Gram Car Carriers

[WhatTheWACC]

Opening a thread on a company called Gram Car Carriers (GCC). This is a Norwegian owner of RoRo (roll-on/roll-off) car carrier vessels that listed on the Norwegian stock exchange last year and moved to the main list at the turn of the year.

GCC has so far flown quite under the radar, which is likely explained by its short listing history and the general aversion to the freight business. However, car shipping is currently in a very strong upcycle, providing a very affordable entry point into the market through GCC.

What makes this investment case particularly attractive is the simplicity of GCC’s business and its very strong contract backlog, which guarantees exceptional visibility for cash flows in the coming years. For the years 2023-2026, the company is forecasted to distribute dividend yields of 14%, 22%, 21%, and 18% (totaling 75% of the current market cap), based on contracts already locked in. In addition, GCC’s NAV based on the market value of its fleet is approximately USD 660m, which is well above the company’s current market cap of USD 480m, leading to a modest P/NAV multiple of 0.73.

Business

GCC owns 19 Distribution, Mid-size, and Panamax class car carrier vessels, which it leases out. Its customers are largely large & listed car carrier operators, such as Glovis, Wallenius Wilhelmsen, and Höegh Autoliners, which reduces counterparty risk. GCC is responsible for the operational maintenance and management of the ships, but the risk for the demand of the end product (i.e., cars) lies with the lessee, which significantly reduces GCC’s business risk profile.

GCC leases its ships on relatively long contracts (average 4.5 years), which improves visibility of future cash flows and reduces the risk of spot price volatility. The value of the contract is determined by the daily TC-rate (Time Charter), which has risen sharply in recent years as supply and demand are in a state of extreme imbalance.

Currently, the average TC-rate charged by GCC is USD 25,620, but this will rise significantly in the coming years as new contracts come into effect. For example, the largest Panamax-class vessel, Viking Bravery, will transition to a new contract period this year, increasing its TC-rate from USD 18,000 to USD 64,900. It is expected that the remaining free vessels will be leased out driven by the extremely hot market, further increasing the average TC-rate.

Furthermore, GCC’s capacity is very well utilized, with only 3%/20%/24% open days for 2023-2025. In addition to the utilization rate, business profitability is affected by vessel maintenance costs, measured by the average “cash break-even” figure. This includes vessel operating expenses, insurance, overheads, and debt servicing costs, and in Q1 the figure was USD 16,920. Simply put, if the average TC-rate exceeds the Cash break-even, GCC runs a profitable business.

Valuation

GCC owns 19 ships with an average age of 11 years. The typical lifespan is about 25 years, so the current fleet still has plenty of service years left. As noted above, the current market value of the ships significantly exceeds the company’s market cap, which is why the 0.73 P/NAV is priced at a significant discount. Currently, there is much more demand for RoRo vessels than supply, which is why GCC could be quite an attractive acquisition target for a freight operator at these prices based on its fleet alone.

The value of GCC’s contract backlog in terms of revenue is USD 874m, which corresponds to approximately USD 550m in present value EBITDA. Valuation based on the contract backlog can be outlined by adding the fleet’s “scrap value” (i.e., the value of steel etc. if the ships were demolished) to the present value of the backlog’s EBITDA, which at current metal prices is about USD 133m. This corresponds to an extremely negative scenario where the current contract periods are completed and then the ships are scrapped about 10 years before the end of their lifecycle, with no new contracts signed. This EBITDA + scrap value (550m + 133m = 683m) almost equals the company’s current enterprise value (EV 694), which gives some context to the low current valuation. Furthermore, if the next three expiring ships can be leased at the prevailing high price levels, they alone will add an estimated USD 100m to the EBITDA.

In addition to the fleet value and contract backlog, the stock is very cheaply priced based on earnings multiples, with next year’s P/E and EV/EBIT figures at 3.5 & 4.1. This limits the downside risks significantly, while there is plenty of room for valuation expansion on the upside.

