Seaspan's Aggressive Targets
Seaspan execs said that they had the ambition to become the world's largest containership leasing company...
One of my longtime favorites that continues to look good for new buyers on dips is Seaspan (SSW), a leading containership owner and lessor. Granted, that business sounds about as exciting as paint drying or bauxite mining, but it's growing fast and has high competitive barriers.
Seaspan last week hosted its first analyst day since its initial public offering in 2005, and it shocked a lot of analysts with its aggressive targets. Chairman Kyle Washington and chief executive Gerry Wang said that they had the ambition to become the world's largest containership leasing company, and they had accelerated all of the company's five-year fleet acquisition targets to three-year targets.
SSW execs told analysts that they are looking to nearly double their fleet to 100 ships from 55, lifting their asset value to a $7 billion-$10 billion range from the current perch at $4 billion. The execs aim to hit this goal by 2010, which is actually less than three years.
This is very ambitious, but certainly within reason considering the fact that the company's business plan has always seemed airtight to me. Consider that Seaspan did a $700 million IPO in August 2005 that was at that time the largest in the shipping business. The company had 23 vessels then with an asset value of around $1.5 billion. It has more than doubled its fleet since then, so it's not much of a stretch to think it can double its fleet again now that it has lifted its credibility among bankers, insurers and investors.
I spoke to Wang recently about his company, and was impressed both with his business plan and enthusiasm. You might think enthusiasm is a superficial quality, but as an investor you really want the head of a company to be able to communicate his beliefs well to institutional investors and the public because they are the ultimate arbiters of value.
A Canadian citizen who was raised in Shanghai, Wang was working as a consultant for the national Chinese shipping line in 1998 during the Asian financial crisis when he noticed that the demand for ships was weak and prices were low. He recommended that the shipping line increase its containership fleet, but executives demurred, complaining that it would be two years before they could get funding through the government bureaucracy. Wang said that he then asked how long it would take to get funding to obtain ships on a long-term charter, and the executives said it would take no time at all since it would be a business transaction, not a capital expenditure.
That got Wang thinking. He went home and called up some business acquaintances and proposed that they borrow some money and partner up to create a company that would buy containerships cheaply and put them out on long-term charter to the Chinese and other carriers. He obtained the backing of Montana copper and construction magnate Dennis Washington, who is the Chairman of the Board of Directors for Washington Group International (WNG), and together they persuaded some European and South Korean banks to provide financing.
Wang's big idea was to create the Southwest Airlines (LUV) of containership lines. He wanted all new ships to be completely interchangeable so that they were easy to run and maintain. He wanted to be the low-price leader, and he wanted to grow by at least 15% per year. In the late 1990s, with shipping at low tide, he was able to buy five new ships from Samsung Heavy Industries and only needed to wait 13 months. Demand is so strong now that, if you can find a ship maker who will take your order, you need to wait four years.
Seaspan is attractive to many investors because of its fat dividend, which is now at 6%. Executives have made it very clear in public, and in conversations with me, that they intend to grow their distributable cash flow over time. Since going public, SSW has paid out $2.82 in dividends, according to data compiled by Merrill Lynch. That amounts to a 13% payout on its $21 IPO price. The stock has also risen more than 40%, so altogether the total return has been 62% through yesterday's close, vs. 23% for the S&P 500.
Merrill analysts believe that SSW can actually increase its dividend by 2009 to the point at which it would yield 7.1%, which would obviously be awesome.
The fundamental business prospects for SSW are right in line with my expectations for robust growth in world trade. Since containers are a vital link in the globalization structure, due to the fact that manufacturing is moving farther away from consumers, it only makes sense that shipping volumes will rise dramatically. Merrill estimates that world container trade has risen 10% annually, which is almost three times global trade growth.
SSW gets an increasing amount of that business because most of the world's containership carriers are moving away from a business model in which they own ships and instead are turning to leasing. Analysts estimate that 51% of all containerships are now out on leases rather than carrier-owned. As that trend continues, SSW will see its market and client base grow. Wang has said that he believes that the share of containership outsourcing, or leasing, will ultimately grow to 60%, providing many new opportunities for the company to grow.
At the moment, SSW is only around the sixth-largest containership owner, so its goal to become #1 is pretty ambitious. But even if it doesn't make it right away, there's plenty of money to be made as it strives to achieve this title. Merrill estimates that $10 billion in new vessels are needed in the industry each year to meet rising demand, so it's not like we're talking about an industry where there's an overabundance of supply.
Of course, much of that volume is going into the China trade -- around one-third of the world container volume to be exact. Seaspan has 22 of its 55 vessels out on charter to China Shipping Group and another 10 to China Cosco. Those are two Chinese heavyweights.
Plus, all of SSW's boats are currently out on charters of 10 years or more. But as the company grows it wants to move toward more of a portfolio approach, in which it would have some boats out on three-, five- and seven-year charters as well to take better advantage of rising spot rates. That might be a couple of years away, however, since the 10-year charters make it more capable of assuring the stability of its large dividend.
The bottom line is that I am looking at SSW as a buy on dips to the $30.25 to $31 area. My 15-month target is $40, which would be a 30% move, plus dividends. I'll set an initial stop at $28.50, close only, in case my thesis springs a leak.
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