S E C T O R S P E C I A L
Container shipping industry – finally the auspicious ‘land ahoy’?
Six years ago, the shipping sector witnessed a downturn that entered history books of the industry. A downturn that was predominately self-inflicted: responding to a substantial capacity glut with adding tonnage while growth only moderately recovered would have been the ingredients for an indigestible dish in any industry. As of today, there is no general consensus about the current state of the shipping industry. The environment is still tense and overcapacity remains a concern. However, Maersk already called out the bottom of the global trade cycle in late 2013 and Moody’s upgraded its industry outlook to stable in April 2014. Also Berenberg positions itself on the more bullish side of the market as half of the most relevant industry drivers indicate a moderate recovery while the others point to a more neutral development:- Transport volumes are expected to gain momentum on the back of returned GDP growth and should rise at a healthy clip of above 3% for the fifth consecutive year (6.0% in 2014), a figure most industries would envy.
- Freight rates still suffer from persistent overcapacity, however, have probably reached the trough as, firstly, the ongoing trend towards an alliance-based landscape should relieve competition, and, secondly, contracting for new vessels has seen a clear downturn recently. - Operating costs have declined significantly due to both carriers that have learned their
lesson on cost management and a favourable fuel price development positively influencing bunker costs which are by far the single largest cost item.
- Charter rates are still pressured by the prevailing overcapacity. However, the market is in a state of upheaval as carriers seek for a more flexible fleet structure with a higher share of chartered vessels, particularly with regard to smaller-sized ships.
So far in 2014, only a few carriers including Maersk and CMA CGM, were able to translate the improved market conditions into increased profitability. In contrast to Maersk, the market has not yet priced in the cost-cutting achievements of CMA CGM. We like the French carrier which, on top of being one of the industry market and cost leaders, has brought itself back in the game by recently announcing the promising Ocean Three alliance. We also like the outlook for Hapag-Lloyd, which has significantly brightened as a result of the ongoing CSAV merger. This transaction is a door opener for important scale improvements and a broader global footprint and will be followed by a capital increase supporting credit metrics and the liquidity profile.
Companies covered in this study: (Screening coverage)
Company Bond ratings/Outlook A.P. Møller-Mærsk A/S Baa1/stable (Moody’s)
BBB+/stable (S&P)
CMA CGM S.A. Caa1/stable (Moody’s) B-/ stable (S&P)
Hapag-Lloyd AG Caa1/negative (Moody’s) B-/ stable (S&P)
Issuer rating/family rating is two notches above the respective bond rating for CMA CGM and Hapag-Lloyd
Berenberg’s top picks:
Bond/recom. Price / YTW / Z-spread
CMACG 8 ½ 04/17 Overweight 101.5 / 7.4% / 696bps CMACG 8 ¾ 12/18 Overweight 102.8 / 7.7% / 741bps CMACG 8 ⅞ 04/19 Overweight 102.9 / 7.6% / 730bps HPLGR 9 10/15 Overweight 102.9 / 5.8% / 563bps (Pricing: 27/10/2014 BGN Close)
28 October 2014
Alexandre Daniel
Analyst +49 69 91 30 90-593 alexandre.daniel@berenberg.comDwight Bolden
Research Support +49 69 91 30 90-596 dwight.bolden@berenberg.comType BERF <Go> at Bloomberg for further Berenberg Fixed Income Research
EUR denominated container shipping bonds
Source: Bloomberg, Berenberg Research (Pricing: 27/10/14 BGN Close) 0 20 40 60 0 1 2 3 4 5 6 time to worst BBB+ non-financials MAERSK 3 3/8 08/19 A- non-financials MAERSK 4 3/8 11/17 500 600 700 800 Z -spre ad CCC+ non-financials CMACG 8 3/4 12/18 HPLGR 7 3/4 10/18 HPLGR 9 10/15 CMACG 8 1/2 04/17 CMACG 8 7/8 04/19
F I X E D I N C O M E R E S E A R C H
|
C O R P O R A T E STable of content
Container shipping industry – change on the horizon? 3
Transport volumes – growth gaining momentum 4
Freight rates – already reached the trough 6
Operating costs – the key to profitability 10
Charter/depreciation – one attractive, the other a potential risk 12 Valuation & company profiles
– plenty fish in the sea!
14Valuation – some opportunities in the sea 14
A.P. Møller - Mærsk A/S (investment grade) 16
CMA CGM S.A. (high yield) 19
Hapag-Lloyd AG (high yield) 22
Disclaimer 25
Container shipping industry – change on the horizon?
Despite persistent pressure on freight rates, Berenberg expects a moderate recovery of the container shipping industry on a mid-term horizon. Half of the most relevant industry drivers indicate a slightly positive trend, while the remaining factors tend towards a more neutral development:
(i) Transport volumes: gaining momentum on the back of returned GDP growth (ii) Freight rates: still suffer from overcapacities, expected to remain at the trough (iii) Operating costs: cost-cutting measures more than compensate for weak freight rates
(iv) Charter/depreciation: charter rates still attractive; one-off write-downs pose a potential risk Overall trend “If it rolls, floats or flies, don’t invest in it.” Henderson’s fund manager John Pattullo makes a certain
point by steering clear of shipping companies. With a few exceptions, the container shipping industry has wrestled with earning back its cost of capital for the better part of the past decade. The already choppy waters became even rougher in 2008, when the whole industry was confronted with a crisis caused by a significant drop in demand which resulted in a substantial capacity glut. As of 2011, after a brief recovery, the industry started to face a self-inflicted storm with intense competition and fierce price wars, leaving many shipping companies with record losses and depleted cash reserves.
