Danaos (“DAC” or “the company”) provides seaborne transportation services to many of the world’s largest liner companies.
DAC is up more than 200% year-to-date and an eye-popping 1,500% over the past 12 months.
The company has the potential to continue to rewrite all-time highs, as it continues to successfully recharter its ships at higher rates.
The company maintains a robust capital structure and deploys a conservative financial strategy. A recent refinancing promises to generate additional free cash flow, which will be accounted for in Q2 2021.
The global maritime shipping crisis is in the early stages of a long recovery and DAC remains in the best position to benefit from these market and supply side dynamics.
The company is focused on deleveraging, protecting free cash flow and limiting market risk. DAC is supported by a charter backlog of $1.2 billion.
DAC has the strongest profitability metrics in the sector and has maintained a 5-year average gross profit margin of 73%.
DAC is undervalued according to a variety of metrics. It trades at a low P/E relative to its peers.
Founded by Dimitris Coustas in 1972, Danaos is one of the largest publicly traded owners of modern containerships in the industry. The company’s current fleet of 65 containerships aggregating 403,793 TEUs, including five vessels owned by Gemini Shipholdings Corporation, a joint venture, ranks Danaos among the largest containership charter owners in the world based on total TEU capacity. DAC’s fleet is chartered to many of the world’s largest liner companies on fixed-rate charters based upon market rates.
Dr. John Coustas, Chairman, President, CEO.
Dr. Coustas has managed the company for more than thirty years and owns roughly 40% of the company’s shares. We believe this is a credit positive, as owner-operators tend to manage their companies in a way such that corporate strategy is aligned with the interests of shareholders. This relationship tends to maximize long-term stock price appreciation.
Danaos is well-positioned to opportunistically expand its fleet at this time and a significant recovery in the container trade is likely to continue into 2H 2021 and beyond. Positive supply side dynamics include a historically low order book for new vessels and a reduction in idle capacity, which supports the recent increases in time charter rates. The main question for investors will be at what price and length can DAC fix newly contacts (ie what are the terms of the charters?). Unlike dry bulk, or tankers, these aren’t ‘spot’ voyage rates of 60 to 90 days. The rates DAC are quoting are based on 1-year charter levels and over the past several months, there have been dozens of contracts signed at record levels for durations of three to five years. Danaos has 33 vessels re-chartered over the past 6 months at improved market rates.
The dramatic turnaround and strength of the market, which started in Q1 2021, continues unabated today. The continuation of the pandemic and the ensuing slowdown in terminal operations served to exacerbate demand. The blockage of the Suez Canal further contributed to the disruption in the supply chain and conditions will likely not normalize before the end of the 2021year. The liner sector has been pushed to the limit of its capacity.
Liner companies are reporting record profits and signing multi-year contracts at higher levels, which will keep their profitability elevated. On the non-operating owners front, charter rates have skyrocketed to levels not seen for at least 10 years. Additionally, duration has been significantly increased so that vessels over 4,000 TEU can secure 4+ years of employment at healthy levels.
In light of this, the market is just starting to see an increase in the ordering of new containerships. As a result, the orderbook now stands at 17% of the existing fleet which is higher compared to the 9% nadir at the end of 2020, but still much lower than the 50% it reached in 2008. However, a lack of shipyard capacity and the hesitance of market participants to order vessels with conventional fuel propulsion both are inhibiting factors for new orders and are keeping a lid on excessive ordering. Further, there appear to be less than 5 vessels ordered in sizes between 4,000 and 10,000 TEU, which are the key size range for the Danaos fleet, and these ships won’t be delivered until a few years out.
According to FreightWaves.com, the recently ordered vessels will not deliver until at least 2023, and the next two years should be lean in terms of fleet supply growth. The expected strong demand growth post pandemic will comfortably absorb the existing orderbook.
Danaos is currently in their best ever position and reaping the benefits of the current market environment.The company has a diverse fleet with a charter backlog of $1.2 billion through to 2028. The fleet utilization for LTM Q1 2021 exceeded 98%, a ~7% increase over the prior year. And the average gross daily charter rate was $24,802 compared to $22,922 year over year.
