Haven't been participating for a while but given the recent price action would like to hear your comments on an appropriate discount rate for GSL in a maximum dividend model where the ships are sold as the charters expire.
As far as I can tell a discount rate of about 25% and assumptions of the first dividend being paid in 2014 of 40 million USD until 2026 leads to a share price of about 2 USD.
Does this discount rate make sense to you? It seems low in some ways considering the pricing on the CMA CGM bonds but I can't say I fully understand why they are considered as risky as they are. Of cause the residual values are of tremendous importance too.
Good to hear from you JB. Why are you use a discount rate of 25%?
I will invoke Charlie Munger here:
"Obviously, consideration of costs is key, including opportunity costs. Of course capital isn’t free. It’s easy to figure out your cost of borrowing, but theorists went bonkers on the cost of equity capital...."
It seems to me that starting with today's market based cost-of-equity capital is going to yield a result that's strikingly similar to today's price.
Also, please explain why you assume the ships will be sold at the end of their charters? That seems to me to be a low-to-no probability scenario. Don't you think it's more realistic to assume the vessels will be re-chartered?
This to account for the implicitly high risk of default apparent in the CMA CGM bonds. The current yield is about 32% so there is a high expectation of default even with a zero % recovery.
I assume the ships will be sold when the charters expire to limit the number of assumptions I have to make. Given that it is a maximum dividend model the alternative is to start making assumptions on recharter rates. This is difficult and the second implication is that the cash flows start stretching out all the way to the demolition date of the ships which increases the importance of the choice of discount rate. It also means you need to have an opinion about demolition values. It would also mean that you need to have an opinion about operating costs way out into the future.
25% leads to about current market price. The question is if this is the right rate then GSL is properly priced correctly. If it is too high then it is attractive and if it is too low then then it is expensive hence the question.