May 19, 2021
[8 min Read]
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.
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.
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 $162M in cash which will help them meet short-term loans and uses of cash, while still maintaining an excess amount of cash for emergency uses.
The average charter rate has increased by between 253-427% from Q2 2020 to Q1 2021, which Global Ship Lease has been able to take advantage of.
There are 5 main competitors for Global Ship Lease, all of which are of similar market cap and have enough financial data that is public in order to undergo a comparable analysis. The companies include Triton International Limited ($TRTN), Textainer Group Holdings Limited ($TGH), CAI International Inc. ($CAI), and Touax ($TOUP.PA).
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.
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.
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.
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.
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:
In order to properly value Global Ship Lease, I decided to undergo a DCF model in conjunction with a comparable analysis.
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.
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.
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.
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.
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.