By Mike Wackett
After a very disappointing first quarter for the liner industry, attributed mainly to higher bunker prices, container lines are busy counting the dollars in what is expected to be a highly profitable second quarter. On June 14, investment banker Jefferies issued notes to investors with “buy” ratings for both Maersk and Hapag-Lloyd, based on “improving industry fundamentals”.
It said: “Industry consolidation has led to a 16 per cent higher share of the top six carriers at 67 per cent, with only three east-west shipping alliances. This has led to better capacity management, with increased scrapping levels and limited new vessel ordering.” It also said better-than-expected demand growth of 5 per cent should rebalance supply and demand by absorbing excess capacity faster than anticipated. “As a result,” said Jefferies, “spot rates out of China have more than doubled, while contract rates on east–west trades have been renegotiated at 70-140 per cent higher rates. Furthermore, container rates on north–south trades have recently also started to show signs of recovery.”
Jeffries is particularly bullish about improved profitability for Maersk Line, which posted a $66 million net loss in the first quarter, and projected that the Danish carrier would recover to a full-year NOPAT (net operating profit after tax) of $1.6 billion – 32 per cent ahead of consensus. Indeed, Maersk’s own outlook at its first-quarter results on 11 May for its container line was for an improvement of $1 billion on the result for 2016, when a loss of $384 million was recorded. Jeffries also gave a thumbs up to the group’s strategy of closer collaboration between APM Terminals, Damco and Maersk Line in the newly-formed Transport & Logistics (T&L) division, which it said would “uniquely position Maersk as the global integrator of container logistics”. Synergies of $600m a year are expected to be achieved from T&L by improved utilisation at AMPT and cross-selling of freight forwarding between Damco and Maersk Line.
Meanwhile, Jefferies is also positive about the full-year performance of Hapag-Lloyd, which posted a $47 million first-quarter net loss, and expected the German carrier to “more than triple” its adjusted EBIT, including a “limited” positive contribution from its merger with UASC. Cost synergies from the merger are predicted to be some $435 million a year from 2019. However, Jefferies cautioned its clients of two potential downsides for Hapag-Lloyd shares: acquisition integration risk and increased political risk following the UASC merger.
CMA CGM substantially outperformed its peers in the first quarter, with a net income of $86 million, but there seems little doubt that most ocean carrier chiefs will be smiling when they announce their first-half results in August – if off-record comments of liner sources to The Loadstar recently are anything to go by.
One executive said it was “looking like our best quarter for a long time”, explaining that his line had not only benefited from the hike in headhaul spot and contract rates from Asia to North Europe, but had also “made a fortune” from the backhaul capacity crunch, which had seen rates treble on the route.
Reprinted courtesy of The Loadstar (www.theloadstar.co.uk).