Investeringskommentar, Michael Field, Equty Analyst, 12/8/2016
Despite the severe headwinds facing the company in the form of lower oil prices, overcapacity in sea shipping, and anaemic global shipping growth, Maersk has delivered second-quarter results ahead of expectations, mostly driven by strong cost-cutting measures. We expect to make a slight upward revision to our full-year forecasts for 2016, which will have minimal impact on our fair value estimate. We are maintaining our no-moat rating for the firm, evidenced in the extreme 2% return on invested capital, or ROIC, achieved over the quarter for the group.
Maersk Line (the largest business in the group) delivered a second-quarter loss as freight rates remained under pressure, falling 24% year on year. Thus, while Maersk has decreased unit costs by 15% over the same period, the firm is currently playing catch-up. There is some good news, however, as Maersk revealed on the earnings call that freight rates have begun to improve.
Maersk Oil delivered a 12.1% ROIC over the period, above its cost of capital. This was mainly achieved through cost reductions of 25% year on year, bringing the break-even cost per barrel down to $42, now below the average Brent level of $46 observed over the quarter.
In APM Terminals, like-for-like container throughput was flat year on year, and below the market growth rate, while the ROIC on the operating businesses fell to 8.8%, below the targeted 10% level.
Finally, in Maersk Drilling, cost reductions of 8% year on year couldn’t offset the drop in activity in the business, leading to a 25% fall in reported earnings. We are more concerned by the idling of rigs: Maersk expects at least 10 rigs to be idle by the end of year. While Maersk’s response to the difficult market conditions has been commendable, we do not believe the macroeconomic conditions facing the company will abate quickly, and we see the path to above-10% ROICs as long and difficult. As such, we believe the shares are currently fairly valued based on our DKK 9,100 estimate
Bulls Say
- Maersk Line remains one of the most profitable ocean carriers; since 2011, the firm has boasted an EBIT margin that is on average 500 basis points higher than those of its peers.
- Large cost-cutting measures, including significant headcount reduction, should help create a leaner business model going forward.
- Significant divestments of noncore assets, such as Danske Bank and Supermarked, have led to a more focused entity.
Bears Say
- Excess capacity in global container shipping continues to put pressure on shipping rates. -
- Lower crude oil prices will likely remain a significant headwind for Maersk Oil, while also providing a problem for other divisions, including Maersk drilling.
- Maersk Line operates in a highly cyclical, maturing business marked by capital intensity and intense price competition.
