Shipping is a complex sector to invest in or understand. Writing this article has required an extensive amount of research and understanding – but I now feel that I can present a good thesis for what is essentially one of the largest container shipping lines in the world.
Understanding A.P. Møller – Mærsk A/S (OTCPK:AMKBY) isn’t easy – but I’ve done my best to really boil it down to the basics in this article, and keep it as brief as possible.
Let’s get into it and see what makes Maersk tick.
Looking Into A.P Møller – Mærsk
The company, which is known more simply as Maersk, is a Danish Shipping company. The company has revenues over $62B, with net incomes on this revenue of around $18B for the fiscal of 2021.
Maersk has over 83,000 employees active in over 900+ subsidiaries around the globe. The company’s history goes back nearly 120 years, and it’s one of the largest components of the Copenhagen stock market index. Maersk has representation and offices in over 130 nations across the world.
The company has a high, BBB+ credit rating with a stable outlook. It pays a dividend this year of 2500DKK for this year, coming to a yield of well over 8% based on the current share price. This dividend is an outlier, and the typical yield for Maersk is closer to 2-3%. This dividend is the result of a massively attractive set of 2021 results, with a strong 2022 expected due to the very strong current trends in shipping.
Maersk also trades at a massively high share price for the native share. Due to a low amount of stock splits, the company’s share price is over 18,000 DKK per share, or over $1,700.
The company is a publicly-traded family business, with a majority stakeholding through the namesake Møller company through a variety of holding companies.
You will find a lot of information about the company’s historical business segments. These are no longer relevant, as of 2017 and forward. Since then, Maersk is strictly a shipping business.
Out of its current operations, 75% is in container shipping, 15% in Logistics and Services, and 7% in what’s known as Terminals & Towage. In terms of divisional segmentation, the company reports in the following segments:
- Ocean, consisting of former Maersk Line and Hamburg Süd, integrated in late 2017, and the transshipment hubs under the APM Terminals brand.
- Logistics and Services, focusing on the supply chain solutions, inland services, intermodal services, and deliveries of highly customized freight forwarding for a variety of customers.
- Terminals and Towage, containing the company’s gateway terminals, salvage, and freight towing capacities. These operations are also known through the Svitzer brand, owned by Maersk.
- Manufacturing, combined with Other activities, holding things like the manufacturing of reefers, supply services (marine services which weren’t able to be sold). Maersk’s plan is to sell this segment, both the manufacturing and the services. For now, they remain in the company.
You don’t need me to tell you that shipping on a global scale is, at best, a “volatile” sort of business.
What determines volumes are international trade and global fleet capacities. The supply & demand flow here is extremely closely tied to the volatility of freight rates. Like the REIT sector – or any specific market sector, shipping is a world in itself that bears very close studying to understand.
I can hope to scratch the surface and look at this company, but little more than this.
2015-2018 saw significant consolidation in the market due to a global slowdown in trade and a massive deterioration in operating performance for most global companies – including Maersk. This also saw most of the shipping sector losing the appeal for many “standard” investors. These years saw the sale of Singapore-based NOL by CMA CGM, a merger of the main two Chinese, government-owned COSCO and CSCL, the merger of Hapag Lloyd and the United Arab Shipping Company, and the aforementioned M&A of the Hamburg Süd by Maersk, among others.
These numerous trades were a necessity of the times we live in. The explanations for these are found in simple economics – economies of scale, and controlling costs. When smaller operators own large vessels, there’s always the problem of unused capacities during slowdowns or sub-optimal vessel capacity utilization rates. The creation of shipping alliances means that operators are able to better share resources, pool their vessels, and be able to offer services at a better price.
The world now has three major shipping alliances that compete for the market – these are 2M, consisting of Maersk and MSC, Ocean Alliance consisting of the Chinese, CMA CGM, and Evergreen, and THE Alliance (biggest), including Hapag-Lloyd, Yang Ming, Ocean Express Network, HMM).
This is the way this market now works. The company, or companies, compete on contracts and services. Maersk’s current approach is a continuation of a strategy begun in 2016, which is an integrated ocean and logistics company with an appealing portfolio of end-to-end products and global services.
On a high level, Ocean freight is over 70% of the business, with over 80% of the total EBITDA. The company’s main focus is lowering the volatility of the Ocean segment, making it more resilient through increased flexibility in capacities, offering a variety of services, and developing long-term contracts as opposed to at-need contract models.
This last part is already showing results, and long-term capacity contracts now account for 65% of the total in 2021, up 15% in less than a single year.
In Logistics and Services, the company wants to grow revenue organically as well as by acquisition. To this end, the company has bought a few service companies, including Swedish KGH, US-based Performance Team, and the Visible Supply Chain Management company in the US – as well as a few others, with combined revenues of closer to $1B.
