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Faisal Humayun
Faisal Humayun
Articles (678)  | Author's Website |

Seaspan Is Trading at Deep Value

Industry fundamentals improving; there is a strong order backlog and good balance sheet for growth

September 12, 2017 | About:

The broad markets are trading at premium valuations, but there are buying opportunities that exist in different sectors. In the current scenario, a bottom-up approach to investing is likely to work. One stock trades at attractive valuations and can potentially trend higher from current levels in the next six to 12 months.

Seaspan Corp. (NYSE:SSW), which is an independent containership owner and manager, has declined by 29.3% year to date. Looking at the charts, the company’s stock is trading at the same level as on March 10. This sideways movement in the last six months is a good stock accumulation opportunity.

Before discussing the stock upside triggers, Seaspan common stock offers an annualized dividend payout of 50 cents; this translates into a dividend yield of 7.2%. This payout is sustainable and is one of the key reasons to advise exposure to this stock.

Industry fundamentals positive

Besides the containership supply-demand factor, the industry is significantly dependent on global economic activity.

With the global economic slowdown (particularly in emerging markets), the containership industry has witnessed significant decline in new containership order book. While the order book was swelling in 2013 to 2015, the declines in 2016 and year to date are significant. The same is evident from the charts below.

The key point is that as order book remains weak, it is likely that the day rates will improve in the foreseeable future along with containership utilization. The idle fleet is already on a decline, and I expect this trend to continue.

The factor that further supports my view is China’s economic growth along with the growth trend in other key markets such as India (long-term demand driver). GDP growth has bottomed out in these two countries and as growth ticks higher, the containership industry is likely to see better EBITDA margin. In developed markets, I expect demand to remain stable.

Strong fundamentals

As I mentioned at the onset, the company’s attractive dividend payout is a key factor for considering exposure to the stock. This section will discuss the company’s balance sheet and cash flow that will put into perspective the point on dividends sustainability.

The first important point to note is that Seaspan reduced debt from $3.4 billion in secnd-quarter 2016 to $3.2 billion by the same quarter this year (net-debt-to-equity ratio of 1.6). Further, the company has $305 million in cash and equivalents as of the second quarter, and that implies net debt of $2.9 billion. With a comfortable cash buffer and manageable debt, I don’t see any balance sheet concerns.

The second point to note is that Seaspan reported adjusted EBITDA of $154 million for the second quarter and, for the coming quarter, the company estimates interest expense in the range of $38 million to $40 million. Considering annualized numbers, the company’s EBITDA interest coverage comes to 3.9, and this means smooth debt servicing even at current debt levels.

With industry fundamentals likely to improve in the coming quarters, I see higher EBITDA and therefore higher cash available for distribution to common shareholders.

Overall, the company’s debt is on a decline, debt servicing is smooth, $120 million in undrawn credit facility is available, and the company has eight unencumbered vessels. These points combine to suggest reasonably strong fundamentals.

Growth opportunities

For Seaspan, the current order backlog and gradually improving industry fundamentals ensure that current dividends will sustain and the stock potentially moves higher in the next six to 12 months.

Considering the fact that Seaspan has strong financial muscles, asset acquisition in the coming quarters can trigger stock upside. I wanted to discuss this point because the company has listed opportunistic acquisitions among the key priorities in its second-quarter presentation.

With containership order book at its lowest levels since 2009 and with improving fundamentals, it is entirely likely that companies seek inorganic growth and Seaspan is well positioned for that.

Conclusion

Seaspan has underperformed the broad markets year to date, and the key reason has been EBITDA compression as compared to year-to-date 2016. There are clear signs of recovery in industry fundamentals, and the stock is attractively valued considering this factor.

While the dividend yield of 7.2% is attractive, Seaspan can also offer strong stock upside if the industry recovery sustains and the company pursues inorganic growth besides having steady cash flows.

Disclosure: No positions in the stock.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with eight years of experience in equity research, credit research, economic research and financial modeling.

Visit Faisal Humayun's Website


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