I’m Adding $GSL to My Portfolio to Take Advantage Of The Global Shipping Crisis
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Investment Thesis:
- With global supply chains being pushed to their limits now more than ever before, there is an increasing demand for marine shipping, and many marine shipping companies cannot keep up as they do not have the necessary number of containerships to meet this demand. Global Ship Lease is able to provide these companies with extra containerships on a contractual basis.
- Global ship lease is set to acquire 7 additional cargo ships, which will increase EBITDA by $29M annually. These ships will increase EBITDA by 17% and help $GSL capitalize on the heightened demand. These ships will break even by year 5 (out of their 20-year useful life.) These ships also have a scrap value of $69M.
- Based on various valuation techniques the fair value per share ranging between $20.66–36.47, however based on these valuations a share price of approximately $32.62 would be more likely. The “investment plan” section implies a total upside of this investment to be 78.88%
Company Overview:
Based out of London, UK, Global Ship Lease owns and charters containerships of various sizes to container shipping companies.
Global Ship Lease currently owns 11 charters and is looking to acquire 7 more this year to make their total fleet consist of 18 charters.
COVID-19 has had a substantial effect on marine shipping companies, and with the recent and exponential push for businesses to develop their own E-Commerce solutions. This digital push from companies has led to an increased demand for marine shipping solutions, and this increase in demand is not likely to fade, as these business will likely continue to operate digitally.
Investment Information:
Macro Overview:
As a result of COVID-19 many businesses are switching or have switched to provide E-commerce options as part or majority of their business model/plan.
However, majority of these companies are ordering higher levels of inventory than in previous conditions, to ensure protection against possible inventory shortages. This increased demand for higher levels of inventory have pushed supply chains close to their breaking points. This phenomenon is best exhibited by the global chip shortage we are currently undergoing.
As a result of the increased demand for inventory/supplies, the demand for cargo ships and other vehicles of shipping are increasing as well. This is very good news for cargo shipping companies, however even these cargo shipping companies are being pushed to their limits with their shipping capacity, and as a result have been leasing ships from companies like $GSL.
All of this activity has been sending prices soaring for various products (ie. Chips) and services (cargo shipping). This increase in both price and demand for these products and services are not likely to subside in the short -term, and many analysts are expecting this to last at least one year.
$GSL can and has been taking advantage of this and has opted to purchase 7 more ships by the end of Q2. This purchase could not come at a better time, as $GSL’s margins will be the best (or nearing the best) that they have ever been. As an investor I will look for this to show up on their financial statements for the next 4+ quarters, and hopefully it will serve as a catalyst for a potential share price increase.
Sources:
https://www.globalshiplease.com/static-files/a226750c-bb27-45e2-8017-a0183e07ad26
Financial Information:
Global Ship Lease had a revenue of $73M in Q1 2021, with an adjusted EBITDA of $44.7, and a net income of $4.2M. Furthermore, Global Ship Lease also has $984.3M in contracted revenues, which almost guarantees this revenue in the future.
The marine shipping industry is expected to rebound from COVID-19, having a 6.8% growth forecast for the year 2021. Many marine shipping companies do not have the supply to keep up with the increasing demand and therefore will need to lease containerships to meet this demand.
As previously stated, Global Ship Lease is expecting to add 7 ships to their fleet this year, and they are expecting this addition to increase their annual EBITDA by $29M.
Global Ship Lease has stated that they will be paying $116M in order to purchase these 7 ships. By using their increase in EBITDA, we can assume that these ships will pay themselves off fully (using a 7.88% discount rate for EBITDA) in just under 5 years. These ships have an expected useful life of 20 years, so after Global Ship Lease is able to cover their purchase in 5 years, they will enjoy profit on the next 15 years of operation. These ships also have a scrap value of $69M, which makes this acquisition of new ships even more attractive for future performance.
These additions have been estimated by GSL to increase their EBITDA by 17%, this information will be applied to the DCF model as the CAGR figure.
Global Ship Lease also has over $162M in cash which will help them meet short-term loans and uses of cash, while still maintaining an excess amount of cash for emergency uses.
The average charter rate has increased by between 253–427% from Q2 2020 to Q1 2021, which Global Ship Lease has been able to take advantage of.
Company Information:
- GSL’s credit rating has recently been upgraded by S&P to a B+, which means that they are more likely to meet their financial requirements.
- This still relatively low so there is more inherent risk with this investment.
- They have recently increased their quarterly dividend, which indicates that they are financially healthy.
- GSL has plans for decarbonizing their fleet once it becomes an option for them.
- They are planning to be ahead of the curve and take advantage of this opportunity, which could serve them well down the road.
- GSL is looking to maximize returns in the short and mid time frames, which is good for investors looking to grow their investments in these respective timeframes.
- GSL has been refinancing debt, converting preferred shares, and offering shares in order to fix their balance sheet.
