Seaspan Corporation (SSW, Financial), which is an owner and manager of containerships, has corrected by 22% from highs of year to date to current levels of $15.2. This correction is a good opportunity to accumulate this stock with a medium to long-term investment horizon.
I would like to start with the valuations. Seaspan Corporation is currently trading at a trailing 12-month PE of 11.55. Further, the stock is trading at fiscal year 2017 (December 2017) forward PE of 12.8. These valuations are attractive.
The first reason for considering valuations attractive is the company’s current dividend payout. Seaspan offers a dividend of $1.5 per share that translates into dividend yield of 10.0%. The company’s dividend will continue in the coming years, and the robust dividend payout makes the stock worth considering.
The second important reason for considering the company’s valuations attractive is a healthy order backlog of $5.7 billion as of March. The current order backlog ensures that cash flow remains robust not just in the coming quarters but also in the coming years. I mentioned above that the company’s dividend payout is sustainable, and the order backlog backs my point. It is also important to mention that the global economy has slowed down, but the company’s cash flow is likely to remain robust on the deep backlog visibility.
Another point that makes Seaspan attractive is the delivery of new containerships in the coming quarters. If investors scan through first-quarter results, Seaspan reported robust increase in revenue from $188.5 million in first-quarter 2015 to $215.5 million a year later. This increase in revenue was backed by an increase in operating ship days, and revenue will continue to increase in fiscal years 2016 and 2017 as new containerships are delivered.
Just to put things into perspective, Seaspan has delivery of a containership in the second quarter, one in the third quarter and five containerships in fiscal year 2017. This will ensure that the company’s revenue and EBITDA momentum remains robust. Importantly, this will ensure that the company’s dividend payout capability increases, and a dividend increase seems likely in fiscal year 2017.
From a balance sheet perspective, it is important to note that seven containerships for delivery through fiscal years 2016 and 2017 would require capital investment of $565 million. However, I don’t see funding of new containerships as a concern because the seven deliveries have been chartered to various clients. Therefore, debt financing will be easy as cash flow growth is likely immediately after containership delivery to support incremental debt servicing cost.
In terms of risks, the global economy has slowed down significantly, and this will impact global trade and the containership industry. However, this risk is mitigated by the point that Seaspan has chartered out containerships for long-term, and the steady cash flow is likely to sustain even in the current economic environment.
Seaspan is worth buying for medium to long-term investors and I see the current correction as a good buying opportunity. The company’s fundamental remain strong and is likely to remain robust in the coming quarters. Further, continued dividend payout is an added attraction.
Disclosure: No positions in the stock.
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