Tuesday, August 16, 2016


Analysis: Maersk Line's parent is facing some difficult financial decisions

Maersk Mc-Kinney Moller
The third quarter of 2016 marks a watershed for AP Møeller-Maersk. As the corporate structure of the Danish conglomerate remains under scrutiny, any “progress of the review” will be disclosed by the end of September, according to chief executive Soren Skou.
The board is clearly forced to come up with a masterpiece in terms of corporate finance, proving it has learned from its past mistakes.
Having misjudged the cycle in the recent times under the stewardship of Nils Andersen, it must now decide whether the current corporate structure of the group remains viable, or whether it should become leaner, one reason being that Maersk could probably do without stringent capital requirements at a time when challenging conditions in most of its end markets are likely to persist.
“The underlying profit for the group of $134m ($1.1bn) was significantly lower than for the same period last year for all businesses except Damco,” it said in its interim results last week.
Inevitably, any strategic decision will ultimately affect its capital allocation strategy, both in regard to stock repurchases and dividends.
Cash flows
Market observes are eager to discover the new face of Maersk, while shareholders are urging management to deliver value after a two-year stint during which their pre-tax paper losses amount to one-fourth of their invested capital, including dividends.
True, the income statement suggests that loss-making Maersk Line could be spun off, at least partly, while control of the unit could be retained — but the cash flow statements suggest other divisions are in more critical conditions.
Latest quarterly results showed that as group earnings plummeted, cash flows also came under pressure but did not deteriorate in terms of quality given the effectiveness of working capital management, although any residual benefit from short-term liquidity management seems to have diminished, particularly on the liability side.
In other words, Maersk might have to find alternative funding options other than debt to sustain its rich forward yield as well as to finance future investments at a time when heavy investment itself still absorb one-sixth of sales, while the payout could have become unsustainable, based on reported figures, as one-off items could be more recurring.
Moreover, exposure to counterparty risk must also be taken into account, and that applies both to new and existing contracts – all these elements will ultimately determine which assets, if any, will have to go.
Hard times
In this context, consider that if Maersk had not owned Maersk Oil and APM Terminals in the first half of 2016, its pro-forma operating cash flow at group level would have been $703m lower, but its free cash flow (FcF) would have been positive to the tune of $1bn, against actual FcF of (MINUS) -$1.1bn in the first six months, which was mainly due to $2.2bn of capex allocated to those two units during the period.
FcF was in break-even territory in the second quarter, but at the end of June, Qatar Petroleum announced that Maersk Oil “was not selected to participate in the joint venture operating the Al Shaheen field from July 2017.” Given current market conditions, however, Maersk pointed out that discontinuing the agreement would have a limited impact on its financials as a “new contract would have been on less attractive terms compared to the existing terms.”
The outlook for the black gold is not reassuring, so Maersk could surely be tempted to get rid of its oil division, while it’s hard to envisage the sale of APM Terminals, whose ownership holds strategic merits.
Divvy and buybacks
Although net indebtedness should not raise eyebrows, and the maturity profile of outstanding debt obligations looks just fine, its core operating cash flow in the first half of the year plunged 68% to $1.2bn from $3.7bn one year earlier. As a reference, its annual operating cash flow stood at $7.9bn in 2015, when it came in already below historic trends.
Maersk is now left with only a few peripheral assets to divest following a few years during which non-core assets sales were executed, but its cash flow from investment clearly makes year-on-year comparisons a bit disturbing, given the lack of proceeds from asset sales in the first six months of 2016.
Proceeds from large assets sales were used to pay out excess cash to shareholders last year — which, with hindsight, proved management’s short-termism at the time, and came along rich dividends and the announcement of buybacks that have not prevented a plunge in its stock price. In short, almost $1bn went to waste on buybacks alone.
In the first half of the year, Maersk used $1.9m of debt mainly to return cash to shareholders via dividends ($953m) and buybacks ($475m), while its gross cash pile dropped to almost $3.1bn from $3.6bn at the end of Q1 and from $3.9bn at the end of 2015.
Now it looks as if share repurchases have almost come to an end, with only a few million to be spent to shrink the headcount further, according to my calculations, given the amount of cash invested in buybacks over the nine months ended 30 June. So, I doubt large stock buybacks will resume anytime soon.
It wouldn’t be wise, anyway. Before cash inflows from financing, Maersk burned $7m a day in the first six months of the year, or $1.27bn during the period — clearly, cash outflows could grow rapidly if the current headwinds do not subside.