By Alessandro Pasetti

Back to black was the headline for Hanjin Shipping’s second-quarter (Q2) results this month — but just how good were they, really?

On the face of it, the earnings profile of South Korea’s biggest ocean cargo carrier was much better than in 2014. Yet it’s a long path to recovery, and my biggest concern is the maturity profile of the debt pile that sits on Hanjin’s books.

The group has about KRW2tr ($1.6bn) of bonds outstanding, with KRW1.8tr maturing by the end of 2017, according to its 2014 results.Hanjin’s top line is unlikely to receive a fillip from the business cycle: revenues were down 7.5 per cent in Q2 vs Q1, and fell 6.3 per cent year-on-year. The outlook isn’t any brighter for the remainder of 2015. Hence, it must keep focus on its operating cost base in order to deliver the rising profitability and cash flows essential to guarantee debt repayments are made on time. Its financials aren’t particularly clear, but we can present a back-of-envelope calculation of how some of its key financial metrics could look like at the end of 2015, based on its first-half (H1) year results.

More profits looming?

If Hanjin continues to deliver EBIT in line with its H1 results, it will generate between $350 and $400 million of core operating earnings this year. Assuming roughly $100 million of non-cash items on top of that, with no working capital changes during the period, while excluding interest costs, its adjusted operating cash flow will likely hover around $500 million. Interest costs in H1 stood at $115 million, or about $230 million annualized. Assuming a tax rate in line with H1, Hanjin’s annual income could end up being between $100 million and $145 million if it repeats its H1 performance.

Its gross cash position, including short-term securities, is about $400 million, which yields a resulting net debt position of $1.2 billion, for an implied forward net leverage of about 2x. That level of leverage isn’t prohibitive, but then most of its debts are due over the next 30 months.

Tiny operational issues could have dramatic consequences on its financial performance, and that could be a stressful experience, as Hanjin will have to find a way to refinance part of its maturing debts between now and 2017, while convincing investors that it has actually turned the corner.

Although container, bulk, and terminal sales are likely to remain sluggish, its projected EBIT margin could grow above 5 per cent on the back of lower bunker prices and efficiency measures, so the group should be able to generate the amount of free cash flow that is necessary to meet the majority of its debt repayments, according to our estimates. That said, it will unlikely be able to expand its fleet and its mega-ship capacity to stand in the league of the majors, which could yield a loss of competitiveness.

Difficult times

Martin Song, an analyst at NH Investment & Securities, pointed out earlier this year that, while earnings at the container business were “expected to remain in the black,” those in the bulk carrier business were “likely to stay soft” for some time. Its bulk operations were still in the red indeed in Q2, although quarterly trends were mildly encouraging.

Shareholders have gone through tough times in the last couple of years. The previous Chief Executive, Kim Young Min, resigned at the end of 2013, taking “responsibility for two successive years of losses (…) and a delay in getting financial support from creditors”, Bloomberg noted in November 2013.

Back then, Q4 13 brought bankruptcies at such chaebol groups such as Tongyang and Woongjin, which meant that “in 2014, the most urgent and critical task at hand was improving our financial status,” Hanjin said in its annual results – adding that it reduced debt by more “than KRW1tr and secured KRW300bn through (the) liquidation of long-term contract based bulk & LNG business.” Now it doesn’t look too bad compared with last year, although any exogenous shocks could hinder its recovery.

Similarly, press coverage from World Maritime News, according to which the headquarters of Hanjin Group – which controls Hanjin and Korean Air – and its affiliates had “been raided (…) by the Seoul prosecutors amid corruption allegations” earlier this summer, could be a big blow for its reputation. That’s something the company could do without, given that it will need to receive the long-term backing of institutional equity and bond investors if it aims to stay in business.

Reprinted courtesy of The Loadstar (