ABC Funds - Updated AnalysisSeptember 21, 2007
Earlier this year, Seaspan CEO Gerry Wang established an ambitious plan– to grow the company’s contracted fleet to 100 containership vessels by 2010. With the announcement last week that it was purchasing eight new 13,100 TEU vessels from Hyundai Heavy Industries, it appears Gerry is on track to meeting this goal.
Seaspan’s total contracted fleet, which consists of ships currently in use and those that are under construction, now stands at 63. This is up from just 41 at the time of its August 2005 IPO. Consistent with the company’s business model, these eight new vessels will be chartered out under long term fixed rate charters. In this case, Seaspan is chartering the vessels to China-based COSCO, one of the largest shipping companies in the world. The economics of the agreement are attractive. The charter is set for 12 years and the rate is fixed at $55,000 per day. Upon delivery in 2011, Seaspan’s EBITDA should increase by over $136 million per year.
It is interesting to note that at 13,100 TEUs, these eight new containerships are considerably larger than any vessels currently in Seaspan’s fleet. Presently, Seaspan operates ships that range in size from 2500 to 9600 TEUs. Management believes however, that these super-sized ships, while relatively new to the industry, are quickly becoming the standard. The most obvious advantage is the incredible economies of scale that are achieved in construction. While they may carry a higher total cost, we calculate the per-TEU price tag is approximately one third lower than the next largest sized vessel.
So what does this all mean for Seaspan shares? Interestingly, less than half of Seaspan shares are currently held by institutional accounts. But this could soon change. Given the pace of new charter signings, and the 32 new vessels expected to be delivered over the next four years, we believe the perception of Seaspan could begin to shift to that of a growth stock. This would attract the interest of a large, new set of investors. In addition, with Seaspan’s market cap now at roughly $1.6 billion, it could be catching the eye of some mid and large cap funds.
Furthermore, as net asset value (NAV) investors, we continue to monitor the value of Seaspan’s fleet. Given the rising costs of materials and labour, we calculate that Seaspan is currently trading at a 10% discount to its replacement value of around $35 per share. In addition, as Seaspan brings on new vessels at already negotiated prices, its NAV per share should continue to rise. Finally, investors should not rule out the possibility of a dividend increase in early 2008. The company currently pays an annual dividend of $1.79 per share, which represents an attractive yield of 5.5%. However, Seaspan’s distributable cash flow per share has increased this year, and a dividend increase would be consistent with the company’s policy of providing steady and increasing dividends to shareholders.