So, why do we think Mr. Pattullo is not right anymore? There is no general consensus in the market about the current state of the shipping industry. However, Maersk already called out the bottom of the global trade cycle in late 2013. Moreover, Moody’s upgraded its industry outlook to stable in April 2014 and also Berenberg positions itself on the more bullish side of the market. Our opinion is based on a profound analysis of the different factors affecting the shipping business as well as how they deteriorated in the past and how they are expected to recover in the future. All factors impacting earnings can be grouped into four subgroups: (i) Transport volume is dependent on prevailing economic developments around the
world and the basis for any shipping activity
(ii) Freight rates are heavily dependent on market capacity and demand
(iii) Operating costs are mainly influenced by bunker price changes. Besides other external influencing factors, the company’s cost management abilities play a significant role (iv) Depreciation/charter expenses are highly dependent on the fleet ownership structure
and the current condition of the charter market
Factors influencing container shipping earnings
Source: Berenberg Research
Transport volume
GrossDomesticProduct
Business Climate
Consumer confidence Degree of globalisation
Freight rate Capacity (fleet, orders, scrapping etc.) Demand (transport volume)
Alliances/fragmentation Market share
Operating costs
Bunker (i.a. fleet efficiency)
Administration and others Terminal costs
Vessels (i.a. running costs)
Depreciation/ charter
Depreciation of owned vessels
Time charter of leased vessels
x Net freight − Expenses +
EBIT
The container shipping industry saw a downturn that will cement itself in the history books
There are plenty of market opinions about the current industry state and outlook in the sea
Transport volumes – growth gaining momentum
Except for 2009, volumes have been relatively robust and steadily growing, however, at a different pace than in the pre-crisis period. Current volume growth rates in the mid single-digit area now offer a fundamentally healthy environment for the shipping industry and are expected to further gain momentum in the upcoming years, as important economic indicators suggest:
(i) Global GDP, the main driver for trade volume growth, is expected to rise by 2.6% in 2015, after 2.4% in 2014, supporting demand growth estimates of 6.0% for 2014 and 6.7% for 2015
(ii) Demand usually lags behind the Ifo Eurozone Business Climate Expectations Index, which points
towards further growth for the upcoming year Overall trend
The container shipping crisis over the last six years – the longest downturn the industry has seen in three decades – has predominantly been supply side driven. When it comes to demand, transport volumes have been relatively robust and steadily growing, except for 2009. However, the economic crisis entailed a change in pace, with average growth rates down below double digit pre-crisis levels. Nevertheless, global container volumes grew at a healthy clip of above 3% for the fourth consecutive year (5% in 2013), a figure that most industries would envy. Carriers must and will get used to a new standard, with volumes increasing at an annual rate of 5% to 7% rather than overheated figures above 10% seen for most of the past decade. Reasons why we expect volume growth rates to remain more moderate include:
(i) Re-industrialisation: the overwhelming cost advantage of Emerging Markets (EM) over developed countries is shrinking fast. Higher productivity, weaker currencies, lower energy prices (in particular in the US) and other improving factors in developed countries continuously narrow the gap as do rising wages in EM, thus inducing more companies to make manufacture domestically again
(ii) Technological progress: the rapid technological improvements of EM increasingly reduce their reliance on high-tech imports from developed nations
(iii) Wealth: higher income levels in EM should increase regional demand, thus prompting companies to devote more capacity to serving domestic markets
Volume growth rates in the mid single-digit area offer a fundamentally healthy environment to the shipping industry. Growth is currently gaining momentum worldwide. After a positive development in the second half of 2013, the first eight months of 2014 indicate a similar pattern. Clarkson Research Services expect global container trade to increase by 6.0% (Y/Y) in 2014 and 6.7% in 2015, after having already expanded by 4.9% in 2013.
Growth rates between 5% and 7% are the “new standard” rather than the double-digit figures seen over the past decade
Estimated seaborne container trade volumes in 2014*
Source: Clarkson Research Services, Berenberg Research, A.P. Moeller-Maersk; * in MTEU, Y/Y in % NAFTA Latin America Europe Africa Intra Asia Far East 15.1 (+6.3%) 7.1 (+4.4%) 48.2 (+7.7%) 3.8 (+5.6%) 2.8 (+3.7%) 8.1 (+2.5%) 14.6 (+5.8%) North-South 30.5 (+5.9%) Other East-West 21.3 (+6.0%)
For the third consecutive year, intra-regional trade rates – in particular the 7.7% growth rate for the Asian region in 2014 – are expected to outperform the market. Consumer trade and the geographically fragmented production of goods should continue to generate substantial intra-Asian container volumes. All other lanes are also expected to experience stronger growth, in particular main lanes such as the Far East to Europe route (+6.3% in 2014).
Clarkson’s trend predictions are further supported by important economic indicators such as the global GDP growth, the Ifo World Economic Climate and Ifo Business Climate Expectations Eurozone indices or consumer confidence indicators. We have analysed the relationship between trade volumes and the above mentioned indicators. The heuristic- and regression-based findings are useful to determine the degree of growth momentum transport volumes will probably experience.
