2023-03-22 08:30:00 ET
Summary
- Danaos has significantly underperformed GSL.
- Danaos beats GSL on all fundamental metrics.
- Danaos EV to assets is trading at a historic discount.
During this period of market volatility I decided to evaluate the shipping industry to see if an appealing pair trade existed. Danaos ( DAC ) and Global Ship Lease ( GSL ) are two container charter corporations that have almost identical businesses and thus lend themselves to straightforward fundamental analysis.
Background:
Danaos Corporation is an international owner of containerships, chartering its vessels to many of the world's largest liner companies. They currently own a fleet of 69 ships aggregating 421,293 TEU, a median ship size of 6400 TEU and average age of 14 years. Looking forward, the company has contracted revenue of $2.1 billion with a weighted average 3.4 year duration (source 20-f).
Global Ship Lease is a leading independent owner of containerships with a diversified fleet of mid-sized and smaller containerships. They currently own a fleet of 65 ships aggregating 342,358 TEU, median ship size of 5500 TEU and average age of 16 years. Looking forward, the company has contracted revenue of $2.1 billion with a weighted average 2.7 year duration (source 6-k).
Analysis:
I am going to go over a few metrics that can allow us to see the differences in valuation between Danaos and Global Ship Lease. After reviewing, I think the reader could agree if one wanted to pair trade these stocks, the less expensive company to buy would be Danaos, and the more expensive, Global Ship Lease. All of this information comes from the 20-F and 6-k filings .
We begin this analysis with information from the income statement. This information is for the year ended 2022. The 2023 Q1 will look similar to the last quarter as both companies were already contracted out.
Year Ended 2022 | (in thousands) | ||
Danaos | Global Ship Lease | Difference | |
Operating Revenues | 993,344 | 645,645 | 53.85% |
Vessel Operating Expenses | 158,972 | 167,444 | -5.06% |
Voyage Expenses | 35,145 | 21,154 | 66.14% |
Depreciation | 134,271 | 81,303 | 65.15% |
General&Administrative | 36,575 | 18,526 | 97.43% |
Operating Income | 616,211 | 354,185 | 73.98% |
Interest Income | 4,591 | 2,512 | 82.76% |
Interest Expense | 62,141 | 75,289 | -17.46% |
TEU's | 421,293 | 342,358 | 23.06% |
Vessel Operating Expenses per TEU | 377 | 489 | -22.85% |
After reviewing the income statement a few conclusions can be made.
- Revenues are 50% higher for Danaos
- Vessel expenses per TEU managed are 20% lower than GSL
- Operating income is 70% higher than GSL.
- Interest expense is 17% lower than GSL
These metrics indicate Danaos' operational performance is better than GSL. They also indicate Danaos generates more revenue while paying less interest expense, which indicates the revenue is flowing to equity rather than debt. Normally we could argue for a less profitable company being more expensive if it was growing faster. In container shipping today that is not the case.
Now let's review the balance sheets of the two companies to examine the differences.
Year Ended 2022 | (in thousands except share count, market value and enterprise value) | ||
Danaos | Global Ship Lease | Difference | |
Cash and Equivalents | 267,668 | 120,130 | 122.82% |
Current Assets | 372,521 | 237,047 | 57.15% |
Vessels and Advances on Vessels | 2,912,230 | 1,628,188 | 78.86% |
Total Assets | 3,400,228 | 2,106,215 | 61.44% |
Current Liabilities (including current portion debt) | 228,407 | 261,766 | -12.74% |
Long Term Debt | 402,440 | 744,557 | -45.95% |
Total Liabilities | 839,814 | 1,139,724 | -26.31% |
Common Equity | 2,560,414 | 966,491 | |
Current Ratio | 1.63 | 0.91 | |
Shares Outstanding | 20,349,702 | 36,507,701 | |
Recent Stock Price | 53.00 | 19.00 | |
Market Cap | 1,078,534,206 | 693,646,319 | |
Enterprise Value | 1,213,306,206 | 1,318,073,319 | -7.95% |
Price to Book Value | 0.42 | 0.72 | -41.31% |
Some conclusions we can draw from this are.
- Danaos' current ratio is 80% better than GSL's
- Danaos has 80% more vessel asset value than GSL
- Danaos has 45% less debt than GSL
- Danaos enterprise value is 8% lower than GSL
- Danaos price to book is 40% cheaper than GSL
One potential question could be that Danaos is not carrying the assets at the right value? Here in the 20-f they examined the issue.
'As of December 31, 2022, we concluded that events occurred and circumstances had changed, which may trigger the existence of potential impairment of some of our vessels. These indicators included volatility in the charter market and the vessels' market values, as well as the potential impact the current marketplace may have on our future operations. As a result, we performed an impairment assessment of certain of our vessels, for which an impairment indicator existed as of December 31, 2022, by comparing the undiscounted projected net operating cash flows for each vessel to their carrying value. Our strategy is to charter our vessels under multi-year, fixed rate period charters that have initial terms ranging from less than one to 18 years for our current vessels, providing us with contracted stable cash flows. The factors and assumptions we used in our undiscounted projected net operating cash flow analysis included operating revenues, off-hire revenues, dry docking costs, operating expenses and management fees estimates. As of December 31, 2022, no events or circumstances occurred, which may trigger the existence of potential impairment of some of our vessels.'
Further, the company created a sensitivity analysis on 25 of their ships whose value may be below the carrying value. This sensitivity examined the break even on the ships compared to 1,3,5,10 and 15 year historic rates. Danaos breakeven on these ships range from 35-75% lower than the 15 year average. The conclusion is no impairments.
Examining the balance sheet and income statements on the surface indicates Danaos should be worth more than GSL. Here are some questions we can ask as to why the market, at large, may not agree:
- Danaos has a younger fleet (source 20f) but a slightly longer contracted duration, perhaps this a reason for the difference
- GSL has a 2% higher yield than Danaos, this is as a result of paying out more cash to equity holders relative to Danaos.
- GSL has slightly smaller ships and the newbuildings coming in 2023/24 are less skewed to smaller ships which might give the GSL fleet a higher value.
- Danaos takes delivery of 6 7000-8000 TEU ships in 2024, could the market be concerned about this charter?
Notwithstanding the above, there is no historical evidence to support the valuation difference. I believe one side of this trade may be better than the other, and a compression of the EV to assets spread will occur with DAC outperforming. This is based on a historical look at DAC in the following.
This is a chart of Danaos' historical enterprise value to assets. From its IPO price till today it has never been cheaper relative to the assets. The closest it came was 2009, and it was still 40% more expensive than it is now. This potentially could be the right side of the trade.
Finally, here is a comparison of GSL EV to Assets vs Danaos going back to 2008.
From 2008, Danaos' EV to Assets has traded at an average 13% premium to GSL. Today it is a 35%+ discount. The trade would be to increase weight or buy DAC and reduce weight or short GSL (.49% borrow) with an expected exit where the EV/Assets spread equals 3%, DAC greater than GSL, or a 10% discount to the 15 year average. This would equate to a 37% compression of spread or profit. This spread should compress as income flows into Danaos over the next few quarters.
Many investors are attracted to the GSL yield premium over DAC, but I estimate GSL has finished its outperformance and this will correct itself over time because Danaos's ships have greater value and generate more income. Options trade in both names, however recent volatility has increased premiums.
For further details see:
Danaos Vs. Global Ship Lease, 20% Potential With Pair Trade