Danaos Corporation (NYSE:DAC) just announced their Q1 earnings will be released on Tuesday, March 28th. This strikes me as unusual because they’ve been very consistent in reporting between 5-6 weeks after the end of the quarter going back for the past 5 years (you can see these dates here on SeekingAlpha.) The latest release I could find was May 18th, 2020, during the confusion from COVID.

More likely than not, the delay is just noise. But with a strengthening containership market, a take-private deal makes a lot of sense for DAC, late earnings report or not.

In Good Company

Worth noting, there have been a lot of buyouts and take-private deals in this sector, and for good reason in my opinion: the market continues to undervalue these firms with many of these names trading far under book value, despite the fact that fleet replacement costs are far higher now than they were even 5 years ago.

• On Monday, May 20th, Overseas Shipping Group (OSG) agreed to be acquired and popped 23%. The offer was made at a 61% premium to their 30 day VWAP.
• Star Bulk carriers (SBLK) bought out Eagle Bulk Shipping for a small premium in an all-stock deal. DAC owns around 4% of the combined company currently.
• Triton International was bought out by Brookfield Infrastructure partners (BIP) at a 35% premium.
• Infrastructure fund Stonepeak agreed to buy shipping container lessor Textainer Group for $2.1 billion, at a 46% premium.

Even after a nice 15% run since my last article, Danaos remains a compelling value. I’d argue it’s cheaper today at $85 than it was at $75 when I wrote it up 3.5 months, since it’s earned most of that $10 in that timespan, and because the containership market has significantly strengthened since then.

DAC versus GSL

One of the closest comps to DAC is Global Ship Lease (GSL). Global ship lease has significantly outperformed DAC this year, especially in the last week on the heels of a very good, but largely predictably good, Q1.

I think DAC’s price has a lot of catching up to do. Both firms have similar Enterprise values, but DAC has lower debt and 50% higher contracted revenues.

There are good reasons some investors favor GSL, namely the higher dividend as well as empty order book compared to DAC’s 12 ships on order. But I think DAC’s valuation is too compelling between the Price/Book ratio, forward contracted revenues, and tiny amount of net debt.

It seems GSL is starting to reflect the better market conditions, perhaps DAC will as well after they release Q1 earnings.

Could A Take-Private deal be in the works?

It would not surprise me to see a take private deal in the works for DAC, as the market has failed to reflect the proper valuation for the company in my opinion. The series of wins I described in my last article have only gotten better since. Their investment in Eagle Bulk Shipping, which recently was acquired by Star Bulk (SBLK), is up over 60%, and the bulkers they acquired directly looks extremely well timed. While DAC’s shares have moved up, the valuation has actually de-rated because of how much cash they’ve brought in.

When they report Q1, DAC will have a Tangible Book Value of ~$164 (my estimate) versus a share price of $85 – about half. You would expect this level of discount from a company that was slated to be burning cash or had a big risk of an asset impairment. Neither of these are the case for DAC: they will be generating significant cash for the foreseeable future, and their ships are worth more than they are being carried at.

Even after paying $365.6 million towards the new builds slated for delivery this year, DAC should generate ~$200 million in free cash flow in FY24 and likely between $400-450 million next year. This is nearly half the market capitalization of $1.65 billion.

The Potential Math on a take private transaction

Insiders, mostly CEO John Coustas, own about half the outstanding shares.

A take-private offer at $125 would value DAC at $2.4 billion. DAC would need to provide $1.2 billion to retire the shares Dr. Coustas doesn’t own. Of the $1.2 billion, free cash flow from 2024 and 2025 will cover more than half of this ($650 million by my estimates.) They could sell the Star Bulk shares for another $100 million, leaving $450 million. The rest would be mostly covered by 2026 free cash flow. Selling a few ships is also an option if they want to be risk averse and pay this down faster.

Take Private – Why Now?

I believe the Red Sea Crisis and ongoing shipping tightness, which may allow DAC to charter in 2026 and later, might be enough to motivate DAC into a take private transaction. Every container shipping index has strengthened in the last few months. The Shanghai Containerized Freight Index just eclipsed the 2024 highs and is far above levels from last year.

The Harpex is heading back to levels not seen since late 2022. This publication speculates sees a capacity crisis forming. There a lots of positive signs that oversupply of ships will not be as great as feared.

The Red Sea crisis may not abate for a long time, which is having two positive impacts for DAC. It is both giving them opportunity to fix more ships for 2025-2026, and it’s providing their counterparties like ZIM Integrated Shipping (ZIM) with an influx of cash. One of the bear arguments a few years back was that DAC’s counterparties may become insolvent, in which case their contracted rates could be renegotiated down. The likelihood of that happening has been all but eliminated in my view.

This all may be just enough to give DAC management confidence in locking up their ships in 2026-2027 when the market is forecast to be oversupplied.

Conclusion

I do not know if DAC management has any desire to take the company private or not, but if they did, I think this would be an opportune window with the market strengthening while DAC’s share price has remained reasonably priced. Despite undervaluing the firm in my opinion, I think most investors would welcome a take-private or buyout in the $120-130 range.

In any case, I think DAC will be a big winner over the next 2 years. They should earn around $50 between 2024 and 2025, putting their Tangible Book Value around $210/share by year end 2025 with a net cash position around $500 million (before any accelerated repurchases or larger dividends.) I am very interested to see what additional fixtures have been locked in when they report in a few weeks that could strengthen the outlook further.

They have been repurchasing shares and have reduced the diluted share count from 20.7 million in March 2022 to 19.5 million in March 2024. This 6% reduction in total share count has reduced the float by 12%.

It would not surprise me to see the pace of repurchases slow a bit in Q2 and Q3 as they use the cash flow to pay for the 6 newbuilds, but afterwards there are minimal commitments for all the cash, and they could significantly increase the repurchases, dividends, or both.

I think DAC is a winner here and I expect it to close 2024 above $100, with $130-140 possible by year end 2025.