Worldwide container trade indicators Polynomial regression GDP vs trade volume
Source: Ifo Institute, IMF, Clarkson Research Services, Berenberg Research Source: IMF, Clarkson Research Services, Berenberg Research A high correlation between GDP growth and container trade volume growth can be observed,
however, without a substantial time lag. Our regression analysis shows that over the last 13 years (2009 excluded) an expansion of the GDP by 1.0% increased trade volumes by 3.2%. Even though the result is pre-crisis biased, it is still a reliable indicator for the general trend. The above displayed polynomial regression seems even more suitable, predicting a 6.2% increase in world container trade based on a 2.4% GDP growth for 2014 (Berenberg macro views and estimates as of 17October). The crystal ball among economic indicators turned out to be the Ifo Business Climate Expectations Eurozone index, which almost accurately predicts trade volumes with an adequate time lag and currently suggests an upward trend. We do share the moderately positive outlook, backed by our economists expecting 2.6% GDP growth in 2015 and Clarkson estimating a 6.7% increase in container trade volumes for the next year.
Ifo BCE kind of a crystal ball CCI often a reliable indicator of trade volumes
Source: Ifo Institute, Clarkson Research Services, Berenberg Research Source: European Commission, Clarkson Research Services, Berenberg Research 40 60 80 100 120 -15% -8% 0% 8% 15% '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 World container trade (Y/Y) World GDP (Y/Y) Ifo World Economic Climate (rhs, index 1995=100)
0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% W orl d Co nta ine r Tr ad e (Y /Y ) World GDP (Y/Y) Expect. GDP growth 2014: 2.4%; 2015: 2.6% 25 40 55 70 85 100 115 130 -12% -8% -4% 0% 4% 8% 12% 16% '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Container trade Europe (Y/Y)
Ifo Business Climate Expectations Eurozone (rhs, index 2005=100)
-40% -30% -20% -10% 0% -16% -8% 0% 8% 16% '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Container trade Europe (Y/Y)
Consumer Confidence Indicator Eurozone (rhs) Economic indicators underpin increased global container growth expectations of 6.0% in 2014
Ifo Business Climate Expectations index turned out to be the crystal ball among economic indicators
Freight rates – already reached the trough
The overhanging capacity surplus created by the 9% trade contraction in 2009 is the main reason for the persistent strong pressure on freight rates. Carriers continue to add capacity to the oversupplied market as i.a. market share is measured on the basis of capacity and larger modern vessels reduce unit costs. Moreover, overcapacity enables carriers to easily match incremental demand, placing a cap on significant freight rate increases in the short-term.
However, we believe the trough has been reached as, firstly, the ongoing trend towards an alliance-based landscape should relieve competition in the fragmented industry, and, secondly, contracting for new vessels has
seen a clear downward trend recently. Overall trend
According to the market forces of demand and supply, the distress in container shipping has been literally homemade, at least from 2011 on. On the one hand, demand – a force beyond control of the carriers – has been relatively robust and steadily growing, except in 2009. Although pace slowed down from 2010 onward, growth rates still remained at levels other industries seek for. On the other hand, supply – a force entirely influenced by the industry players – constantly outstripped demand and aggravated the imbalance for several reasons: (i) Market share is traditionally measured on the basis of capacity rather than the
freight actually transported. Carriers therefore expanded their capacity in order to strengthen their market position
(ii) Carriers ordered and still are ordering larger vessels to counteract rising operating costs (e.g. fuel prices, terminal costs). Unit costs decline as a vessel carries more cargo (iii) Falling for government subsidised offers from shipyard owners: low prices incited
carriers to act as asset managers, with the intention to sell overcapacities as soon as demand catches up
As a result, carriers added more capacity to an already oversupplied market. In order to maintain high utilisation, companies reduced freight rates, sometimes by as much as 60%, leaving almost no possibility for profitable operations, thus resulting in intense competition. The market concentration score of 695, measured by the Herfindahl-Hirschman Index, underpins the highly competitive industry environment. The top 20 control 88% of the global operated fleet capacity, with the remaining 12% spread over 80 other carriers. Given this fragmented and commoditised character of the industry, absolute size does not translate into pricing and market power. Nevertheless, size leads to economies of scale, thus higher levels of cost efficiencies and operating profit, allowing carriers to be more competitive on freight rates.
Competitive landscape of the containership market (operated fleet capacity in MTEU)
Source: Alphaliner, Berenberg Research
16% 14% 9% 5% 4% 4% 4% 3% 3% 3% 3% 3% 3% 2% 2% 2% 2% 2% 2% 1% 12% 0% 3% 6% 9% 12% 15% 18% 0.0 0.5 1.0 1.5 2.0 2.5 3.0 MTEU
Note: The HHI measures market concentration. Values less than 1,000 represent a competitive market, values less than 1,800 indicate a moderately concentrated market. Values exceeding 1,800 represent a highly concentrated market.
Herfindahl-Hirschman Index (HHI): 695 = competitive global market share of operated fleet capacity %
A demand and supply imbalance has been the main reason for the industry downturn
Carriers reacted to oversupply by reducing freight rates
The shipping industry is currently highly fragmented
However, as cash reserves are depleted and leverage is exhausted, we expect no further game-changing consolidations in the near term after the recently announced merger of Hapag-Lloyd and CSAV (becoming the global no. 4 in terms of operated fleet capacity). Inspired by the airline industry, carriers have been moving towards a more alliance-based model in order to scale up and face the challenges in their market (ongoing overcapacity, intense competition, fuel price pressure). Alliances usually include vessel-sharing agreements (VSA) under which selected vessels are pooled to support a specific scheduled service or string – a series of vessels dedicated to calling upon a pre-determined list of ports at set intervals. These deals are mainly driven by the intense motivation of carriers to cut operating costs while at the same time reducing competition and thus, releasing pressure on freight rates.