In this industry, company operating costs come from container handling and bunker costs, oil prices/fuel costs, and similar factors. The increased use of low-sulfur/carbon fuels has driven up fuel costs, and corresponding freight costs to massively high levels. Compared to historical levels, current freight rates are well above $4,000 on average, compared to $2,900 in 2011. It’s the highest price we’ve seen in well over a decade.
The volatility in this business is dependent on the world macroeconomic environment and geopolitical considerations. You can imagine what the crisis in Russia could do to freight prices, for instance. The latest biggest impact here was the US/Chinese trade war/trade restrictions, which impacted trade by an estimated $630 billion back in 2018-2019, and reduced the demand by a full 100 bps. COVID-19 lead, once again to demand and SCM disruptions – but in this case, a shortage of containers, which lead to a large price increase that has been the trend since that time.
The current mix of geopolitical and macro instability is a short to medium-term uncertainty for the industry. The logistics & service division is more resilient to this, but also smaller, with the goal of 10% organic revenue growth.
Maersk wants to achieve an ROCE not below 7.5%. This is a high target, in my estimate, given the weighting and volatility of Ocean Freight/segment revenues. During up-times, this target is achievable, but this is not the case during downturns. The company recently set a 12% ROCE target in 2021-2025 on the back of increased demand. It’s important to point out that this is significantly above the <4% ROCE in 2016-2020. The company’s ROCE during 2021 was 45.3%.
This performance is, as I see it, in no way repeatable. During normalization, the company’s ROCE will drop back down to normal levels, which will also impact the share price.
That makes today a complex time to invest in Maersk, even if the company has given us a very solid estimate for 2022.
The company managed ridiculous FCF conversion rates of 98% for the year. Market conditions for freight have been superb – and there’s little visibility at this time when things will fully normalize. At the same time, there are current significant, operational challenges that are driving costs up. So when things normalize, the prices for shipping will likely remain at elevated levels.
These challenges are from increased bunker price, increased fuel costs, increased handling costs, inflation, and operational congestion which means the bottlenecks that have been in ports of the world. The increase in operating costs has been sixfold because of this. The company also expects costs to continue at these levels for 2022, with higher terminal and charter costs contributing to a continuing, high bunker price.
On a high level, Maersk slipped behind competitor MSC in 2021 in terms of overall capacity, with each having capacities of around 4.3M TEU or 17% of the market. There’s only a small difference to the benefit of MSC.
This industry is in its very early stages of digital transformation, and Maersk is actually one of the early leaders to work in this domain. Together with IT companies such as IBM (IBM), the company works in various ways to change the way container-based transportation is approached.
It also increased its CO2 emission ambitions (or lowered, rather), with a 2040 target of “net-zero”, with an existing roadmap for the first milestone in 2030.
Risks To Maersk
You don’t need to be a Rhodes Scholar to understand that Maersk comes with a substantial amount of internal and counterparty as well as macro risks. Maersk regulatory bodies, such as the International Maritime Organization, were first in lowering demands for sulfur content in fuel back in 2020. This started bringing a higher unit cost in container shipping. The net result of these ever-increased demands on the sustainability of fuel is that freight rates and costs for shipping overall are going to go up, except at times when Oil falls to historical low levels.
Oil is currently not at historically low levels, as you might have noticed, so the pressure on freight is going to be a “thing” for quite some time. You can’t expect it to disappear overnight, certainly.
The decarbonization of container shipping overall is a challenge on a very high order. There is such a massive disconnect between the pricing of green versus legacy fuel (as well as the actual current production capacities of these greener fuels) that it’s not even worth talking about the same sort of pricing environment.
All of these trickles down to the company’s biggest risk of all – volatility. Nothing, and I mean nothing that I’ve seen seems able to take away the significant volatility that this company has in its past, and in its future. These things are highly cyclical – and any investor needs awareness of this to try and estimate where things might go in the short-medium term and not be spooked by trends.
I wouldn’t characterize Maersk as an income stock, despite the current high 2022 yield – expectations are for the dividend to drop to around 4-5% in 2022-2023, and normalize to 1-2% in 2023-2025.
Valuing Maersk is complex. In DCF valuation, the thesis is based on modest revenue growth and EBITDA growth at a GDP level of 1.5-2.5%, with CapEx growth at the same levels. Do realize however that there are sensitivities here that are hard to account for, such as the portion of greener fuel and the pricing developments for these commodities. Maersk has a WACC of around 8%, with a relatively low cost of debt below 4%. Taking current data and trends into account, our estimates are for normalization of company sales as freight costs normalize somewhat. This brings us to an implied EV of between 18,500 DKK and 19,500 DKK, or thereabouts, for the DCF valuation. In terms of the current price, the entirety of this target range denotes a very slight undervaluation – though certainly nothing to write home about. There is also a great deal of uncertainty to these numbers, given the overall volatility of the entire industry.