Here’s a deeper dive into the market conditions for those that are interested.
According to MSI, trade is expected to rebound 6.9% year over year in 2021.
And 1-year charter market (8,500 TEU to 3,500 TEU) rates have risen nearly dramatically from a market low in Q2 2020 to Q1 2021.
The latest report from shipbroker Toepfer Transport, effectively shows the same signal- that time charter rates in the multipurpose shipping sector are continuing to climb.
The orderbook to fleet ratio is a useful indicator of future supply growth, across the industry as a whole and within sectors. A proportionally large orderbook will generally lead to a fast-growing fleet. The total order book for new ships had reached its lowest point in 17 years because of COVID-19. But recently, albeit slowly, low interest rates and strong competition between shipyards have prompted non-operating owners, lessors, and ocean carriers to get aboard the newbuilding train.
Orders over the past six months have been predominantly for 12,000 TEU, 15,000 TEU and 24,000 TEU class ships with no interest for mid-sized tonnage.
What the market continues to see, however, is a limited orderbook, which is set to deliver low future fleet growth. The industry orderbook-to-fleet ratio at the end of March 2021 stood at roughly 17%. A sustained fall in idle containership capacity in the second half of 2020 has led to a “sold-out” market with very little idle capacity in Q1 2021; the market dropped from >70% to <10% in less than 6 months.
Additionally, a consolidated liner landscape will continue to provide stable counterparties for Danaos. And with greater stability, liner companies will have fewer incentives to undercut the market.
Two things standout in my mind as potential headwinds to DAC’s stock price in the coming 12 to 24 months.
- As charter rates continue to rise, there’s the potential that excess ships will come online at a faster rate than anticipated. Excess supply would serve to drive down rates and cool the market. Fortunately, the vast majority of these ships are for TEU sizes much larger than Danaos’s fleet.
- There is a slowdown in global consumer demand. This could be triggered by a variety of factors including a resurgence of COVID or rise in inflationary pressure on the price of goods. It is possible that consumers turn to local service purchases rather than durable goods from abroad, such as China, but this will be dictated largely by unknown future market dynamics.
Financials and Valuation
DAC is one of the most efficient operators in the industry and maintains competitive breakeven levels. Peers in our analysis include Atlas Corp. (ATCO), Global Ship Lease Inc. (GSL), Navios Maritime Partners (NMM) and Costamare Inc. (CMRE).
DAC has returned, on a percentage basis, more than 6X that of its peer group over the past 12 months.
DAC trades at a lower TTM P / E multiple and TTM Price / Cash Flow multiple than its peers. Note this is TTM and we discuss forward earnings shortly.
Danaos trades at a competitive median TTM EV / EBITDA multiple.
And the company trades at a slightly higher EV / Sales ratio than its peers, with the exception of CMRE.
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It should be noted that investors traditionally look at Price / Book ratios in shipping. And Danaos is fairly priced by this metric. A Book Value of 0.99X doesn’t leave much room for upside.
The company has a healthy capital structure. DAC has an Adjusted Net Debt / LTM EBITDA of 4.0X and has consistently reduced leverage. A $2.2 billion debt refinancing in 2018 and another $1.25 billion repricing in 2021 has led to a significant increase in net cash flow generation. Net leverage has been reduced by 3.3X since 2017. The continued debt amortization and free cash flow increase provides opportunities for additional deleveraging in the coming years.
The company’s outstanding debt now consists of: 1) $815 million senior secured credit facility; 2) $135 million sale leaseback agreement; and 3) $300 million Senior Notes due 2028 at 8.5%.
Danaos is also expected to benefit from ownership stakes in ZIM Integrated Shipping Services, a liner company. Although the January IPO did not bring ZIM the initial market pricing it was hoping, a secondary equity offering will position Danaos to sell around 20% of its shares in the company at $40 a share. Selling upwards of 2 million shares would net Danaos somewhere $80 million on June 08, 2021. Additionally, ZIM will repay Danaos roughly $53 million for outstanding notes that Danaos holds on June 21, 2021 on an early redemption of $449 million principal amount of series 1 and series 2 notes due 2023. In total, and with the addition of the redemption of notes from HMM, Danaos stands to earn between $150 and $160 million by the end of June 2021. This would nearly triple DAC’s current cash on the balance sheet, which stands at $68 million as of Q1 2021. Danaos’s balance sheet is the best it has been in years. Danaos will likely use the cash to repay debt and for capital expenditures, such as vessel construction when markets are better suited for new build.