The “Big Four” of the container shipping alliances
Source: Alphaliner, company data, Berenberg Research
According to Drewry Maritime Research, we recently saw “the final piece in the mega-alliance jigsaw” with CMA CGM, CSCL and UASC teaming up within a new arrangement called Ocean Three (O3). The alliance is covering East-West lanes and directly competes with the other three global alliances G6, CKYHE and the recently approved 2M collaboration (Maersk and MSC). In terms of capacity, O3 ranks last among the “Big Four”. However, in terms of the main lane relevant Ultra Large Container Vessels (ULCV), O3, with 51 ships (2M: 75, CKYHE: 45, G6: 41), ranks second and is catching up with G6 in terms of total capacity, after taking into account the orderbook.
Vessels deployed in alliances Capacity deployed in alliances (in MTEU)
Source: Alphaliner, Maersk, Berenberg Research Source: Alphaliner, Berenberg Research All four alliances have a clear focus on or are entirely limited to East-West trade lanes (Asia-Europe, Transatlantic, Transpacific), leaving almost no room for competition on the Northern Europe-Asia route and only limited market shares for other carriers on the Transpacific and
G6 - Alliance Capacity (TEU) Market share Vessels CKYHE - Alliance Capacity (TEU) Market share Vessels
Hapag-Lloyd 739,817 4.2% 145 Evergreen 909,283 5.1% 192
MOL 586,636 3.3% 112 COSCO 792,697 4.5% 161
APL 582,760 3.3% 105 Hanjin S 598,325 3.4% 95
OOCL 513,434 2.9% 95 Yang MM 414,924 2.3% 90
NYK Line 500,213 2.8% 111 K Line 357,052 2.0% 69
Hyundai M.M. 396,346 2.2% 60
Ocean Three - Alliance Capacity (TEU) Market share Vessels 2M - Alliance Capacity (TEU) Market share Vessels CMA CGM 1,581,617 8.9% 431
APM-Maersk 2,796,133 15.8% 595 CSCL 664,260 3.8% 139 MSC 2,506,621 14.2% 500 UASC 293,811 1.7% 49 CKYHE 258 G6 226 2M 185 Ocean Three 134 2M 2.11 30% CKYHE 1.95 27% G6 1.81 26% Ocean Three 1.2 17%
Carriers are forced to consolidate via alliances rather than mergers
O3 concludes the recent realignment of the major carriers into four alliances
Mediterranean-Asia routes. The “Big Four” are therefore expected to stifle competition. However, the increased transparency in pricing and services could also possibly lead to a downward discounting spiral, if alliances do not differentiate on their commoditised products, e.g. by offering better intermodal connections, a better document handling or customer service. In the upcoming years, alliances/consolidation are certainly one of the key factors for the sustainability of the industry and should have a moderately positive impact on freight rates.
Shares of the “Big Four” in terms of effective vessel capacity on East-West routes
Source: Drewry, Berenberg Research
Besides the positive consolidation impulse from alliance arrangements, we do not expect any further significant deterioration of the current supply-demand imbalance. Berenberg’s view is based on estimates published by Moody’s and Drewry Maritime Research as well as expectations published by Clarkson Research Services. While both estimates almost match on the demand side (Drewry/Moody’s: 6% growth over the next 18 months; Clarkson: 6% in 2014, 7% in 2015), a clear deviation can be observed on the supply side (Drewry/Moody’s: 8% growth over the next 18 months; Clarkson: 5% in 2014, 6% in 2015). Nevertheless, both expect freight rates for many trade lanes to remain volatile, reflecting the prevailing overhanging capacity surplus created by the 9% trade contraction of 2009.
Clarkson based market balance Containership supply & prospective deliveries
Source: Clarkson Research Services, Berenberg Research Source: Clarkson Research Services, Berenberg Research Taking a closer look at the supply side input factors, we notice that carriers continuously
search for cost saving opportunities through economies of scale by steadily increasing the size of the vessels on most trade routes. Therefore, fleet growth is heavily focussed on larger-sized vessels such as the Triple-E class (up to 18,000 TEU capacity) or VLCS (Very Large Containership, 8,000+ TEU), which provide the desired economies of scale and cost
US Mediterranean Northern Europe Asia 2M CKYHE G6 O3 39% 20% 8% 27% 2M CKYHE G6 O3 32% 26% 23% 19% 2M CKYHE G6 O3 15% 34% 32% 13% -15.0% -7.5% 0.0% 7.5% 15.0% 22.5% -10% -5% 0% 5% 10% 15% 2007 2008 2009 2010 2011 2012 2013 2014e 2015e Capacity growth (Y/Y) Container trade growth (Y/Y) Balance (rhs) 0 8 16 24 0.0 2.5 5.0 7.5 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Containership Orderbook Containership Contracting
Containership fleet development (rhs, MTEU) Alliances are likely to have a positive impact on freight rates over the long-term
Despite a further aggravation of the supply-demand imbalance is unlikely, freight rates remain under pressure due to the persistent oversupply in the market
Vessel upsizing became an overarching trend
efficiencies. Currently, the VLCS fleet is deployed on main lane trades, leading to cascading the Large Containership fleet (LCS, 3,000-7,999 TEU) towards the growing non-main lane trades (“cascading effect”).
