Drewry finds Maersk stock 'unattractive'
A downbeat report from the London-based shipping consultant says freight rates are low and low oil prices are unlikely to drive profitability for the Danish conglomerate, but that stock in A.P. Moller Maersk is still a relatively low risk investment.The investment research arm of Drewry has issued a downbeat report on A.P. Moller Maersk that rates the Danish conglomerate’s stock as having an “unattractive valuation,” but which also rates it as a low risk investment.
While Maersk is a diversified company, with interests in the oil and gas industry, marine terminals, and other shipping and logistics business as well as container shipping, the report from Drewry Maritime Equity Research said the “basis of our bearish view on APMM is driven by Maersk Line losses ahead.”
The report was issued on Thursday, April 7, less than a week before the company will convene for its annual shareholder meeting on Tuesday, April 12 in Copenhagen.
“The underlying fundamentals for mainstay container shipping has continued to deteriorate through the quarter," Drewry said in the report. "Spot rates are quoting virtually at a nadir and our channel checks suggest that contract rates have been signed at significantly lower levels than last year, severally undermining any prospects for Maersk line to return to profitability anytime soon.”
Maersk Line reported loss of $182 million in the fourth quarter of 2015 compared with a reported profit of $1.3 billion for all of 2015. Drewry said the fourth-quarter loss “show(s) that earnings have not only plateaued due to depressed freight rates, but also because cost optimization (driven by low bunker prices) has outlived its utility."
"The path to profitability by cost cutting as a driver have seemingly run its course," it added. "With anemic top line growth, challenges to profitability will only exacerbate.”
Drewry joined a chorus of dire projections for the container shipping this year, saying industry “is staring at a terrible 2016 with a structural slowdown in global trade volumes and ever increasing capacity."
It noted that Drewry’s latest Container Forecaster publication says the total container shipping industry will lose $6 billion this year, up from $5 billion in a prior forecast, “largely because of the awful rate outlook. Drewry forecasts global freight rates to decline by 8.3% this year (after a 13% decline in 2015).”
“We expect a very challenging two-year period for Maersk Line as the industry navigates through a chronic overcapacity and structural slowdown in global container demand. Consensus is building in a minor rate recovery this year, however, we remain skeptical and expect the consensus estimates to downgrade significantly through the year for both FY16 and FY17.”
The steep drop in crude oil prices over the past year has been good news for container carriers, with Drewry estimating that operating costs fell by an estimated 13 percent per TEU in 2015. At Maersk, for example, the share of bunker cost in the total unit cost fell to just 11 percent in the fourth quarter of 2015 from around 20 percent in 2011-2014.
However, Drewry said, "This indicates that bunker does not form a major cost driver anymore, a primary cause for lower earnings in FY15. Even as fuel prices remain relatively benign, we believe the benefits have already bottomed out. Profitability fundamentals will worsen as we estimate that carrier costs will remain flat in 2016, and this will no longer provide the positive edge over declining revenues."
Maersk “B” shares have traded on the Copenhagen Stock Exchange at between 7,355 Danish Krone (U.S. $1,127.51) and 14,970 DKK during the past 52 weeks. The stock was trading at 8,190 DKK a share when the report was issued and Drewry said its fair value was actually around 8,000 DKK. Friday it was traded between 8,130 DKK and 8,425 DKK. APMM also has an ADR that trades in the over-the-counter market in the United States under the symbol AMKBY.
“What we are implying is it will underperform given all the reasons we mentioned and hence any rise will be an opportunity to sell,” said Rahul Kapoor a director and analyst at Drewry Maritime Equity Research.
A Maersk spokesman declined to comment on the report, noting, "We are in silent period before the Maersk Group Q1 earnings," but pointed to a Feb. 11 press release when it said "Maersk Line expects a significantly lower underlying result for 2016 compared to 2015."