- This may hurt the stock price in the short term; however, they are doing this for all of the right reasons and to position themselves for maximized future growth.
- GSL is expanding into reefer cargo
- Reefer cargo is the fastest growing and most lucrative segment to cargo shipping.
- Is forecasted to grow at a CAGR of 10.9%, which is the most of any transport method.
Competitor information:
There are 5 main competitors for Global Ship Lease, all of which are of similar market cap and have enough financial data that is public in order to undergo a comparable analysis. The companies include Triton International Limited ($TRTN), Textainer Group Holdings Limited ($TGH), CAI International Inc. ($CAI), and Touax ($TOUP.PA).
Valuation Information:
In my DCF model I used information from many different sources to estimate a fair value per share. This section is aimed at helping you (the reader) to better understand where my numbers came from and why I used them.
WACC:
I got the figure for my WACC from a website called TrackTak. This site provides information about a company that helps in the creation of DCF models.
CAGR:
The number I arrived at for the CAGR for Global Ship Lease was found in their investor presentation. In this presentation they stated that their new acquisition of 7 ships would help to increase their EBITDA by 17% annually.
Interest Expense:
As you might notice, my interest expense remains constant over the 10-year DCF model, this is simply because the historical interest expense has been very volatile with no pattern in particular. As a result of this I thought that it would be best to use their average interest expense for the model.
Tax Rate:
In their investor’s presentation, Global Ship Lease said that they receive many tax benefits and deductions. As a result, their financial statements have a provision for tax consistently near 0.1%.
Investment Valuation and Plan:
Valuation:
In order to properly value Global Ship Lease, I decided to undergo a DCF model in conjunction with a comparable analysis.
DCF:
The DCF model that I conducted (using the information found in the “valuation information” section of this report), found that the estimated fair value per share of Global Ship Lease is $32.62. This signifies a share price increase of over 100% and seemed very optimistic. As a result of this, I decided to do a comparable analysis in order to verify or invalidate the results from the DCF model.
Comparable Analysis:
I decided to do two comparable analyses, one with an operating multiple (EV/EBITDA), and one with an equity multiple (P/E) to compare and contrast the figures reached and why they might be different. The EV/EBITDA multiple is commonly used in investment banking for valuing companies (which is why I used it), however it doesn’t factor in debt or depreciation which is why I decided to also compare their P/E multiple.
EV/EBITDA:
My analysis implies an upside of 27.28%, which translates into a share price of $20.66. Global Ship Lease has a significant amount of debt and depreciation expense on their financial statements, so I also decided to analyze GSL’s P/E multiple.
P/E:
My analysis implies an upside of 124.68%, or a share price of $36.47, which is similar to the figure achieved in the DCF model. This can further support the argument that the level achieved in the DCF model is potential the fair value of $GSL.
Plan:
An entrance into a position is $GSL would be favourable if bought below $18, as it still leaves enough upside to make this investment attractive.
I would consider selling 30% of my position when the price hits the EV/EBITDA fair value of $20.66/share, and then sell the remaining 70% of the investment once the price reaches the $32.62 DCF fair value level.
Following this plan (using the share price at the time of writing this report), would return 78.88% if this plan was to come to fruition.
Catalysts:
Future Earnings releases
- Having the increased EBITDA from the acquisition of 7 ships show up on the financial statements could serve as a catalyst.
- Also increased prices, demand, and margins are likely to help $GSL beat their earnings estimates for the next 4+ quarters.
Future acquisitions of ships:
- As long as Global Ship Lease has the necessary financial performance to acquire more ships, then any such acquisition may help the share price.
- Future credit rating increases: Global Ship Lease has a low credit rating which makes the investment riskier.
- If they can improve their credit rating, the inherent risk decreases, and investors will pile in.
Future dividend increases
- If Global Ship Lease can keep increasing their dividends it will send a bullish message to investors and it will let investors know they are financially healthy.
Risks:
Credit rating decrease
- Their credit rating is already quite low, and any decrease in their credit score will spook investors and may make potential investors think twice about the risk of such an investment.
Future share offerings
- Global Ship Lease recently offered shares in order to fix their balance sheet, which is a good reason for such an action. However, share offerings tend to hurt share prices in the short term.
- This recent share offering decreased $GSL’s price in the short term, however this offering has the potential to help them greatly over the long run.
- Furthermore, it does not seem to be the case that $GSL has had a history of share offerings, which is a good sign for investors.
Portfolio Reasoning:
- $GSL fits right in with my portfolio of small cap, and undervalued stocks.
- It helps diversify my portfolio into a completely new industry.
- Has significant upside potential, especially if the heightened demand for shipping remains.
Follow the journey of UndervaluedSmallCaps as he builds a portfolio of winning small cap stocks. You can check out his portfolio at Utradea, a social platform for investment ideas and insights. This is stock #3 in the portfolio
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