Description

Atlas Corp (ATCO) is a global asset manager that owns and operates two subsidiaries (Seaspan and APR Energy). The company is led by a brilliant capital allocator (David Sokol) and backed by a very smart, long-term oriented shareholder base – The Washington Family (Dennis Washington) and Fairfax Holding (Prem Watsa). Both subsidiaries generate cash flows for Sokol to allocate in the most attractive projects.

Seaspan (~85% of EBITDA) with 127 ships and 1M+ twenty-foot equivalent units (“TEU”), is the world’s largest containership owner/operator (short intro video).  The company makes money primarily by leasing its vessels to major container shipping companies; 7 of the 8 top global liners.  These leases are typically long-term and with fixed-rate time charters for the contracted period – offering a highly visible stream of cash flows. Seaspan currently has over $4B of contracted future revenue which should generate ~$500M in operating profit per year over the next 2-3 years. This is a cyclical industry that is difficult to accurately forecast renewal prices in the distant future, but we should do well through cycles. Please refer to swag95’s writeup for an overview of Seaspan and the industry.

APR Energy (~15% of EBITDA) owns and operates a fleet of small-scale power plants that provide power solutions. APR, within weeks, delivers large blocks of power that can run entire cities or industrial operations, anywhere around the globe. Here is a short video (link) of APR’s power grid and its latest project in Mexico (link).

While they ultimately provide power, I view APR more as a Project Engineering company. Their mobile turbines are not really that differentiated. The competitive advantage at APR is its ability to quickly and efficiently deliver power to its customers. It’s their ability to move the turbines cost-effectively to the needed location, navigate customs issues, and deliver a project on time that gets APR invited and be the winner of bids. Managing mobilization cost vs budget (engineering team vs finance team) on a project is the key to earning attractive economics on a project.

APR has 13 power plants in 11 countries and has a meaningful tailwind from the growing emerging market demand for power. The demand is not just for energy consumption by the local population – it is more about the demand from the large industrial parks, mining operations, etc. all-over developing countries. Given China's influence and productivity in some of these developing nations, I think there are enormous opportunities and demand for energy. 

Here is why I like Atlas Corp:

·         Exceptional Management: David Sokol, chairman of Atlas, is an exceptional manager. Sokol’s ability and opportunity to allocate the cash flows from the two subsidiaries and ATCO’s access to capital is at the core of the long-term thesis. This is hard to quantify or model, but Sokol has created value on several projects – see appendix for some of his notable accomplishments.

·         Strong Shareholder Base: The two largest shareholders, The Washington Family (Dennis Washington) and Fairfax Financial Holdings (Prem Watsa) collectively control ~70% of the common shares. Both are very successful, long-term oriented shareholders that can support the management team in different ways.  In addition to providing capital, this shareholder base has also proven to add value by sourcing attractive acquisition opportunities. A good example of this is how Prem Watsa sold APR Energy to Atlas earlier this year.

·         Ample Re-Investment Opportunities: Given Sokol’s capital allocation track record and the shareholder base backing him; here are some of the current investment opportunities that are competing to earn allocation:

o   Container Shipping – Seaspan is currently the largest lessor/operator with a ~8% market share today.  This is a highly fragmented industry with the second largest player maintaining less than ~5% market share. In the past ~3 years, the new management team has already allocated +$2.8B in the container ship business – they acquired 36 ships generating ~$350M of EBITDA. Atlas has lots of room to deploy more capital to and consolidate the shipping industry.

o   Mobile Power – Atlas diversified its cashflows by acquiring APR Energy, a mobile power solutions provider, for $750M in 2020. It is too early to judge this acquisition but so far it seems like a good purchase – they have already made meaningful operational and leadership improvements over the past few months. I expect APR energy to generate about ~$150M of EBITDA next year. Furthermore, APR should offer decent cash flow and good reinvestment opportunities with attractive unit economics (mid/high-teens returns on capital – in line with its peer Aggreko).

o   New Subsidiary – ATCO is currently being run with a fairly simple rule; to allocate capital on opportunities that yield attractive risk-adjusted returns.  They are open to acquiring business outside the containership and mobile power space. That being said, it’s a wide universe of opportunities that the team can source and deploy capital into.

o   Debt Paydown – Management has already paid down ~$800M of debt; with more paydown to come. Their target is to become an investment grade. Today, the balance sheet offers better flexibility and has a lower cost of capital of ~4%. Redeeming the preferred shares (~8.5% cost) is also another option. See appendix for ATCO’s capital structure.

