Danaos: an undervalued, even safer mid-term bet (NYSE: DAC)

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Danaos Corporation (DAC) announced on January 18 that the company had successfully rechartered 11 of its container ships on long-term agreements. Additionally, Danaos is selling two twenty-year-old ships for a price of $130 million. Both of these moves are great news for the company and only underscore its ever stronger strategic position and long-term outlook.

New charters inked

Danaos announced that it has rechartered 11 vessels, ranging in size from 2,500 to 10,000 TEUs, on charters with an average revenue-weighted life of 4.7 years each. They bring the company’s contract coverage to 95% for this year, 77% for 2023 and 57% for 2024. The value of these new charters is $870 million in revenue or $700 million in EBITDA .

These charters are unlikely to have a huge impact on 2022 earnings – Danaos already had 90% charter coverage for the year – but going forward we should see significant support for the company’s EBITDA. thanks to the reloading of these ships. Either way, it’s a great sign of Danaos management’s long-term thinking and shows that the company is well positioned to continue raking in cash for several years to come, whether charter rates turn around or not. down later this year.

Ship sale

Danaos announced that it was selling two twenty-year-old 6,422 TEU ships for a total price of $130 million; checking their latest quarterly report, we can safely assume that they are Leo C and Catherine C. Both vessels were acquired by Danaos in July when the company purchased its remaining stake in the joint venture Gemini for $72.3 million, net of Gemini’s cash balance, which gave the company the remaining 51% interest in 5 JV-owned vessels and their respective charters. The purchase price, net of cash, plus total debt of $45 million, gives us Gemini’s valuation for its vessels – fully discounting the attached $117 million of contractual EBITDA – was 189.6 millions of dollars.

The joint venture had 5 vessels in total, all built in 2002 with the exception of Belita which was built in 2006:

  • 1x 5,544 Genoa
  • 1x 5610 Suez Canals
  • 2x 6,422 Lion C and Catherine C
  • 1x 8533 Belita

With an overall capacity of 32,531 TEUs, we can achieve a cost per TEU for a valuation of $37.4 million per vessel. The sale price of $130 million represents a 73% appreciation since the acquisition. The two vessels sold are to be delivered in November, after the expiration of their respective contracts worth $18,000/day. Although there is a chance that Danaos could have significantly increased the charter rate and kept these vessels for a few more years (the HARPEX shows them grabbing a rate of $108,000/day, although the contracts term are always lower), it also makes a lot of sense for Danaos to unload these aging vessels at exorbitant prices before the year-end new builds are delivered and the new emissions standards come into effect. .

Evaluation

Danaos continues to be heavily undervalued by the market – the company is worth $1.645 billion, or $1.19 billion net of the company’s $455 million stake in ZIM Consolidated (ZIM). Although the company saw its shares climb 7.8% on news of the recharters, I believe it is still significantly undervalued. Annualizing the company’s last quarterly Adjusted EBITDA gives us $600 million for 2022. In Q3, Danaos had 90% contractual coverage for 2022, with new re-leases this coverage increased to 95%. Applying the same relative increase to the company’s EBITDA gives us $633 million for 2022. The company’s cash and marketable securities, which account for the increase in ZIM’s market cap, are $633 million. $614 million; their total debt remains the same as when I last covered Danaos (according to publicly available information).

EV/EBITDA ratio

Share the value

Upside down

6.5

$174

117.5%

seven

$190

237.5%

ten

$282

252.5%

It seems reasonable to value Danaos at the company’s 5-year average EV/EBITDA ratio of 7, which gives us $190 per share.

Conclusion

The recent rechartering of 11 vessels by Danaos is a reminder of the company’s willingness to think longer term and make strategic choices that may involve sacrificing some of the immediate gains that could have been captured by signing a shorter term charter so that the company can have what’s left extremely strong gains over a longer period. The sale of two old vessels also makes a lot of sense and I hope that Danaos will reinvest some of this money in buyouts or increase its dividend payment, such as Global Ship Lease (GSL) after re-leasing 5 vessels. With such earnings visibility for the next two years and an excellent balance sheet, preparing to load even more cash, Danaos still looks vastly undervalued.

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