In terms of peers, Kuehne + Nagel (OTCPK:KHNGY) is the closest peer with a decent market cap, but the problem with many of Maersk’s European peers is that they are in logistics more than in container shipping. I also include Hamburger Hafen (OTCPK:HHULY) and consensus numbers out of COSCO in the comparison to get some balance here, and logistics business have significantly higher multiples than container shipping – at least usually (13X for HHULY versus ~5X P/E for Maersk usually, with currently over 15-17X now)
Based on peer-average multiple targets, the implied P/E calls for a share price of ~21,800 DKK and a P/B implication of 16-18,000 based on a peer average of around 2X P/E. Again, these numbers at least somewhat suggest that Maersk could rise from here.
In terms of the NAV, I use EV/EBITDA multiples with reference ratios from peers or market-relevant transaction/valuation multiples. These transaction multiples are, for instance, used to evaluate the Ocean shipping segment, where we have recent M&A’s at 14-16X EV/EBITDA – although given a conservative approach, won’t use more than half or slightly above half this multiple due to the volatility in the entire segment (Maersk bought Hamburg Süd at a 10X 2017 EBITDA multiple).
This range of around 5-8X EV/EBITDA for the company’s various segments gives us an implied asset value of around 90-95B USD. Removing debt and commitments, we have around 85-88B USD, which comes to (at 18.9M shares) at a per-share implied price range of 4,500-4,600 USD for the native, or, a share price of at least 30,700 DKK.
This is where Maersk shows us a massive upside – though as we’ve said, all of these valuation methods have their flaws and shortcomings. And with a company like Maersk, nothing is really considered “safe” here. I would be extremely careful applying these multiples, even at a weighted ratio.
Other analysts call Maersk a “BUY” with a price target range of $2,965-$4,700 (hence why I use dollars for NAV) in terms of S&P Global. This comes to more or less the same high range as I use, but a lower range that’s perhaps very weighted on DCF and peers comps.
The current analyst average by S&P Global, with 17 analysts following the company, is $3,865/share, which comes to a share price of 26,400 DKK for the native.
This is an undervaluation, with 10 of 17 analysts at either a “BUY” or an “Outperform” with only one analyst believing the company should be “SOLD” here. However, analysts short-term nature and perspectives are well-documented.
Maersk has an ADR called AMKBY, which offers the opportunity to invest at a cheap share price due to the 0.005X nature of the ADR, with one receipt currently priced at $13.20. I would personally go for the native share, as this is one of the most liquid stocks traded in Copenhagen.
My PT for Maersk comes to a weighted average of around 19,800 DKK, as I’m weighting NAV very conservatively, but I do see an upside to the company in the continued, difficult logistics environment.
Maersk has been on an absolute tear for some time now.
The question is how long it will continue. The last few weeks of pricing action has seen some decline to the stock. What seems clear is that the fundamental reasons Maersk is currently going up are unlikely to disappear in the near term. Logistics capacities are strained, and there’s plenty of volatility and demand in the market. The ongoing fuel crisis is also likely to keep prices at a premium.
I belong to the camp that doesn’t see pricing for shipping ever returning to pre-pandemic levels. I don’t believe the mix of oil pricing, CO2-ambitions, geopolitical instability, and demand will allow for a full normalization back down to those pricing levels, even if prices will move in a downward direction.
How this impacts the company’s valuation will, of course, remain to be seen. I bought one share of Maersk years ago. That share has obviously appreciated a great deal, and I have been on the sidelines with the company since.
There are unfortunate realities to investing in Danish companies that not only keep me from going deeper into many of them here, but that prevents me from investing in them, despite living less than 4-hours’ ride from Copenhagen.
Danish dividends are taxed at 27%, but even the national IRS here only recoups 15% “automatically”, with the remainder needing to be applied for manually, by myself, with the Danish IRS. This is completely unique for me. For investment funds, recent news in 2021 confirms that Denmark will deny dividend withholding tax refunds to foreign investment funds (Source).
This doesn’t make the company uninvestable – but I do apply an additional discount that I want to see before seriously putting capital to work in a Danish business as opposed to an EU or NA business that allows me to keep going very worry-free/hassle-free or free of administrative constraints with my dividend refunds.
Furthermore, most of the company’s peers aren’t publicly traded. This makes Maersk one of the few, massive, global container shipping businesses of its kind that can easily be invested in.
I’m long Maersk – and I may buy more going forward – but investors should take care here, even if the upside and the long-term appeal of owning shipping is not to be underestimated.
The value of the underlying assets cannot be discussed or denied. If you have a strong stomach for the year-over-year rollercoasters this company can bring about, then you may be in a position to profit from Maersk.
Remember, just because a company is up 130% in 3 years doesn’t mean it can’t rise more. I’m certainly not touching my Maersk share here.