·         Valuation: ATCO today ($11 per share) is trading for ~$2.7B market cap ($7.7B enterprise value).  ~$750M of which is the purchase price of APR Energy. This implies that we are paying ~$7B for the Seaspan operation or ~9x EBITDA.  A very reasonable price given the +$4B of contracted future revenue and a run rate of over +$570M of funds from operation ($2.37 per share of TTM FFO) in the hand of one of the best capital allocators.

Overall, I think we are paying an attractive price for the current businesses and look forward to watching David Sokol and the team create value over the next several years. In the meantime, we will be collecting a ~5% dividend. 

In the midst of a global pandemic where the probability of outcomes can be extreme, I like the idea of owning a global asset manager who can have the ability to be an opportunistic buyer.

Key Risks:

·         Key-person risk: Core to the thesis is David Sokol’s ability to allocate the cash flow from the shipping operation. Without Sokol, ATCO would still be a reasonable asset but would likely not offer the attractive upside optionality that I am expecting.

Seaspan Background: Please refer to swag95’s writeup for more on Seaspan and industry overview.

Dennis Washington began the operation of Seaspan with its first ship (Hamburg) in 2001, and later completed its $600M IPO with 10 vessels in 2004. Since then, Seaspan has increased its TEU capacity by another ~20x to become the largest (~8% market share) containership lessor in a very fragmented industry. Today, Seaspan owns 127 larger / younger fleet of ships that are in long-term charters with 7 out of the 8 leading global liners.  30 (~25%) of Seaspan’s fleet are unencumbered.

APR Energy Background: APR is a new addition to the Atlas portfolio. This is an interesting business that was taken private by Fairfax Financial and Albright Capital in 2016 and recently acquired by Atlas in February 2020. The purchase price seems reasonable – Atlas paid $750M (~5x EBITDA) – for a business that can deliver a mid-teen type of return on capital.  APR had a decent success over the past decade – it grew from generating ~$64M of EBITDA in 2010 to its current run-rate EBITDA of ~$150M. I am excited to see what David Sokol and the new team can do with this business. Recent trends (leadership change, utilization of assets, etc.) are very promising.

David Sokol’s Background:  David’s money-making track record:

o   Ogden Project:  ~1983, commissioned by Ralph Ablon (chairman of Ogden Corp), David started the Ogden Project with a single venture project in Tulsa Oklahoma. David grew this project to a billion-dollar business and took it public in 1989. He was a 32-year-old CEO of a publicly-traded company.

o   MidAmerican Energy:  In 1990, commissioned by and in partnership with Walter Scott, Jr., David took over a small, one geothermal plant operation that generated $100M revenue and $27M in profits. Over the following decade, David grew MidAmerican’s revenue 25x ($2.5B revenue and ~$150M profits) and sold it to Berkshire Hathaway in 2000.

o   Berkshire’s MidAmerican Energy: Since 2000, commissioned by Buffett, over the following decade under Berkshire’s ownership, David grew MidAmerican’s profit by ~8x. When he left Berkshire in 2011, revenue was at $12B with a profit of $1.2B.  

In addition to leading the MidAmerican business, David was a very visible lieutenant of Buffett and was often referred to as “Mr. Fix-It” by Buffett. David was instrumental in turning around Berkshire’s Johns Manville and NetJet businesses as well as the acquisition of new businesses (e.g., BYD, Constellation, Lubrizol). He was often praised by Buffett and was regarded by most as the likely candidate to run Berkshire Hathaway in the future.

o   Seaspan/Atlas Corp: Commissioned by Dennis Washington, since becoming the chairman in 2018, David has already accomplished a lot at Atlas. He took over a cash burning, highly leveraged, cyclical business, in the middle of weak global trade and an oversupply of containership. He quickly transformed the balance sheet, upgraded the management team, improved the operation, and diversified the cash flow stream as a holding company. I am excited to see what he will accomplish over the next decade.

Capital Structure (as of 1/10/2021): No significant debt maturities until 2024

Catalyst

• Continued execution and capital allocation by the current management team. 
• Acquisition of a new subsidiary in a new market or vertical.
• Continued improvement of ATCO's balance sheet.