CASE STUDY: Global Ship Lease (GSL)

(Zen Buddha Silence by Marilyn Barbone)

(Image: Zen Buddha Silence, by Marilyn Barbone)

October 10, 2021

Here is the performance of the Boole Microcap Fund this year and since inception (06/09/20).

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2021 net return (thru 10/08/21) 42.2% 22.3% 18.7%
2020 net return from inception (06/09/20) 21.1% 31.7% 16.3%
Compounded annual return (net) 31.2% 26.9% 17.5%
Overall gain (net) 72.2% 61.1% 38.0%

Our investment in Global Ship Lease (GSL) has been one of our best ideas thus far.

Shipping is a terrible business.  It is asset-intensive, with low returns on capital.  There are short-lived booms and sustained busts.  Also, the booms are impossible to predict with any precision.  However, if you can be roughly right about when the next boom will start, you can do well investing in shipping.

I first wrote up the idea of GSL in June 2020 here: http://boolefund.com/global-ship-lease-gsl/

At the time, the stock at $4.62 a share was extremely cheap based on our five measures of cheapness:

    • EV/EBITDA = 5.28
    • P/E = 1.93
    • P/B = 0.20
    • P/CF = 0.81
    • P/S = 0.29

These figures made Global Ship Lease one of the top ten cheapest companies out of over two thousand that we ranked.

We bought GSL stock in June 2020 at $4.57.  Today the stock is at $21.48.  The position is up 370% so far, which makes it our best-performing idea.

But there still appears to be substantial upside for GSL.

Shipping rates now are at record highs.  They could stay this way for 6 to 12 months and maybe longer.  That’s because demand is strong, while supply is quite constrained.

Demand

Demand is strong and likely to remain strong because global GDP is strong.

Moreover, 70% of global containerized trade volume is in non-mainline routes—and these routes are growing faster than mainline routes.  As well, these routes are served by mid-sized and smaller containerships.  This is where GSL focuses.

Supply

The supply of container ships is constrained.  There are not many new ships coming into the market in the next couple of years.  It takes two to three years for shipyards to make a new ship, and there are only 120 shipyards (compared to 300 in 2008).

Furthermore, the supply of mid-sized and smaller containerships is even more constrained that the supply of larger ships.  There are very few orders of mid-sized and smaller containerships coming into the market in the next couple of years.

What is the intrinsic value of GSL today?

EBITDA based on 10-year average rates is about $350 million.  Normalized net income is ~$150 million.  Normalized cash flow is ~$160 million.  Based on normalized figures:

    • EV/EBITDA = 4.23
    • P/E = 5.33
    • P/B = 0.46
    • P/CF = 5.00
    • P/S = 1.33

NOTE:  I use P/NAV instead of P/B.  A conservative estimate of NAV is approximately $47 per share.  A more realistic estimate of NAV is around $62 per share.  See this analysis by J. Mintzmyer on Seeking Alpha: https://tinyurl.com/39jx5fey

George Youroukos, Executive Chairman of the Board, recently acquired approximately $10 million of GSL’s stock.  Youroukos clearly believes GSL’s stock is cheap.   This brings Youroukos’ total position to 6.4% of GSL’s outstanding shares, worth over $50 million.

Here is GSL’s Q2 2021 earnings presentation: https://www.globalshiplease.com/static-files/a226750c-bb27-45e2-8017-a0183e07ad26

Intrinsic value scenarios:

    • Low case: Global Ship Lease may be worth 50% of NAV.  (A conservative estimate of NAV is about $47 per share.)  That works out to $23.50 a share, which is over 9% higher than today’s $21.48.
    • Mid case: Global Ship Lease is likely worth at least NAV of $47 per share.  That’s about 120% higher than today’s $21.48.
    • High case: NAV may be closer to $62, which is over 180% higher than today’s $21.48.

So far in 2021, GSL has increased its fleet by 53%.  It paid prices in the range of 3.6 to 4.0 times EBITDA.  These deals are immediately accretive because most of then already have charters attached.  GSL will have most of its fleet contracted by the end of the year.

The Piotroski F_Score for Global Ship Lease is 6, which is OK.

Bottom Line

GSL is one of our best-performing stocks, up over 370% since we bought it in June of 2020.  The Boole Microcap Fund continues to hold most of the position because GSL is still undervalued compared to NAV.   If GSL hits NAV of $47, it will be up over 925% since we bought it.  That said, NAV may be closer to $62, which is over 1,255% higher than where we bought it.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

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