Summary
- Reading fellow Seeking Alpha authors' analysis on GSL got me interested in the stock. However, after doing my own research, I cannot call myself a confident GSL bull.
- New container supply expansions will continue beyond 2023.
- The market is signaling continued weakness in pricing.
- GSL is trading at a small PE premium to its comparables, reducing the margin of safety.
- For these reasons, I adopt a hold outlook on GSL.
Introduction
I read Double Dividend Stocks ' recent analysis suggesting a buy on Global Ship Lease ( GSL ) and the stock intrigued me. However, my research did not lead me to have the same enthusiasm for buying GSL. I have concerns on supply-side container expansion risks and continued weakness in pricing beyond 2023. GSL is also trading at a normalized PE premium to its comparables, thus reducing the margin of safety. In my view, this reduces my confidence in GSL being an alpha opportunity, even after accounting for its attractive 7.6% TTM dividend yield.
Why I am not as bullish on GSL
I recognize the key structural advantages of GSL, such as a lock-in of 2023 contracts. However am not as bullish on GSL due to 2 key views:
- New container supply expansions will continue beyond 2023
- Market is signalling continued weakness in pricing
New container supply expansions will continue beyond 2023
Industry experts such as BIMCO's Chief Shipping Analyst Niels Rasmussen and Maritime Strategies International's analyst Daniel Richards are both expecting supply expansion in global container fleet capacity. The chart above shows my triangulated interpretations from their combined views:
Rasmussen expects 2023 and 2024 to result in 7.7% and 7.0% YoY growth in global container fleet capacity to reach 27.4 million TEU . Richards has a similar forecast that anticipates supply growth to "accelerate markedly" in the 7% range over the next 2 years and above average growth in 2025. This has further upside risks to 10% if the amount of ship scrapping is higher than expected.
GSL may have only 10% of capacity exposed to spot container rates, however these expert opinions make me more wary of GSL's exposure to container rates in 2024 and beyond.
Market is signalling continued weakness in pricing
Data from the Composite World Container Index shows a dramatic 79% fall in freight rates from $10,000 per 40ft container to ~$2100 per 40ft container.
In the Q3 FY22 earnings call, management proposed a view that a lack of supply in the charter market makes price signals from steep declines less reliable. GSL's Chief Commercial Officer, Thomas Lister suggested that more time was needed to get a clearer view:
Anyway, we will have better visibility in due course, although probably not until the new year and possibly not even until after Chinese New Year.
- Thomas Lister, GSL's Chief Commercial Officer.
Well, we're now past the calendar new year and also the Chinese Lunar New Year on Jan 22 2022 ( Gong Xi Fa Cai to all fellow investors). The prices have continued to fall since Q3 FY22 and expert commentary does not cast a bright view on the market. For example, according to proprietary data from Xenata , a freight rates data provider, Maritime Strategies International's analyst Daniel Richards notes that there are definite signs that contract rates are following the path of spot rates and starting to fall.
This does not help GSL when it undergoes contract renewals in 2023, 2024 and 2025.
Valuation
Peer set besides Global Ship Lease ( GSL ) includes Genco Shipping & Trading ( GNK ), Eagle Bulk Shipping ( EGLE ), Danaos Corporation ( DAC ), Safe Bulkers ( SB ), Navios Maritime Partners ( NMM ), Costamare ( CMRE ), Capital Product Partners ( CPLP ), MPC Container Ships ASA ( OTCPK:MPZZF ), Golden Ocean Group ( GOGL ).
As can be seen from the chart above, GSL has a LTM normalized PE of 2.5x. This is at a 8.7% premium to the median multiple of 2.3x. Considering the supply and pricing headwinds, the premium valuation of GSL relative to its peer set makes me more cautious about buying as the reduced margin of safety make me less confident in the stock's alpha potential over the S&P 500 ( SPY ) ( SPX ).
Takeaway
I don't doubt that GSL is a good company, with attractive dividend characteristics. I simply lack confidence in GSL as a clear alpha pick to outperform the S&P 500 because the industry currents are going against it; container supply expansions beyond 2023 and continued pricing weakness. This, combined with a slight premium valuation over its comparables leads me to have a 'hold' outlook on GSL.
For further details see:
Global Ship Lease: Riding Against The Currents