Jefferies raises box line outlook

6/20/2017

Investment bank Jefferies has raised its target prices for shares in Maersk Line and Hapag-Lloyd on the back of improved conditions in the container shipping sector.

Jefferies expects container demand to grow 5% this year, while increased scrapping and limited vessel ordering is set to absorb excess capacity by 2020.

“As a result, spot container rates out of China have more than doubled, contracts on east-west trades have been renegotiated 70% to 140% higher and north-south trades have recently also started to show signs of recovery,” Jefferies said.

“Our estimates are based on a 10% higher average freight rate, resulting in a $2bn underlying net profit after tax recovery for Maersk Line to $1.6bn. However, we estimate container freight rates could be 36% higher this year, assuming stable spot rates.”

Closer collaboration in its transport and logistics division would “uniquely position Maersk as the global integrator of container logistics”, Jefferies said. As a result, Maersk’s return on invested capital is expected to recover from less than 1% last year to over 8%, driven by a recovery in freight rates and synergies of $600m by 2019, mainly from improving APM Terminals’ utilisation and cross-selling freight forwarding services.

Meanwhile, Hapag-Lloyd is also set to benefit from improving industry fundamentals, following its recent merger with United Arab Shipping Co.

“We are projecting 2017 earnings before interest and tax will triple on a 10% higher container freight rate,” Jefferies said. “Hapag-Lloyd’s acquisition-driven growth has led to a 7.5% points higher 2016 ebit margin than its peers. The merger with UASC offers cost synergies of $435m by 2019, further enhancing profitability.”

Industry consolidation has led to the top six carriers having a 67% market share, a rise of 16%. With a fleet of 230 vessels with a combined capacity of 1.6m teu, Hapag-Lloyd has 7.4% capacity market share.

“We estimate FY17E adjusted ebit will more than triple to €395m, based on a 10% higher container freight rate, with a limited positive contribution from UASC,” Jefferies said.