Last week, I wrote about the staggering numbers behind global trade. I even mentioned a couple of ways investors could potentially profit.

One of those ways is with containership leasing firm Seaspan (NYSE: SSW).

A Seaspan assist ship docking with a bulk carrier (above)

Seaspan made its market debut in 2005 with ownership of 13 containerships. That fleet size doubled to 25 vessels within two years and doubled again to 50 just three years later. Today, the company owns 112 ships.

That makes it the world’s largest independent containership owner, with 15% more capacity than the next-closest competitor. These ships span the full spectrum, from small “feeder” vessels to mid-sized liners to ultra-large containerships (ULCS) that can hold up to 14,000 containers.

Those containerships aren’t experiencing much downtime these days. Those ships were “on-hire” 99.6% of the time last quarter. That’s the highest utilization rate since 2011.

Other than a few days in dry-dock for scheduled maintenance, Seaspan’s ships have essentially been available – and chartered – around the clock. And rates are holding steady. With a growing fleet, charter revenues have increased 5% year-to-date to $843 million.

It helps that Seaspan has longstanding relationships with seven of the top eight liners in the world, including heavyweights such as Maersk and Cosco. These renters have all signed long-term charter agreements at fixed rates, thereby insulating Seaspan from any day-to-day choppiness. The leases have an average remaining term of 4.5 years.

Over time, ship charters will gradually expire one by one and Seaspan will sign new leases or renewals at the going market rate (which could be higher or lower than today). Still, earnings visibility is strong for at least the next several years, with 89% of next year’s base revenues locked up and 77% for 2021.

The Boom Or Bust Nature Of Shipping

By most measures, SSW is underpriced. The stock is trading at just 90% of its book value (assets minus liabilities). That means the market isn’t even assigning full value for the firm’s vessels – let alone any future earnings potential. 

The biggest deterrent is probably the balance sheet. Modern containerships aren’t cheap, and Seaspan had to borrow to build out its fleet. The current debt of $4.3 billion is considerable for a company this size. However, this debt load is manageable given the firm’s steady, contractual cash flows. Recent financing arrangements have also boosted liquidity and allowed the company to prepay older notes, freeing up vessels that had previously been used as collateral. 

Like many industries, shipping goes through boom and bust cycles as freight demand and available capacity sometimes get out of whack. As a renter, not a shipper, Seaspan is partially protected from harsh downturns. But charter rates can and do fluctuate. Fortunately, they are on the upswing right now. That’s partly due to industry consolidation. This used to be a fragmented market, but now the 10 largest shippers (including giants such as Maersk and CMA-CGM) account for approximately 90% of global container freight volume. Burned by overcapacity, these shippers have turned more cautious about over-expanding. 

A Big New Catalyst?

Seaspan also made a big announcement recently. First, the board has approved a corporate reorganization plan whereby Seaspan will become a subsidiary of a larger holding company called Atlas. Once the deal is finalized next year, shares of SSW will be converted into shares of Atlas on a one-for-one basis under the ticker ATCO. This deal still needs to meet shareholder approval. But the vote is little more than a formality. 

#-ad_banner-#As part of the reorganization, Seaspan has agreed to buy APR Energy for $425 million (or $750 million including the assumption of debt). APR is a leading provider of mobile power solutions, a fancy way of referring to a fleet of gas turbines and other electricity-generating equipment. This equipment is leased under contracts to business and government customers for a wide range of uses, not the least of which is backup power in the event of a natural disaster. 

There aren’t too many apparent synergies between gas turbines and containerships. But I’ve invested in holding companies before with disparate assets (one operated oil refiners and fertilizer plants) with good results. 

Besides, the acquisition will also help diversify revenue away from the cyclical maritime shipping sector. On the downside, it will also add $325 million in debt. Fortunately, this won’t strain the balance sheet. Seaspan has made great strides in deleveraging, reducing debt by nearly 20% and lowering the debt/equity ratio to the lowest levels in 12 years. 

Action to Take

While I have some reservations about the deal, Seaspan (soon to be Atlas) appears to be getting some valuable, rent-earning assets at a great price. It sounds like the company is on the hunt for additional acquisitions and will branch even further away from its ocean-going roots. 

Seaspan’s fleet utilization is at an 8-year high, and the company just signed nine charter extensions with one of its biggest renters. The stock is best suited to risk-tolerant investors, especially given the hefty debt burden. Still, the solid 3.5% yield and significant upside are hard to ignore. 

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