Maersk Rakes in the Booty, but Stormy Seas Await

By Megha Mandavia WSJ

Global sup­ply-chain dis­rup­tions are keep­ing the good times rolling for con­tainer ship­ping com­pa­nies. But if the global econ­omy con­tin­ues to worsen, cus­tomers may start push­ing harder to rene­go­ti­ate con­tracts—mean­ing still-rosy earn­ings ex­pec­ta­tions could need to be cut.

Dan­ish con­tainer-ship com­pany A.P. Moller-Maersk, which moves 17% of the world’s ship­ping con­tain­ers and is a bell­wether for global trade, re­ported its 15th straight quar­ter of earn­ings growth on Wednes­day. It raised its profit fore­cast for the sec­ond time this year and now ex­pects un­der­ly­ing earn­ings be­fore in­ter­est and tax will be around $31 bil­lion in 2022. Smaller peer Ha­pag-Lloyd AG, the world’s fifth-largest ship­ping line, also raised its profit fore­cast last week.

Maer­sk’s out­look for trade vol­umes, how­ever, is less rosy. It bumped down its guess for global con­tainer vol­ume growth in 2022 to the lower end of the pre­vi­ously fore­cast 1% to -1% range. Maersk ex­pects a grad­ual nor­mal­iza­tion in ocean trade in the fourth quar­ter as con­ges­tion eases and more ca­pac­ity comes on­line.

Spot rates have in fact al­ready started soft­en­ing even though they still sit far above prepan­demic lev­els. The World Con­tainer In­dex com­piled by Lon­don-based Drewry Ship­ping Con­sul­tants is down 27% since the be­gin­ning of the year. Con­tainer ship­pers, how­ever, have con­tracts locked in at rel­a­tively plump rates even if spot rates de­cline. Cus­tomers, anx­ious about seem­ingly never-end­ing sup­ply-chain snarls, are com­mit­ting with car­ri­ers for longer.

Long-term con­tracts are at rates be­low spot lev­els but sig­nif­i­cantly above con­tract lev­els in the past. Maersk said it now has 71% of vol­umes on con­tract—and that its av­er­age con­tract rate for 2022 is around $1,900 per 40ft box (FEU) higher than in 2021.

Ac­cord­ing to Jør­gen Lian, ship­ping an­a­lyst at DNB Mar­kets, Maersk and other ship­ping com­pa­nies have done a good job se­cur­ing rev­enue from this up­cy­cle and lim­it­ing sen­si­tiv­ity to spot rates. To con­tinue their win­ning streak, though, they will have to push back against de­mand for rene­go­ti­a­tions—which tend to ma­te­ri­al­ize when over­all de­mand soft­ens. Ship­ping de­mand faces a po­ten­tially tough blow with global growth slow­ing just as con­sumers are ship­ping de­mand back to­ward ser­vices as economies move past Covid-19.

Con­tainer-ship op­er­a­tors reaped very strong prof­its over the past two years, and the post-Covid-19 nor­mal­iza­tion has taken longer than ex­pected. As a re­sult they are trad­ing at very at­trac­tive earn­ings mul­ti­ples even af­ter a big share price run-up since 2019. For ex­am­ple, Maer­sk’s en­ter­prise value cur­rently sits around 2.4 times next 12 months’ ex­pected earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion, ac­cord­ing to Fact­Set—com­pared with around four for most of the early and mid-2010s.

Source: The Wall Street Journal