Analysis: Kuehne + Nagel on a slow path to value destruction?
There could something fundamentally wrong in an industry where the market leader and other players ...
Seaspan’s funding plans continue to be high on my radar, following a 60% plunge in its share value since last August when I argued that the world’s largest non-operating containership owner needed a firm hand on its charter tiller to keep its business plan on course.
There is always the possibility that bearish investors overreacted of course, the bulls will argue, but the main question for me is whether Seaspan is troubled – perhaps seriously – based on its financial fundamentals.
Its cash flow statements at the end of the first quarter were delivered alongside other announcements concerning governance and corporate affairs, and cumulatively prove to me April 2017 is likely to mark a watershed in its corporate history.
Founded in Hong Kong in May 2005, the business was IPO’d at $21 a share shortly after, reaching a record valuation of about $37 a share two years later. Currently its stock changes hands at $6.10 – a value that implies stress, based on a number of financial metrics, including price-to-book value.
Regardless of cash flow seasonality and price movements often distorted by opportunistic trading, its latest cash flow figures clearly paint a picture of a corporation intent on strengthening its balance sheet – with damage limitation arguably a top priority in a challenging market for most of its clients.
Moreover, cash flow statements point to what could be next in terms of capital allocation, as well as why its stock deserves to be cheap in this shipping environment.
An independent charter owner and manager of containerships, Seaspan supplies most of the world’s major container shipping companies, as the table below shows.
On the bright side, it is making an effort to carefully manage operating cash flows, which were steady year-on-year at almost $77m in the first quarter, when it also cut back on vessel expenditures to $11.9m from $117m one year earlier.
Both actions helped it maintain a rich dividend policy in the three months ended 31 March, when it shelled out $55.3m to preferred and ordinary equity holders.
As it said in the first quarter, however, it amended certain agreements “with Jiangsu New Yangzi Shipbuilding and Jiangsu Yangzi Xinfu Shipbuilding to defer the delivery of two 10,000 teu newbuilding containerships from the first and third quarters of 2017, respectively, to the first and second quarters of 2018”.
Careful budget consideration is unlikely to be any different any time soon, although, somewhat optimistically, management noted earlier this year the major lines were forecasting a “profitable 2017, amid strong freight rates and cargo volumes”.
As it continues to focus on cost control, Seaspan also raised new cash from shareholders to preserve some key financials metrics, as well as the payout.
All its vessels are currently employed, but that on its own has not been enough to keep the house in order over the past few months.
“In March 2017, the company entered into an equity distribution agreement with sales agents under which the company may, from time to time, issue Class A common shares in one or more at-the-market (ATM) offerings up to an aggregate of $75m in gross sales proceeds. During March 2017, the company issued a total of 3,700,000 Class A common shares under the ATM offerings for gross proceeds of $24,667,000,” it said in its latest trading update.
This is not a warning sign yet, in my view, but rather one of its usual fundraisings that also occurred in the past.
Meanwhile, gross cash balances of $295m at the end of March, down from $367.9m on 31 December, were not too bad – but only in the light of gross cash balances being higher than in Q1 2016.
Still, the amount of credit available under existing debt agreements is not much, when gauged against its outstanding debts…
…however, it’s making an effort to cut down its debt pile…
…and, in that respect, on a trailing basis, medium-term trends are encouraging.
Numbers aside, there are other elements to this intriguing corporate story.
As I briefly touched upon in my coverage last summer, possible conflicts of interests were one side of the Seaspan’s story and, admittedly, the group is working towards fixing its past mistakes.
In April, the board created a new executive committee (“which consists of Messrs Simkins and Sokol and Seaspan’s chief executive, Gerry Wang”), whose mandate is to work closely with management and provide advice on the group’s “activities, including financings, budgeting and operations”.
My reading of latest announcements is that earnings projections are at risk, and so more scrutiny is warranted.
Seaspan used equity in the past to redeem part of its outstanding debts, and in the good days it made a lot of sense, but a falling share price makes its corporate strategy more expensive, and possibly unsustainable if market conditions do not improve markedly.
Although it says it is looking to “opportunistically pursue vessel acquisitions”, while enhancing the long-term contract backlog, I do not see how, in this market, that will mollify investors.
In fact, next for the chop could be the dividend – dividend risk is implicit in its 8% forward yield.
Finally, another development contained in the latest quarterly trading update certainly deserves a mention.
“In April 2017, Seaspan and Gerry Wang amended his employment agreement to eliminate transaction fees for Mr Wang under the agreement for any containership orders, purchases or sales by Seaspan that are entered into after April 9, 2017, and agreed to enter into discussions about further amendments to his employment agreement and compensation package,” it said.
I’m afraid the party is over for Mr Wang, but there remains hope for shareholders – at least until the end of the second quarter 2018.