Outlook improves for merged container lines

1/13/2018

Earnings before interest and tax (Ebit) at top European container lines are being forecast to double this year, driven by recent merger and acquisition activity.

Ebit will then double again next year as market conditions improve, with Maersk and Hapag-Lloyd set to be among the leading beneficiaries overall, according to Jefferies analyst David Kerstens.

“European container shipping sector Ebit is set to double this year, driven by the consolidation and cost savings from the integration of recent mergers and acquisitions of UASC and Hamburg Süd,” Kerstens said. Ebit will “double again next year in view of a rapidly improving market balance beyond the first half of 2018, resulting in a more benign freight rate environment,” he added.

Although expected capacity growth in the first half of 8% looked high, the current idle rate was low, at only 2% compared with 7% at the same time last year.

“Capacity growth is expected to slow to 2% in the second half of 2018,” Mr Kerstens said. “Gross capacity growth of 3% for 2019 and 2% for 2020 is expected to be absorbed by accelerated scrapping of about 2% per annum ahead of International Maritime Organization sulphur regulation and continued healthy mid-single digit growth in demand of 4%-5%, underpinned by growing e-commerce.”

As a result, the container shipping market would likely become undersupplied by 2020.

Maersk would benefit from the closer collaboration of its transport and logistics division alongside the integration of its recently completed Hamburg Süd acquisition.

“Maersk’s balance sheet is expected to improve following the sale of the energy division for $14.5bn, which we expect will likely lead to a cash return of more than $4bn in 2018,” said Kerstens.

Hapag-Lloyd, meanwhile, is well positioned to benefit from a more benign freight rate environment beyond the first half of 2018 as the world’s fifth-largest container liner with a 7% capacity market share.

“The integration of UASC has largely been completed and targeted synergies of $435m per annum are expected to lead to a doubling of 2018 ebit, while a rapidly improving container shipping market balance is expected to again lead to a doubling of 2019 Ebit,” Kerstens said.

Container shipping stocks are “strongly correlated” with spot freight rates, which Jefferies expects will increasingly reflect the rapidly improving market balance beyond 2018.

“With no plans to order new vessels, we are projecting equity free cash flow yield will double to 12.5% for Maersk and surge to 19% for Hapag-Lloyd by FY19E,” Kerstens said. “Risk factors include increasing overcapacity in the first half of 2018, rising fuel costs exacerbated by stricter environmental legislation, acquisition integration risk and increased political risk.”