Hard times by one of its customers almost brought down Danaos
Stock: Danaos Corporation(NYSE:DAC)
The shares of Danaos Corporation, a $153.7 million Greece-based international owner of containerships and chartering vessels, have been hovering near its one-year low in recent memory at $1.40 at the time of writing. Danaos trades at a hefty 69% discount to its book value of $4.50 as of June.
In its recent six months of operations that ended in June, the 45-year old vessel operator reported an 18% revenue decline or $50.5 million lower revenue to $224 million (vs. 3-year average -5.4%), and a disappointing 56% drop in profits to $38.7 million.
Danaos explained that it recorded $41.3 million out of the $50.5 million revenue decline in relation to one of its customers’ (South Korea’s Hanjin) bankruptcy.
To be exact, Hanjin canceled its charter of eight of Danaos’ vessels resulting in marked reduction in the latter’s revenue resulting in $41.4 million reductions in profits, accordingly.
Meanwhile, Danaos stated that these supposedly leased vessels were rechartered at lower rates and in some cases experienced off-hire time in this fiscal year.
In addition, Danaos is in breach of certain financial covenants as a result of the Hanjin bankruptcy.
The company claimed that it is still currently engaged in discussions with its lenders regarding refinancing substantially all of its debt maturing in 2018.
“In the meantime, we continue to generate positive cash flows from our operations and currently are in a position to service all our operational obligations as well as all scheduled principal amortization and interest payments under the original terms of our debt agreements.”
Danaos’ CEO Dr. John Coustas
As of June, Danaos reported $63.8 million in cash and cash equivalents and $2.41 billion in debt ($239.7 million lower vs. a year earlier). The company also had $438.8 million lower in shareholder equity to $494.1 million.
1 Operating days
In the recent six months, Danaos reported 9,488 operating days as of June compared to 9,590 a year earlier.
2 Vessel Utilization
In the recent six months, vessel utilization was at 95.3% compared to 95.7% a year earlier.
3 Average Gross Daily Charter Rate
In the recent half, the rate was at $23,606 compared to $28,621 a year earlier.
Cash flow fell by 32% year over year to $90 million brought mostly by lower profits while capital expenditures were $3 million leading to a free cash flow of $88 million (vs. $132 million a year earlier). Danaos also allocated $104 million for debt reduction (net any issuances and other financing activities).
Hampered by one of its customer’s bankruptcy, Danaos appeared to have carried on. The company’s admission that it is still working on its covenants brought by the aforementioned unlucky event accompanied by a leveraged balance sheet makes Danaos a speculative buy.
As of June, Danaos recorded 17.5% lower rate year over year in its chartered vessels again may be attributable to the South Korean customer.
As claimed by Danaos, the company has maintained positive cash flow albeit lower in its recent months of operations making it capable of staying afloat amid turbulent times.
Asking about 65% discount (brought by high leverage and uncertainty) from Danaos’ book value indicated a per share figure of $1.58 a share.
In summary, Danaos is a speculative buy with target price of $1.58 a share—13% higher than its recent price of $1.40.
Danaos Corporation is one of the largest independent owners of modern, large-size containerships. Our current fleet of 59 containerships aggregating 352,600 TEUs, including four 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. Our fleet is chartered to many of the world’s largest liner companies on fixed-rate charters. Our long track record of success is predicated on our efficient and rigorous operational standards and environmental controls.
Danaos’ CEO Dr. John Coustas (second quarter comment)
“continuation…The charter market is moving sideways at levels slightly above the lows of 2016 but we have not yet seen a meaningful improvement to signal a market recovery. Box rates have improved as a result of improved capacity deployment through the alliances and the recent industry consolidation activity has reduced our counterparty risks. On the other hand, consolidation in the liner industry combined with legacy newbuilding orders for large vessels still to be delivered is anticipated to maintain pressure on charter rates for a considerable amount of time. Danaos continues to have low near term exposure to the weak spot market with charter coverage of 87% for the next 12 months based on current operating revenues and 66% in terms of contracted operating days.
Our commitment to provide best in class service to our customers is now being reinforced by the utilization of our in-house developed IT tool for online acquisition and analysis of big data for online performance monitoring of our vessels, a unique feature for efficient ship management in the industry.
During this extended period of market weakness which has presented many challenges, we remain focused on taking necessary actions to preserve the value of our company by managing our fleet efficiently and taking prudent measures to manage and ultimately deleverage our balance sheet.”
Disclosure: I do not have shares in any of the companies mentioned.