Since the investment case rests largely on high dividends, the increase in the payout ratio to 75% (from the previous 50%) announced by the company in connection with the Q1 results was very positive news. The increase had been anticipated to happen during this year, albeit at a later stage. At the same time, management indicated that 75% is a sustainable level in the long term, which increases confidence in the positive future outlook. The company’s insiders have also bought shares extensively during the spring, and yesterday GCC announced the start of a share buyback program, both of which reinforce the belief that the current share price is cheap.

This is certainly not a stock one wants to hold through the entire cycle, but at this price level, the ticker seems like quite a no-brainer. Even in the worst-case scenario, the company is capable of paying out dividends nearly equivalent to its entire current market cap, guaranteed by the very strong contract backlog. In addition, the company’s long-term outlook when current contracts expire is quite positive as car sales and shipping grow, driven especially by China.

I recommend others to dig into the company as well, and I would love to hear what others think about this case.

[onetwothree123]

What are the risks?
Who are the competitors and how large are they?
What are the growth prospects?

[KohtiVapautta]

First of all, a great summary of Gram Car Carriers, @WhatTheWACC!

Then, some answers to the questions presented:

• Risks can likely be found in the company material, but we’re talking about shipping, which is traditionally a very cyclical industry. However, ship chartering seems to be on the more stable end of the business. But it’s about leasing equipment to transport service providers. This means the financial situation of the customers is a significant prerequisite for the validity of the contracts. Then it might be good to also consider potential geopolitical risks—i.e., in which regions operations occur and what the possible consequences of conflicts would be. Though, these vessels are also particularly well-suited for transporting military equipment, so even that isn’t quite clear-cut.
• In a way, those customers who acquire their own tonnage are competitors. It’s a matter of balance sheet and risk management for those transport service companies; by using an external tonnage provider, the burdens on their own balance sheet and risks are reduced. And the ship lessor thus shares this risk by taking part of the fleet onto themselves. Car factories are also competitors to a certain extent; the more factories built in different markets, the less need to transport cars. For example, the US Inflation Reduction Act is expected to reduce the need for transporting cars to that market from elsewhere. However, the Gram fleet consists more of distribution and mid-size vessels, which serve distribution from factories to markets at a regional level (but Gram cannot benefit from this within the United States due to the Jones Act, whereas the situation is different from Mexico).
• Gram’s own materials show the image below, which suggests there is growth potential. However, much depends on how car manufacturers design their own logistics networks, as I already pointed out. So, demand is very much tied to how car manufacturers rethink their own distribution networks. Thus, growth potential is linked to the growth in car production, but the connection is not direct.
  
  

Generally speaking, I think this market is currently a bit “hot,” which is reflected right now in the available vessel charter rates and the ongoing growth in newbuild orders. As I understand it, shipyards are receiving inquiries for new vessels, and thus order books are still growing strongly. In these situations, it’s easy to end up with overcapacity, which in the slightly longer term leads to a drop in charter rates. Personally, I follow the industry and currently have a small weighting in the sector, as I suspect the market is at its peak.

Regarding the valuation: the NAV likely follows those vessel charter rates quite closely. When there is a shortage of vessels in the market, their prices also rise. And when the markets crash, vessel prices follow suit. Of course, the scrap value of the vessel always acts as a floor, which naturally follows steel market prices. In these tonnage providers, I personally follow more the company’s ability to generate cash flow and how the financing is structured and at what price. Essentially, how much charter rates have room to drop while the company still produces positive cash flow. And of course, what portion of the fleet is chartered out and for what duration.

And you should at least keep an eye on WAWI(OSL) and HAUTO(OSL) for now. These companies are likely the largest transport service providers in this sector and both are significant customers for Gram. This industry is very fascinating overall because the companies are so interconnected. For example, Gram’s major customer UECC is a JV of Wallenius Lines (not that Wallenius Line, which is a significant owner of WAWI) and NYK (NKK). In a way, the whole industry is a kind of ecosystem that organizes the transport of cars (and other Ro-Ro cargo) globally and contains many links between companies.