DAC has a TTM gross profit margin of 71% compared to a sector median of 29%. And a TTM EBITDA margin of 65% compared to a 13% sector median, respectively.
First quarter results were announced on May 11, 2021. Operating Revenues increased $25.9 million primarily as a result of contractual increases in charter rates of vessels under long-term charters and the contribution of additional acquired vessels. The revenue increase amounted to 24% over the prior year.
Adjusted EBITDA increased by 34%, or $24 million, to $96.3 million in the three months ended March 31, 2021 from $71.9 million year over year. The increase was mainly attributable to a $25.9 million increase in operating revenues. This also represents an increase in EBITDA of $83 million over Q4 2020, which highlight the first signs of rechartering at higher levels.
Adjusted Net Income increased by 74%. to $58.0 million, or $2.83 per share. Interest expense decreased by 7.4% to $15.1 million in the three months ended March 31, 2021 from $16.3 million the year prior.
Danaos announced on May 10th that they will start giving a 50-cent quarterly dividend, which yields roughly 3% annually. The new fixed dividend will likely expand the shareholder base and grow a new group of yield driven institutional investors. A larger shareholder base has the potential to increase the liquidity of the stock. The dividend is well above the S&P 500 yield of 1.37%.
Danaos trades at 5X forward earnings, while its competitors trade at an average of 7.4x. At 7.4X DAC would be priced at $96.80. This is >45% upside.
DAC also trades at a discount to its Net Asset Value Per Share, which is $90.9.
DAC is at a Buy Point
In 2020, DAC earned $462 million in revenue. Management believes that there is significant upside in 2021 assuming that 13 vessels with charters expiring this year are re-chartered at the average charter rate these vessels earned in 2020. Current rates are trending toward revenue upside of more than $130 million in 2021 versus 2020. The company successfully covered 91% of 2021’s operating days and a significant portion of its 2022 capacity has been booked.
DAC is currently trading at just ~2X 2022E EPS, which Analysts are estimating to be between $20 and $22 dollars a share when you factor in DAC’s stake in ZIM. This is near a historical low for the company. And DAC is not alone. In fact, many names in the containership sector are also trading at or near historical lows. At the end of Q2 2020, DAC was trading between $5 and $6 per share and the EV/EBITDA for the stock was ~6.5X (based on an expected forward EBITDA of $250 million). Today, DAC is trading in the mid $60s with an EV/EBITDA approximately ~3.5X (based on a forward EBITDA of $550 million). Therefore, even though DAC’s share price has increased from $5.00 to $67.00 for a ~12X gain, the company’s EV has only increased by about 25%. We took a position in DAC on May 13 at $55.00. The stock is currently trading in the mid $60s, as of the first week of June. We will look to add to this position if the stock sells off below $50.00 in the coming months. We believe this is a buy and hold for 24 to 36 months.
The Investor Weekly feels there is still considerable upside in the coming years for Danaos. The effects of 1) rechartering its ships at higher rates and 2) improving free cash flow via a recent repricing and aggressive deleveraging have yet to be fully priced into the stock price. Almost all of the major containership companies today are now cheaper than there were last year in terms of EV/EBITDA, P/NAV and Forward P/E.
The Invest Weekly team believes that a share price of $95 to $100 dollars is realistic.
Disclosure: The Investor Weekly is long DAC. The article expresses solely the opinions of the author. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article. This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.
Danaos Financials and Valuation
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Other stocks we will be looking at in coming weeks, include:
SIVB – SVB Financial Group – Financials, Regional banks
Upstart Holdings, Inc. – Fintech
I am/we are long Danaos (“DAC”) either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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