Capacity additions have been partly offset by record breaking levels of scrapping in H1 2014 which are expected to continue to volumes of 0.5 MTEU in 2014. Moreover, slow steaming continues to absorb capacities as it requires more vessels in order to maintain shipping-delivery schedules, without creating additional transportation capacity (slow steaming effects approx. 2.3 MTEU of nominal capacity). Idling has been a curb to capacity increases in the past, reaching its peak of 1.5 MTEU in 2010. However, today idling only plays a minor role with a volume of 0.23 MTEU laid up in August 2014 (1.3% of the fleet by capacity).
Another common method to adjust and manage capacity is blank sailing. The method involves the cancellation of calls at certain ports or even of whole loops in some regions. Frequently, blanked sailings are applied by alliances or sometimes even industry-wide. According to SeaIntel Maritime Research, 115 blanked sails occurred on the Asia-Europe trade route in 2013, which is equivalent to an annual reduction in capacity of 1.1 MTEU.
Newbuilding contracting is expected to decline by 55% this year, mainly driven by a rise in the price of vessel newbuildings. Meanwhile, the containership orderbook, as a proportion of the fleet capacity, currently stands at a historically modest 19.5%. We therefore expect slightly rising deliveries in 2015 to not materially outstrip demand. However, with VLCS deliveries set to continue apace, carriers will have to carefully manage supply via idling vessels and slow steaming, postponing and cancelling deliveries, and scrapping the oldest and most inefficient vessels, in order to create an environment that supports improved freight rate levels.
Selected freight rate composites & industry earnings Seasonal post-peak decline in demand weighs on rates
Source: Clarkson Research, Bloomberg, Berenberg, Shanghai Shipping Exchange Source: Clarkson Research, Berenberg, Shanghai Shipping Exchange So far in 2014, freight rates remained almost on previous year’s levels. After a peak season that
was characterised by high levels of vessel utilisation but did not exhibit any positive pricing developments, now the current season is the time when carriers scramble to remove capacity. Again, this reflects the persistent overcapacity in the market, which enables carriers to easily match incremental demand, placing a cap on positive pricing developments.
Lately, key Asia-Europe rates as indicated by the Shanghai Container Freight Index (SCFI) and the World Container Index (WCI) are declining week-on-week, in a manner comparable to last year when rates began to fall at a similar time in August/September. In spite of freight rates remaining on weak levels, cost-cutting measures and increased operating efficiencies helped industry earnings to moderately recover as reflected by the Clarkson Average Containership Earnings Index increasing by 6.9% compared to the previous year during the first nine months of 2014. 0 5,000 10,000 15,000 20,000 750 1,250 1,750 2,250 2,750 '09 '10 '11 '12 '13 '14 '15
SCFI comprehensive index (USD/TEU) WCI freight rate composite (USD/FEU)
Clarksons aver. containership earnings (rhs, USD/day)
800 1,000 1,200 1,400 1,600 0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 2012 2013 2014
(SCFI rates in USD/TEU per week)
Scrapping, slow steaming and idling are again expected to partly offset capacity growth
Today, blank sailing is increasingly applied to reduce capacities rather than catch up with delays
The orderbook as a proportion of the fleet stands at a historically modest 19.5%
Freight rates in 2014 are almost on the same level as in 2013
Current volatility in freight rates is seasonal and similar to the previous year
Operating costs – the key to profitability
The container shipping industry slowly shifts away from the outdated mindset that key aspects of its cost structure can be improved to only a limited extent. An increasing number of companies successfully started to go beyond traditional measures such as slow steaming and the ordering of new vessels to achieve higher cost savings: (i) Fuel procurement management
(ii) Renegotiation of all vessel-related contracts (i.e. terminal and inland transportation)
(iii) Limiting expensive value-add services as they do not enable higher margins or lead to customer loyalty,
attributable to the commoditised character of the industry Overall trend As an industry with low margins, container shipping is inherently sensitive to cost volatility.
On top of the already plunging freight rates in 2008, the sector saw itself confronted with soaring operating costs, mainly driven by bunker prices. With the exception of a single year, neither freight rates nor fuel prices significantly recovered since then. Carriers therefore had to analyse cost drivers one by one in order to rein expenses and relieve pressure on margins. As a first step, container shipping companies addressed bunker costs, which are by far their single largest cost item. Fuel expenses have been known for constituting up to 50% of total costs and becoming more and more volatile due to broad fluctuations in correlated crude oil prices. After reaching record highs in 2008, followed by a sharp decline post-Lehman, oil prices again started to peak late in 2010 and early 2012, while carriers were not able to raise freight rates sufficiently to compensate for increased fuel costs. Indeed, they even had to lower rates and rather started optimising bunker consumption by adopting common industry measures such as slow steaming or ordering new and more fuel efficient vessels.
However, bearing in mind new environmental regulations kicking as of 2015, shipping companies will have to go beyond slow steaming to compensate for upcoming price increases. Carriers have to comply to worldwide IMO regulations on low-sulphur fuel and carbon dioxide emissions in a growing number of areas, shifting a greater share of consumption from traditional bunker to more expensive low-sulphur fuel (380cST). Nevertheless, companies should benefit from prices that have recently moderated from historical highs, for both high- and low-sulphur fuel. Prices have fallen to their lowest level in over four years, in particular after a four-month slide (end of June to end of October -18% to 498 USD/metric tons for 380cST). Therefore, the majority of carriers should report lower fuel costs for 2014, thus a declining share as a percentage of total sales, e.g. below 21% for Hapag-Lloyd and CMA CGM. As a second step, often overlooked in the past, an increasing number of companies now efficiently manage their fuel procurement by i.a. matching networks with cheap fuel price areas. Other measures include hedging, which is practised to a larger extent at Hapag-Lloyd (up to 80% of likely bunker needs over 12 months) than at CMA CGM as indicated below.
