The past year has been negative for Seaspan Corporation (SSW, Financial) with some unfavourable business developments coupled with the stock declining by 41%. With Seaspan operating as an independent owner and operator of containerships, sustained sluggish growth in China and other emerging economies has impacted the company growth. Further, the news of Hanjin Shipping declaring bankruptcy also impacted the stock. Long-term charter for four vessels was cancelled as a result of the bankruptcy.
It was therefore not surprising to see the stock declining in 2016. However, the stock has been trading sideways for almost two months now, and the negative news has been discounted. The current consolidation phase is a good opportunity to consider Seaspan for the medium to long-term.
There are signs of economic stabilization in China with the manufacturing index expanding for the fifth month. If this recovery sustains and other emerging markets also witness improved growth, I expect better times for Seaspan in terms of container utilization and rates.
The second important point worth noting is that Seaspan declared common stock dividend of 37.5 cents per share for third quarter 2016, and this translates into an annualized dividend of $1.50 per share. At the current stock price of $9.10, the stock offers a dividend yield of 16.4%.Ă‚
When talking about sustaining dividends and Seaspan being attractive at current levels, the following points will put things into perspective.
First, Seaspan has contracted backlog of $5.4 billion as of the third quarter 2016, and this implies strong cash flow visibility for the coming years (5.1 years of average remaining charter). While the bankruptcy of Hanjin Shipping shows the potential risks involved with the backlog, as industry conditions gradually improve, a large part of the backlog is firm. This will ensure that dividends sustain.
Second, Seaspan has eight vessel deliveries scheduled for 2017 and this involves total capital expenditure of $470 million. As of the third quarter, the company already had available financing of $240 million and with a good record of raising funds; I don’t see any funding constraints going forward. In addition, as of Sept. 30, Seaspan had $539 million in cash and equivalents. The key point is that Seaspan will report revenue and Ebitda growth in FY 2017 and FY 2018 as these vessels become operational. This further underscores my point that dividends will at least sustain at current levels.
Seaspan has total debt of $3.1 billion as of the third quarter, but I don’t see debt as a concern in the coming quarters. Seaspan reported net cash flow (before interest payment) of $134 million for the quarter. With interest expense at $44 million, I don’t see debt servicing concerns as the company’s cash flow further swells in the next 12 to 24 months.
Considering these key factors, it is entirely likely that Seaspan has bottomed out at current levels, and I expect the stock to trend higher in the medium to long term. The key risk still relates to economic factors and the stock upside will potentially be determined by the extent of recovery in China and other emerging markets. However, on the fundamentals front, the outlook is bright, and Seaspan has the ability to navigate challenging times.
Disclosure: No positions in the stock.
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