AMKAF - Maersk: Attractive Again After Pullback

2023-11-16 02:04:25 ET

Summary

• Maersk's revenues and profits have significantly decreased due to the normalization of the shipping industry following the COVID-19 pandemic.
• The company is proactively managing costs and reducing its workforce to mitigate the impact of lower freight rates.
• Despite the challenges, Maersk has a strong balance sheet and potential for growth, making it a buy.

Maersk ( OTCPK:AMKAF ) is the second biggest container shipping company in the world. Following a global increase in shipping prices following the begin of the COVID-19 pandemic, shipping prices and volumes have fallen sharply since their highs, greatly affecting Maersk and its peers. In this article we will try to put a valuation on Maersk following the normalisation of the shipping industry.

Shipping rates and volumes 2020-2022

Due to COVID-19 fundamentally disrupting the supply side of the logistics industry, demand for logistics services significantly increased starting in early 2020. With demand increasing and the market experiencing abnormal capacity shortages, freight rates increased across the board to all-time highs.

With heightened volumes and record freight rates, many shipping companies posted record revenues, record profits and record capital returns to shareholders. Obviously, these circumstances also had a positive effect on stock prices of affected companies.

With returns of up to 800% from the begin of the pandemic until peaking somewhere in mid 2022 many freight forwarders were sitting at all-time high stock prices.

With normalisation from the COVID-19 effects came decreasing volumes and freight rates starting in Q3 2022. Of course, compared to the peaks of 2022, stock prices of those companies also started to normalise together with revenues and profits.

Maersk's normalisation

While the loaded volume remained relatively flat in the Q3 2023 report , compared to Q3 2022, the loaded freight rate decreased by 58% Y/Y. With unit costs also staying relatively flat Y/Y, the change in global freight rates had the biggest effect on the company.

As a result of these changes, Maersk's revenues decreased ~46.7% and profits decreased over 90% Y/Y in Q3 2023, thus the normalisation in the shipping industry has greatly affected Maersk.

While the company has also paid high dividends in both 2022 and 2023, most of the stock action probably stems from the normalisation of the company's operations. From the 2022 peak to now, the shares have lost over 50% of their value.

Maersk's Response

Being aware of the industry dynamics Maersk has already warned of possible normalisation, in their Q1 2022 report for instance. The company generally seems prepared for the industry downturn. Maersk has already started talking about proactively managing costs in their earlier reports, for instance in the Q1 2023 report .

Even though volumes mostly continue to increase, increases in supply ensure that prices will probably stay lower for the foreseeable future. Finally, in their latest report, the company has announced an intensification of their cost reduction efforts compared to previously planned:

Maersk now aims to reduce the workforce below 100,000, from 110,000 in January 2023, resulting in savings of USD 600m in 2024 compared to 2023 and increased restructuring costs of USD 350m, up from USD 150m announced in early 2023, of which the majority of the increase is expected to impact 2023.

As part of this restructuring, the company has also announced a reduction in CAPEX for 2023 and 2024. However, Maersk is has still maintained their full-year guidance, albeit at the lower end of the EBITDA range of $9.5b - $11b.

Valuation

Continued volatility and macroeconomic uncertainty make it difficult to value the company. We will use the guidance given by the company and make some cautious estimates, while being aware of the broader context of uncertainty.

With an estimated profit of around $4.7b for full-year 2023 and strong cash-flow from operations of $9.5b for the nine months ended September 2023, the common stock is currently trading at a P/E of under 6.

With negative net-debt and over $7b cash on hand, the company is also posting a very strong balance sheet. The common stock is currently trading at a P/B of under 0.5.

Given continued conservative action and cost reduction from management, we will assume a P/E of 9 for our valuation, which would mean an increase of over 50% compared to the current common stock prices. Such an increase would put the company's multiples closer to some industry peers.

Risks

As mentioned several times before, there is heightened risk due to extreme volatility in the industry and great macroeconomic uncertainties surrounding global trade in and container shipping in general. An oversupply in the freight industry could lead to further reduction in freight rates and in extreme cases could lead to unprofitability for Maersk and other companies.

Conclusion and what to look out for

Based on a strong balance sheet, negative net debt and continued cost reduction measures, we believe the company is well positioned to weather upcoming storms in the industry. With the common stock currently trading at suppressed prices, we think Maersk deserves a buy-rating.

It is important to look out for developments in the freight forwarding industry and global macroeconomic trends. A continuation in freight rate decrease could lead to unprofitability for Maersk and other players.

We are especially looking out for the company's full-year 2023 report and also guidance given for 2024.

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