Fuel costs & bunker price development Freight rates & bunker price development
Source: Hapag-Lloyd, CMA CGM, Bloomberg, Berenberg Research Source: Shanghai Shipping Exchange, Bloomberg; *Index 100 = Jan 2011 12% 15% 18% 21% 24% 27% 30% 200 300 400 500 600 700 800 01/2009 01/2010 01/2011 01/2012 01/2013 01/2014 Hapag-Lloyd bunker costs as % of ttl sales (rhs) CMA CGM bunker costs as % of ttl sales (rhs)
Bloomberg Weighted Average 380cST Bunker Price (USD/metric t)
70 85 100 115 130 145 01/2011 01/2012 01/2013 01/2014 01/2015 Freight rate index (SCFI based)*
Bunker price index (380cST based)* Soaring operating costs combined with plunging freight rates have dramatically dampened industry margins Bunker costs are by far the single largest cost item
Carriers will have to go beyond slow steaming
Fuel procurement management is key to significant bunker savings
However, hanging cost saving efforts on the price of fuel is not sustainable as it applies to all carriers and eventually is passed onto customers as lower freight rates. Vice versa, rate increases in the form of bunker surcharges have never been successfully asserted. In 2012, the Boston Consulting Group (BCG) published a global study measuring key cost drivers of major carriers and ship owners, unveiling that operating expenses can fluctuate by as much as 30% (crew costs 40% per vessel and per day, consumables 50% p.v./p.d., lube oil 70% p.v./p.d., bunker fuel 30%). The majority of carriers have started just recently to change their mindset that key aspects of their cost structure can be only improved to a limited extent. The renegotiation of terminal and inland transportation contracts, the renegotiation of container lease terms, as well as dry-docking expenses and administrative costs, are only some of the issues on their agenda.
Another point is the additional services carriers started to offer in order to charge higher rates and enable higher margins. Container shipping is a mass market service and historically has always been a commodity business. Carriers so far have struggled to monetise value-added services and superior performance as they were not compensated for the higher costs and complexity they incurred to provide a better value to customers. Moreover, customer loyalty for commoditised services cannot be achieved, which mainly leaves, if not solely, the price of a journey as the ruler. In the era of alliances, up to six different shipping line containers can be found on one ship, all with the same service level, schedule, transit time and the same ports of call. Customers usually switch carriers for a slightly lower price, thus, a rate cut by even a small carrier has the potential to immediately initiate the next round of price cuts.
A superior management of operating costs is therefore the key to profitability in the shipping industry. So far in 2014, carriers have continued their efforts to reduce costs. Despite a continuing pressure on freight rates, cost-cutting measures have enabled companies like Maersk and CMA CGM to increase their profitability and remain among the few profitable container shipping companies.
Operating expenses can fluctuate by as much as 30%
Container shipping is a commodity business, not compensating for better services
Cost-cutting measures enable companies to be profitable despite the ongoing pressure on freight rates
Charter/depreciation – the one attractive, the other a potential risk
Charter rates are still pressured by the prevailing industry overcapacity and therefore have not picked up to pre-crisis levels yet. However, the market is in a state of upheaval as carriers seek for a more flexible fleet structure with a higher share of chartered vessels, particularly with regard to smaller-sized ships. Therefore, we expect a slight upward tendency for charter rates. Moreover, the market for lessors of vessels (non-operating owners) is changing. The landscape is transforming from a German-dominated market towards a more internationally fragmented structure. Also, depreciation is an important factor for the shipping industry. Based on strongly varying assumptions by carriers concerning vessel lifetime, there is a risk of large one-timewrite-offs occurring within the next couple of years, affecting the earnings of carriers significantly. Overall trend Charter: Similar to freight rates, charter rates follow cyclical patterns. Between 2002 and 2005,
rates increased to unprecedented levels on the back of the global economic recovery, thus growing transport volumes. However, following the 2008 financial crisis, the picture changed. During the global economic downturn time charter rates reached a historical low. Not until 2010, with the global economic recovery slowly progressing and the manufacturing activity increasing, the charter market started to recover. Nevertheless, charter rates have failed to return to pre-crisis levels so far, which can be attributed to the prevailing supply-demand imbalance in the industry. Considering the current market situation, an increased chartering activity offers a viable solution to many carriers in order to maintain a greater operational flexibility. This is further supported by a relative decrease in the price of chartering compared to the price of newbuildings over the past decade.
Charter rate & newbuilding price Charter rate & business climate
Source: Clarkson Research Services, Berenberg Research Source: Clarkson Research Services, Bloomberg, Berenberg Research In the medium-term we expect charter rates to roughly remain at current levels with slight
upward tendencies. Our assessment is based on the following factors:
(i) Prevailing supply and demand imbalance which is further fuelled by a continuous oversupply of vessels, particularly striking during the trade contraction in 2009.
(ii) Increasing chartering activity among operators, in particular with regard to smaller-sized vessels, will moderately adjust rates upwards over the medium-term.
(iii) Indication of the Ifo Business Climate Expectations Eurozone Index. As mentioned before, the index serves as a good indicator, with an adequate time lag, for trade volumes. The same applies with regard to charter rates.
