Seaspan Corporation (SSW) holders have faced plenty of rough seas recently. SSW has lost more than half its value over the last year and the dividend was slashed by 2/3. Some profitable leases were defaulted upon in the Hanjin bankruptcy. The current situation would be far more dire if SSW had not prepared for the worst by repeatedly raising capital.
This included a $100 million equity offering in May 2016, a $115 million offering of SSW-PG in June 2016, a $225 million offering of SSW-PH in August 2016 and another $80 million follow-on offering of SSW-PG in August 2016. This combination of fresh equity capital and long-term leases has left SSW well prepared to weather even a severe storm. This article looks at 10 reasons to consider the high yielding SSW-PG preferred stock issue.
What is SSW-PG?
SSW-PG is a par $25 cumulative preferred issue with an 8.2% coupon. Dividends are paid quarterly and SSW-PG now yields 9.4% at a recent price of $21.93. It's a perpetual issue, which means that the company has no obligation to call it. SSW-PG may be called at par starting on 6/16/2021. See prospectus for additional details.
SSW-PD, SSW-PE, SSW-PG and SSW-PH are similar cumulative preferred perpetual issues with equal seniority. SSW-PG has an average daily trading volume recently of approximately 100K shares, but volume can be significantly lower at times. Limit orders and patience are recommended when trading. Note that SSW-PG trades ex-dividend for the quarterly dividend shortly on 7/26/2017.
1. Strong liquidity.
Liquidity is always an important consideration for preferred stock investors. SSW had strong liquidity including $296 million in cash as of Q1 2017 (see page #1 of the SEC 6-K filing). There is an additional $20 million of restricted cash. SSW also has access to capital on favorable terms if necessary. For example, the SSWN baby bond is trading above par.
2. Profitability expected in 2018.
As per Yahoo Finance, all 11 analysts covering SSW expect it to be solidly profitable in 2018. The average earnings estimate for 2018 is $1.09 per share with a low estimate of 95 cents per share.
3. Preferred dividend coverage of 2.8X for 2018.
We can use the 2018 analyst earnings estimate consensus of $1.09 per share to calculate the estimated 2018 preferred stock dividend coverage. SSW has 106 million shares outstanding so analyst estimated earnings for 2018 are $115 million. All preferred dividends total $64 million annually. Note that the analyst earnings are net of preferred stock dividends. Therefore, the total preferred stock dividend coverage for 2018 should be approximately: ($115 million + $64 million) / $64 million = 2.8X.
4. Long-term leasing model.
Shipping is a very cyclical sector. Fortunately, SSW utilizes a long-term leasing model to protect investors from volatile short-term leasing rates. Over $5 billion in contracted leases are already locked in.
5. Containership leasing rates rebounded in Q1.
While most SSW revenues are derived from long-term leases, short-term containership rates are also important. Spot rates affect ship valuations and related access to capital. Short-term rates are also a good indicator of what rates can be obtained as long-term contracts eventually come up for renewal. After a lengthy period of depression, it was very gratifying to see the recent improvement in containership rates. As CEO Gerry Wang commented on the Q1 2017 earnings conference call (see page #1):
"We have seen significant improvement in charter rates over the past two months. In particular, Panamax charter rates have more than doubled to approximately $10,000 per day."
6. Positive indications for Q2.
While SSW has not yet reported Q2 earnings, China's COSCO Shipping Holdings Co. Ltd. (OTCPK:CICOF) reported strong earnings for the 1st half of 2017. As noted in the 7/7/2017 article linked above, their shares:
... surged as much as 14% on Friday after the company said it expects to turn a profit for the first half of 2017, driven by an improvement in the shipping market.
7. SSW has rallied significantly since late May.
SSW hit a 52-week low of $5.02 on 5/30/2017 and has rebounded more than 30% off that low. This recent strength in the common stock is positive for preferred stock holders.
8. CMRE preferred stock has rallied.
Costamare Inc. (CMRE) is a close peer of SSW. Both of these containership shippers utilize a long-term leasing model. CMRE-PD was trading at $20.59 back in December when I wrote this positive article and has since rallied to trade near par $25. This rally in CMRE-PD, makes SSW-PG the best high yield alternative in the containership sector. Note that the high yielding GSL-PB preferred issue should be avoided as Global Ship Lease Inc. (GSL) is struggling to refinance its looming secured bond maturity.
9. Lower common stock dividend is positive for preferred holders.
On 4/11/2017, SSW slashed its quarterly stock dividend to 12.5 cents per share from 37.5 cents per share. With a current share count of 106 million, this move is saving $106 million in cash annually. While this is painful for common stock holders, preferred shareholders benefit as the company retains more cash.
10. SSW-PG yields more than peers.
As discussed in this excellent recent article by Arbitrage Trader, SSW-PG now offers a significantly higher yield than SSW-PD, SSW-PE or SSW-PH. For example, the 9.4% yield offered by SSW-PG compares favorably to the 9.2% yield offered by SSW-PH. These are all very similar perpetual cumulative preferred issues with equal seniority. Some of my Panick Value Research Report subscribers have asked if the differing call dates can justify the differences in yield.
Absolutely not in this case. SSW is still working through a difficult period. As such, they want to retain capital and liquidity. The company has no obligation to redeem any of the preferred issues. There is no penalty for failing to redeem any of the existing public preferred issues as there was for SSW-PC (which has already been redeemed). It is unlikely that any of the SSW preferred issues will be redeemed over the next 2 years. As such, the optional call dates don't matter much.
What are some of the major risks?
SSW suffered a Q3 2016 loss due to the Hanjin Shipping bankruptcy. This voided some profitable long-term leasing contracts. There is concern about the financial health of Taiwan shipping line Yang Ming. Yang Ming leases account for 9 ships out of a total fleet of 114 for SSW. Fortunately, Yang Ming counter-party risk appears to have decreased as they raised a modest amount of additional capital in Q1.
The recent rebound in containerships rates could not have come at a better time for Yang Ming. While Yang Ming remains at risk, their Q1 loss narrowed significantly as rates improved. The Hanjin bankruptcy proved to be extremely disruptive and costly for South Korean exporters. Taiwan has $1.9 billion of aid available in an effort to prevent a similar disruption of its containership exports.
Even with a focus on long-term leasing, SSW would be damaged if containership rates remain low enough for long enough. Containerships rates are dependent on unpredictable factors such as global economic growth and world trade. Trade can be negatively impacted by events such as wars and international relationships. China plays an especially important role in the shipping sector. A trade war or increased tensions with China could negatively impact containership shipping rates.
SSW-PG offers an attractive 9.4% yield and the potential for some capital gains as the containership sector recovery continues. SSW is what I would call a "classy company." The search for high yield often leads to tiny, struggling microcap issues with weak liquidity and projected losses. The SSW-PG preferred issue is a rare high yield opportunity that avoids all of those concerns. SSW is a sector leader with a fleet of 114 ships. Liquidity is strong and the company has access to capital. All analysts expect a profitable 2018.
Note: My Panick Value Research Report is focused on high-yield preferred stocks, exchange traded debt issues and other undervalued high-yield opportunities. Members receive an advance look at all my articles as well as continued coverage. Please read our outstanding subscriber reviews here. SSW-PG was added as a high yield pick for Panick Report subscribers at $21.24 on 6/26/2017.
Disclosure: I am/we are long SSW, CMRE.
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.
Additional disclosure: I am long SSW-PG.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.