SSW

This is not a very Saul-ish stock, but I believe we have discussed it before. Part of the allure is the dividend, which Saul doesn’t pay much attention to (according to the KB).

Seaspan is a shipping company, and supply has exceeded demand in their industry lately, but Seaspan always seems to manage to keep their ships on contracts. They had a customer go bankrupt recently, but they seem to be dealing with it ok, based on what they said in the CC last week. But the market clearly doesn’t like it. They’re down to less than $10 a share, after staying between $15 and $18 for about 12 months leading up to about 2 months ago when the price started to fall.

Naturally, the share price drop has been accompanied by an increase in the dividend yield. The dividend was running around 10%…quite high, but TMF always touts its sustainability…and is now up to 15%+.

Even if the dividend ends up getting decreased, this is a company that actually grew revenue 6% this quarter, has a PE of 7.8 (!) and is a TMF recommendation. That’s a lot of safety built in, in my opinion, while on the downside…well it seems very little is expected of the company already.

I picked up a few shares this morning. While this is a value play rather than a growth play, I believe the market has priced in a much darker future than Seaspan is likely to actually have. Of course, the market seems to be doing that a lot lately.

Bear

5 Likes

While this is a value play rather than a growth play

Hi Bear,

I don’t follow this stock, but a quick look makes me think this stock is really all about the dividend that is now at around 14%, rather than a “value” or “growth” play. If they can continue the divi, they’ll be fine. If they announce a dividend cut, they’ll get decimated, I think. Witness what has happened to STON over the last few days. I lost all my dividend and option income for the last 8 years overnight. I still made a small profit, but it was an unpleasant surprise.

Proceed with caution.

DT

2 Likes

Thanks DT, but I see a lot of differences in the fundamentals. STON has been losing money for years (negative earnings). SSW has a PE of 7.9!

Bear

Yeah Bear, they are not remotely similar as businesses - I just used STON as an example of what happens when a high yielder cuts their divi. It isn’t pretty. If SSW can continue to make money and meet their dividend payments, all should be rosy. But when I see a dividend that high, I get nervous. Especially in this market.

Good luck.

DT

While this is a value play rather than a growth play

I would not consider a stock where the fundamentals can deteriorate very quickly a value stock. The dividend is unsustainable and in my opinion should be canceled, the company needs to preserve money. They have huge cap-ex requirement and issued preferred’s heavily this year but that market is now closed for them. Rechartering the vessels returned by Hanjin is a risk, and so are some of the 2017 deliveries. The CEO has a serious conflict of interest like getting bonus for acquiring assets (not profits, not revenue) and inter-party dealings.

3 Likes

Thanks for the info CM001.

They have huge cap-ex requirement and issued preferred’s heavily this year but that market is now closed for them.

Why is it now closed to them?

The CEO has a serious conflict of interest like getting bonus for acquiring assets (not profits, not revenue) and inter-party dealings.

Can you say more about that?

Bear

Why is it now closed to them?

They did back to back issues when the rates are super low and if you look at their recent issues they are all trading below par. I am not sure they can float another issue with an yield < 9%, if at all. There are some covenant issues with earlier preferred’s.

First conflict of interest is CEO compensation related to the asset purchase rather than performance metrics. Which is a wrong incentive. Secondly they have some investments in CGI and SSW is planning to acquire that company, and the CEO is sitting on purchasing committee (SSW) and sale committee (CGI) and gets compensated for asset purchase. Given SSW’s financial position they have loaned money to CGI.

My question to you would be, 1) why you think the industry cycle has bottomed? 2) What are your expectations around their ability to recharter Hanjin vessels at decent rates? 3) How you think 2017 deliveries will play out? 4) The company is going to take some more write-downs ( another $50 M) in the next quarter and possibly some more if the current downturn in rates continue. Have you considered that?

In short, If you are buying in an industry at cyclical downturn, make sure you buy a company that will survive the worst. That way when the industry turns around you can benefit. I am not saying SSW will go bankrupt, but they are not in a solid financial footing in my opinion.

4 Likes

Thanks CM. Where do you get your information? Particularly on the CEO’s compensation/performance metrics and the CGI thing? Not doubting you…just don’t see anything in the CC or anything.

To your questions:

  1. Not saying it has. I just think SSW is in a good position to weather the storm.
  2. The vessels are only like 3% of their fleet. I would imagine they will figure it out.
  3. You mean, will more customers go bankrupt? I’m not following.
  4. Yes, just hoping they will be minimal. The downturn can’t last forever, right?

Thanks for your thoughts!

Bear

Not doubting you…just don’t see anything in the CC or anything.

If you go back to older CC and read their filings you can make your own opinion.

  1. If they are in a good position to weather then why is dividend yield at 15%?
  2. No. Currently they have 2 or 3 new deliveries for which they don’t have long-term contract. The risk is either you lock low long-term rates or take a chance with short-term rates. Not good options.
  3. If the rates remain at current level for 2017, you are looking at another $50 impairments in 2017, in addition to next Qtr (4Q) impairments
1 Like