Currently, the largest non-operating owner (NOO) in terms of capacity is the German shipping company Claus Peter Offen GmbH & Co. However, it is almost certain that Seaspan will overtake the leading position in the near future, considering the Canadian company’s large orderbook. Seaspan is mainly profiting from the National Shipbuilding Procurement Strategy (NSPS) initiative in Canada, launched in 2011. NSPS is a program designed for the renewal of the Federal Canadian Fleet (Department of National Defense and Canadian Coast Guard) and is based on long-term strategic relationships with the respective shipyards. Based on first
0 50 100 150 200
Time charter rate index (index 2000=100) Newbuilding price index (index 2000=100)
92 94 96 98 100 102 0 40 80 120 160 200
Time charter rate index (index 2000=100)
Ifo Business Climate Expectations Eurozone index (index 2000=100) PMI China index (rhs, index 2005=100)
Charter rates, similar to freight rates, are affected by seasonal fluctuations
The prevailing industry overcapacity is the main force behind the pressure on charter rates
At the moment Claus Peter Offen GmbH & Co is the largest NOO, with Seaspan in the fast lane
estimates, the entire program will include the construction of over 50 large and 70 smaller ships within a time frame of 30 years.
Looking at the overall market of NOO’s, it is apparent that the market is dominated by German shipping companies. However, according to Alphaliner the combined market share of all German NOO’s (in terms of capacity) significantly decreased from approximately 61% in 2008 to 51% in 2014. This development is linked to a number of interrelated circumstances, starting with the global financial and economic crisis which negatively impacted the market for container shipping, which in turn led to losses and hence, the inability of many German shipping companies to service their debt. As a consequence several German shipping funds (German KG financing structure) collapsed. Moreover, major shipping banks are reluctant to provide new loans to funds in the light of tighter lending criteria and high insolvency rates. With this method disappearing as the major financing source and a limited state support, the future of German NOO companies remains uncertain at the moment.
Fleet and orderbook capacity (including number of vessels) of top 20 non-operating owners
Source: Clarkson Research Services (2014), Berenberg Research
Depreciation: When analysing the container shipping industry the significance of depreciation must not be neglected. As vessels represent the largest asset on a carrier’s balance sheet, depreciation can have a major impact on earnings figures. In the shipping industry it is a common practice to apply the straight-line method for depreciation. Although this is not necessarily the best approach for a cyclical industry such as container shipping, it reflects the industry’s more conservative stance towards depreciation. When accounting for depreciation two major factors have to be considered: the useful economic life of vessels and the residual value. Both factors are hard to estimate for different reasons. With regard to the useful economic life of vessels, in particular market cycles and uncertain market conditions, which can result in varying levels of vessel deployment, have to be considered. Moreover, technological and regulatory changes can reduce the vessel-lifetime considerably. For residual values the market price per ton for iron and steel scrap represents the primary factor as it heavily influences the price for scrapping vessels and therefore the residual value. Depending on the underlying assumptions, the longer the useful lifetime or the higher the residual value, depreciation can be reduced while concurrently reported earnings increase and vice versa. Looking forward, it could be the case that large one-time write-offs occur within the next couple of years, which would considerably affect the earnings of carriers. This assumption reflects a possible interaction between technological changes, in particular with regard to bunker consumption and increasing oil prices, and a large stock of vessels which was accumulated before the trade contraction in 2009 due to massive ordering.
96 77 88 110 65 54 69 67 48 37 53 30 45 13 35 35 45 30 29 51 0 200 400 600 800 1000 TTE U
Fleet capacity Orderbook Capacity No. of vessels
Numbers indicate current portfolio of vessels, excluding new orders. German-based NOO’s lost in significance and are facing an uncertain future
Depreciation must not be neglected as it can have a major impact on earnings
One-off threat due to a sharp decline of vessel-lifetimes in the upcoming years
Valuation & company profiles: plenty fish in the sea!
Long story short: a superior management of operating costs is the path to profitability and the prerequisite to survive in the commoditized, highly competitive container shipping industry. Maersk and CMA CGM have been the flag ships of cost efficiency for years, enabling both to increase their profitability and remain among the few profitable container shipping companies. Also Hapag-Lloyd’s efforts to reduce costs did pay off in 2013, however, were insufficient to compensate for falling freight rates and generate positive EBIT in H1 2014.
Berenberg expects all three companies to realise further cost improvements, in particular on the back of alliance-based network optimisations, ship-related economies of scale and energy efficiencies, as well as favourable external developments such as the sharp decline in fuel prices.
Operating expenses per FFE Spread development since issuance
Source: Company data, Berenberg Research Source: Bloomberg, Berenberg Research Hapag-Lloyd has the highest cost improvement potential, in particular in case of a successful integration of CSAV which would result in c. $ 300m synergies. Despite Hapag-Lloyd’s good track record in integrating acquired companies (CP Ships as the most recent), there is still an integration risk. Berenberg consider the uncertainties resulting from the merger and the currently challenging market environment to be adequately reflected in the 628bps Z-spread of the 10/18 bond, thus recommends to marketweight the security. With regard to the 10/15 bond, we assess the repayment risk to be low following the improved liquidity profile that will result from the CSAV related € 370m capital increase in 2014. Moreover, management is forced to deliver in 2015, in order to pave the way for the committed IPO in 2015. We therefore recommend to overweight the 10/15 as pricing looks attractive compared to the lowered risk.
