note that the operating cash flow in the 9-month period of 2016 ($232.5 million) was at pretty much similar levels with the respective period in 2013 ($225.7 million) (Ref. Doc 6, Page 13). However, the number of ownership days in 2016 were 22,781 in YTD September compared to 17,944 days in the respective period of 2013 (Ref. Doc 5, Page 3 and Ref. Doc 6, Page 38).
In other words, the ratio of operating cash flow for each ownership day of the fleet has been reduced from $12.6k per day in 2013 to $10.2k per day in 2016. It is expected that this ratio is going to be further reduced, given the challenging market conditions and the fact that lucrative charters expire in the coming years, 9 of which are expected to expire by the end of 2017.
D. Share count
Seaspan had about 65 million shares outstanding as of September 2013 (Ref. Doc 6, Page 11) and it was paying a quarterly dividend of $0.3125 per share, which translates into about $20 million per quarter. The current quarterly payment to the common stock is about double, at $39.6 million per quarter, based on the share count of 105.6 million shares (Page S-35) and a quarterly dividend of $0.375 per share.
Based on the above arguments, we believe that the long term value for equity holders is being gradually evaporating. As an illustration, the equity value at the end of 2013 was $1.6 billion, whereas it is now at about $0.85 billion, almost half of it has been gone in about three years' time. To be fair, part of this is due to the dividends of $0.3 billion that have been distributed to the common equity holders. Still, the reduction is noteworthy.
We have a SELL recommendation on the stock, especially given the challenges that the containership owners seem to face in the current market which has put pressure both on charter rates (reducing cash flow generation) and asset values (increasing leverage).
Reference 1: Annual Report 2013, Form 20-F, www.seaspancorp.com/wp-content/uploads/2...
Reference 2: Annual Report 2014, Form 20-F, www.seaspancorp.com/wp-content/uploads/2...
Reference 3: Annual Report 2015, Form 20-F, www.seaspancorp.com/wp-content/uploads/2...
Reference 4, Q2-2016, Earning Release. files.shareholder.com/downloads/SSW/3957...
Reference 5, Q3-2016, Earning Release. files.shareholder.com/downloads/SSW/3957...
Reference 6, Q3-2013, Earnings Release. files.shareholder.com/downloads/SSW/3957...
Disclosure: I am/we are short SSW.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.