Danaos has sold its stake in ZIM, net debt is on track to reach $0

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We tracked data from Danaos Corporation (NYSE: DAC) developments over the past five consecutive quarters, and with another trading period reported this week, it’s time for another update. If you are new to the Danaos investment case, please click here and read my latest updates, as this article assumes you know the general idea.

In this short update, we go over the key topics where we got new developments. More specifically, we will discuss:

  • ZIM Integrated Shipping Services (ZIM) takes over;
  • The recent refinancing and net debt of Danaos remaining on track to reach 0;
  • Recent takeovers of Danaos and their future prospects.

ZIM integrated shipping services have the boot

One of the most significant developments in Danaos’ third quarter report was that their remaining stake in ZIM was sold entirely. In the second quarter, Danaos made no changes to its stake in ZIM. So, seeing the company dump the rest of its shares only after ZIM had fallen further may have disappointed some investors.

However, we have to remember that it would have been incredibly difficult to time the perfect outing. Unlike Danaos, which is a container ship lessor, ZIM is an ocean liner, whose revenues are directly affected by violent and continuous changes in freight rates. As you can see, container ship rates have fallen from last year’s unsustainable record highs, and ZIM shares have followed suit.

World Container Freight Index

Global Container Freight Index (freightos.com)

However, ZIM has also been seen as rather undervalued in the shipping community lately, so we can understand why Danaos management might have also been reluctant to sell earlier. Either way, ZIM has been quite a profitable asset for Danaos. Of course, if Danaos had sold its shares at almost $90, we would have made a lot of money, but even selling ZIM at an average price of $28.36 ($161.3 million proceeds / 5,686,950 shares), DAC has benefited greatly from ZIM.

As you can see, even with shares of ZIM now trading near $25, less than Danaos’ average sale price, the stock has returned over 240% including its massive dividends since IPO. in stock exchange. A return of 800% would have been nicer, but that’s the way it is.

ZIM total returns since public listing

Total ZIM returns since public listing (Koyfin)

The combination of Danaos’ own operating cash flow, gains from its stake in ZIM since its IPO (including dividends) and continued repayment of its own debt have put the company on the right track. to achieve net debt of $0 by the end. of the year.

Danaos net debt on track $0

Danaos has made tremendous progress in reducing its net debt over the past five years. From 7.3X in 2017, it was only 0.5X at the end of Q3. In addition to the profitability of the business, which is reflected in the accumulation of cash and the repayment of debt, the gains in ZIM’s share price over the past year, as well as the dividends received from ZIM, have also contributed to the decline in net debt.

Cash and Net Leverage of Danaos

Cash and Net Leverage of Danaos (Koyfin)

Additionally, in the third quarter, the company entered into an agreement with Citi and Alpha Bank to refinance the currently outstanding $437.75 million credit facility, which will have two major effects on Danaos.

  1. A 2.5-year maturity extension of the 2.5-year refinanced debt and the creation of a 5-year track with no maturity before 2027; and
  2. Increased flexibility in current renewable installation with Citi.

In this context, during the company’s earnings call, Chairman, President and Chief Executive Officer, Mr. Coustas, said (emphasis added):

This means that we have no significant capital or refinancing requirements until then. [2027], and we have the flexibility to pursue our strategy of growth, share buybacks and acquisitions. In fact, our net debt to be very close to zero by the end of this year, which protects Danaos from the recent dramatic increase in interest rates.

This last point is quite important. Shipping lines have always carried large amounts of debt on their balance sheets, with increased interest charges killing their profitability. The fact that Danaos is sheltered from rising rates, combined with the fact that, following the refinancing, Danaos will triple the unencumbered and debt-free fleet to 45 vessels from the current 15 vessels, has resulted in its balance sheet being (l one of the healthiest in the industry.

Buybacks – Please no more buybacks

We have repeatedly discussed why Danaos’ asset base, combined with the value of its secured leases, should value the company significantly above its current market capitalization levels.

Based on our own estimates, as well as others we’ve seen from various analysts in the field, Danaos should be worth between $125 and $155 per share. It is difficult to find a precise figure, as the underlying value of Danaos vessels can change over time and each analyst may use different discount rates. Nevertheless, we believe that this range is relatively accurate.

With shares trading as low as $53 during the third quarter, we are quite certain that Danaos is trading at a massive discount to its net asset value. We understand that the market may be fearful of the continued decline in rates, as well as the uncertainty of how rates will move beyond 2023 (when the company’s leases begin to renew based on these rates). at that time), which could result in a slight discount. The current discount, however, is utterly ridiculous.

Analysts and investors practically begged management for buybacks at this point, and indeed, in its third-quarter report, we learned that Danaos had already bought back $28.6 million worth of shares as of November 7 in the under the $100 million share buyback program announced in June.

For one thing, that’s a decent amount of shares bought back. On the other hand, we already knew that Danaos had repurchased $25.1 million worth of shares on the August 1 Q2 release date. This therefore means that between August 1 and November 7, only $3.5 million of shares were redeemed, implying a disappointing deceleration. What shall we do now?

The way things are looking, the stars have aligned for Danaos to significantly speed up redemptions. Their backlog of $2.3 billion through 2028 is huge, inventory is very cheap, net debt is approaching $0, and recent refinances have not resulted in any maturities until 2027. Current liquidity and at come from Danaos have to go somewhere.

In the quote above from Mr. Coustas, he mentioned the use of Danaos money for buyouts, but he also added the word “acquisitions” to the list of potential candidates for capital allocation. The thing is, it would be sad to see Danaos acquire anything other than its own shares at this point. Even if they buy an undervalued company, their stocks are probably cheap here. When management came under renewed pressure on the earnings call regarding the future fate of buyouts, Coustas said (emphasis added):

Yes. Well, Omar, as I said, we’ll wait. We said — but we will continue to buy back shares. And we really should wait and see when opportunities present themselves.

Ok, the last part is funny. What opportunities? Let the discount to NAV approach 80%? Nonetheless, we see that buyouts are on management’s mind, and with the most recent developments discussed, they should feel more comfortable with buyouts.

In the meantime, we wait. There is nothing else to do. We’ll be waiting for Danaos to generate all those monster cash flows hitting the balance sheet over the next two to three years while we collect the 5.3% dividend. And, as Danaos begins to drown in cash, we expect that either through buyouts (preferably), other acquisitions, or P/NAV reaching absurd levels, Danaos Corporation stock will soar. at a much higher price than it deserves.

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