2023-04-10 05:32:43 ET
Summary
- Container shipping has been very volatile of late.
- Individual lessors can offer significant value still.
- GSL has backlog + strong management. Solid Buy.
Introduction
Shipping is not for the faint of heart! I'm quite certain that many readers are familiar with the fact the overall shipping sector can be volatile. However inside the overall sector there are many individual areas that may warrant a look. I think that Global Ship Lease (GSL) - a small sized container company - is one of this. The reasons I think it merits scrutiny are:
- a strong management team
- an exceptionally large backlog
- in an unloved sector
I rate GSL a buy in this sector.
Who is Global Ship Lease?
Global Ship Lease is a small, US listed container company. It was established in 2007, as a spin off from CMA CGM. It owns a fleet of ships which they then lease out to larger companies (MSC, ZIM, CMA CGM, etc.), normally for periods of 1 to 5 years. These companies then deal with individuals and companies, and deliver goods in containers all around the world.
GSL is a small cap company. As at April 9th 2023, the stock costs just over $18, and it has a market capitalisation of around $660m.
How has the stock performed?
In one word, poorly! This is the 1 year performance of GSL:
And this is the performance since it listed in 2007
Source: Yahoo finance
So anyone who purchased shares in the last 12 months - or over time - has certainly been disappointed. That said, I think in recent years GSL has performed well operationally and is managed well.
GSL: about the company
GSL owns a fleet of 64 reasonably old 64 container ships. You can see each individual contract here:
The market cap is $660m, as discussed above. And a snippet of their balance sheet is here:
Current assets are $237m. In addition there's restricted cash of $120m (pre-payments for leases). We are going to ignore this pre-paid cash for now (for the purposes of valuing the stock).
There is also $109m of preferred shares (which I will consider as "debt" here).
The total liabilities are ~ $1.14bn. Including the preferred shares means the overall liabilities are around $1.25bn. Reducing it, their net debt position is ~$1bn. Which gives us: market cap + net debt = $1.7bn (approx.)
So for $1.7bn you can purchase their entire fleet, plus all the backlog they have. We have to consider if this is worthwhile.
Company backlog
This is the interesting part of any container-ship lessor. All lessors grew their backlog significantly during covid, given a period of high rates and long-term contracts were available.
GSL has just under $2.1bn of contracted revenue. And has all of its ships rented for approximately the next 2.7 years. So you do not need to worry about GSL having work to do, until 2026.
$2.1bn revenue is a significant amount of backlog. You'll note its quite well diversified, and all of the names listed above are reasonably well-known household names. It seems somewhat unlikely they'll default on GSL.
So we know that they have $2.1bn in their back-pocket. How does that translate into earnings / cashflow?
The below is their Q4 / full year 2022 earnings.
Let's try and break this down:
-> Q4: earnings were $75mn on revenues of $165m.
-> With backlog of $2.1bn, that translates into about 12 quarters of earnings. So GSL will earn ~ $900m on their backlog. That is after all interest is repaid, and depreciation allowed for.
-> Let's consider depreciation, interest, and dividends on preferred. $21m + $10m + $2 = $33m. So as a proxy for cash flow $75m + $33m = $108m. Over the next 12 quarters, they'll earn around $1.3bn in cash
-> The market cap of the company is $660m. As I view it, the company is currently valued at $1.7bn, for which you get $1.3bn from existing contracts, and take on the whole fleet of 64 ships. So $400m effectively purchases a fleet of 64 ships, with no debts or preferred shares outstanding.
Are the ships valuable? What could GSL be worth?
GSL give their charter-adjusted NAV as $2.9bn.
$2.9bn less their net debt of $1bn implies an equity value of $1.9bn. Or 3x their current price. That would be quite a nice return! But I think that is somewhat optimistic here, unfortunately.
GSL's fleet is old. The fleet of 64 vessels as of December 31, 2022 had an average age weighted by TEU capacity of 15.9 years. So after 3 years - clearly - the fleet will be just about 19 years old. That said, these ships should still work for several years yet - provided they continue to be maintained adequately. The oldest ships that GSL currently owns, and operates, are 23. So their fleet should continue to work after age 20. They are selling ships "at NAV" once they finish their contracts, if they can't re-contract. That's not a bad strategy...given the company trades under NAV.
GSL looks cheap: what's the catch?
In Covid times, there was significant supply chain disruption. This led to container rates going wild for nearly 2 years. As a result, companies like GSL did very well. And that's the reason we have large backlogs today.
However, lessors and liners both ordered a lot of ships. As supply chain disruption ceased (and we all went outside again) rates to lease a ship came down significantly.
This is a good source of rates for containers in general:
And this shows how rates have fared over the last 24 months:
GSL take time to highlight the risks to rates in their own quarterly presentation as well:
GSL point out that the overall orderbook is nearly 30%. That is certainly a worry. It will continue to put pressure on rates. However, it's worth pointing out:
- GSL compete primarily in the smaller container area (sub 10k TEU)
- GSL have NO new builds. None.
- And rates are still profitable! Seasure (a broker) gives us colour on rates:
Now, rates are not as high - or for long durations - as they were during covid. However if GSL has ships coming up for lease, it seems likely they can achieve a rate of ~ 20k/day for a medium sized Panamax.
Returns for shareholders
The reason I like GSL over some of their competitors e.g. (DAC) is that they are trying to reward their shareholders today. They have a regular dividend in place, of $1.50/year. Which gives you a fine return of ~ 8% in terms of dividends.
In addition to the dividends, they have bought back stock. Most recently they bought back an additional $10m:
I expect them to continue to purchase stock over the next few years.
Business plans
It's not fully clear what they plan on doing with their money. Their debt is clearly manageable. However they have told us on their conference calls:
Seeking Alpha GSL conference call
So I think we will see them buy ships. Most likely, it seems they'll purchase older ships, in the smaller segments, where they compete today.
Is this a good plan? To be honest, I believe so. They are avoiding new-builds (Certainly a positive!); they are taking their time, and they being selective. They have a good balance sheet and can afford to wait, and invest when others are looking to divest.
Risks
This is a small cap, shipping company. So do your own due diligence and don't rush in! Some of the risks here are:
Management: if management are bad actors, your return will be significantly impacted. However I think they are returning capital to shareholders, and they aren't making foolish moves.
Overall economy / recession: no company will be immune if the economy faces a "hard landing". And especially not a container shipping firm. This is a real risk, and implies (to me) that you should only take a reasonably small position in any individual stock at the moment.
New deliveries / container markets: We saw the Harpex above. If more and more container ships are ordered (and delivered) we'll see weaker and weaker rates. Ultimately, if this happens, GSL's share price will fall and management will not be able to save the company. GSL's balance sheet is strong, and the company will survive. However it will not be in a position to thrive.
Overall
Overall, I think GSL is a good buy. I do not have a target price for it, however they are returning capital to you, the shareholder. They are significantly de-risked. And there is significant upside if rates are good / if management remain good actors.
I think interested investors could scale into GSL stock at this level, and should be rewarded over time as a result. I don't know how cheap it is - compared with competitors - however I think one should consider GSL a good choice given their management team.
For further details see:
Global Ship Lease: Solid Buy