HY container shipping bonds Maersk vs similarly rated peers
Source: Bloomberg, Berenberg Research Source: Bloomberg, Berenberg Research 2000 2250 2500 2750 3000 3250 2009 2010 2011 2012 2013 US D /FFE
CMA CGM Maersk Hapag-Lloyd
0 150 300 450 600 750 900 O A S (i n bp ) 500 600 700 800 900 1000 0 1 2 3 4 5 6 Z -s pr ea d time to worst CMA CGM CDS EUR CCC+ non-financials CMACG 8 3/4 12/18 HPLGR 7 3/4 10/18 HPLGR 9 10/15 CMACG 8 1/2 04/17 CMACG 8 7/8 04/19 0 10 20 30 40 50 60 0 1 2 3 4 5 6 Z -s pr ea d time to worst BBB+ non-financials OMVAV 4 3/8 02/20 DPWGR 1 1/2 10/18 MAERSK 3 3/8 08/19 HOFP 1 5/8 03/18 A- non-financials MAERSK 4 3/8 11/17
Maersk and CMA CGM have been flag ships of cost efficiency for years
CSAV integration brightens outlook for Hapag-Lloyd
CMA CGM bonds have constantly been undervalued in our opinion: the company successfully implemented cost-cutting measures at an early stage and has managed to generate positive results and outperform the industry average for years (core EBIT margin in 2013 exceeded industry average by approx. 6%). We particularly like the good business profile of the global number 2 and its broad worldwide network. The high degree of chartered vessels within the fleet enables the company to rapidly respond to changing market conditions. As of today, we prefer CMA to Hapag-Lloyd given its lower leverage (although still high), better scale and superior margin performance. Spreads have recently widened and offer an attractive opportunity to capitalise on a materialisation of the recently announced Ocean Three alliance and CMA CGM defending its position as a cost and market leader. As a result, we recommend overweighting all three of the CMA bonds.
A.P. Moeller-Maersk did not rely entirely on its highly profitable oil & gas division to navigate the group through stormy waters. The industry leader of container shipping defended its market position by applying stringent cost discipline and implementing numerous efficiency measures. We like the company’s large scale and diversified operations which mitigate cyclicality and volatility to a certain extent. Maersk is currently on track to further improve its cost structure and network efficiencies on the back of the recently announced 2M alliance with MSC. However, all credit positives seem to be already priced in, as the bonds currently trade close to A- levels rather than to the adequate BBB+ spread curve. Taking into account the present execution risks related to the oil and gas business (most profitable group segment), we see limited upside potential while there is an albeit moderate downside risk. We therefore initiate with a marketweight recommendation on both Maersk bonds.
CMA CGM: the hidden champion
Historical spread developments vs benchmark Historical spread developments vs benchmark
Source: Bloomberg, Berenberg Research Source: Bloomberg, Berenberg Research
Maersk: the star among the container shipping companies, however, already as expensive as a star 200 400 600 800 1,000 10/13 12/13 02/14 04/14 06/14 08/14 10/14 O A S spr ea d HPLGR 9 10/15 HPLGR 7 3/4 10/18
BofA ML CCC & Lower BofA ML B Corporates
300 550 800 1,050 10/13 12/13 02/14 04/14 06/14 08/14 10/14 O AS s pr ea d CMACG 8 1/2 04/17 CMACG 8 3/4 12/18 BofA ML CCC & Lower CMACG 8 7/8 04/19
A.P. Møller-Maersk A/S
Bloomberg Ticker: MAERSK <Corp>
Recommendations:
Marketweight
Bond (Pricing: 27/10/14 BGN Close) Price Z-spread YTW Callable Volume Recommendation
MAERSK 4 ⅜ 11/17 111.3 34.3bps 0.6% N € 500m Marketweight
MAERSK 3 ⅜ 08/19 111.6 45.1bps 0.9% N € 750m Marketweight
Investment thesis & recommendation
Berenberg initiates with a marketweight recommendation on both A.P. Møller-Maersk bonds. We like the company’s large scale and diversified operations, which mitigated impacts from the cyclical and volatile part of the group’s activities in the past. Moreover, the company is on track to further defend and improve its market positions in its different business segments. In particular with regard to the group’s largest division, Maersk Line, we expect a further optimisation of the cost structure and the network efficiencies on the back of the recently announced 2M alliance with MSC. However, the credit positives seem to be already priced in, as Maersk’s bonds currently trade close to the
A- average trend line rather than to the adequate BBB+ spread average. Also taking into account execution risks related to Maersk’s oil and gas business, the group’s most profitable segment (approximately 51% of the group’s EBITDA in 2013), we see limited upside potential while there is an albeit moderate downside risk.
Maersk Line capacity and market shares
Company data Selected financials 2013 LTM 06/14
Headquarter: Copenhagen (Denmark) Revenue ($m): 47,386 47,737
Market cap/employees: $ 49.7bn/88,900 EBIT ($m): 7,336 6,587
Major shareholders: A.P. Møller Holding (41.51%) EBIT margin (%): 15.48 13.80
Ratings/Outlook KPIs 2013 LTM/Q2 2014
Moody’s: Baa1/stable Total capacity/vessels: 2.6 MTEU/574 n.a.
Standard & Poor’s: BBB+/stable Own capacity/vessels: 1.6 MTEU/275 n.a.
Fitch: n.r. Orderbook: 0.3 MTEU/16 n.a.
Bond ratings: Equivalent to issuer rating Transported volume: 8.8 MFFE 9.1 MFFE
Strengths/Opportunities Weaknesses/Threats
• High degree of business diversification and large scale operations to absorb shocks (decreasing the group’s overall volatility) • Exploiting network efficiencies (2M alliance) and rationalising
operations to manifest industry cost leadership
• Declining margins in some business segments (e.g. oil & gas) which are usually needed to offset other cyclical segments • Continuing overcapacity and shrinking freight rates in container
shipping segment (largest revenue contributor)
30%
16% 18% 14%
Pacific
Pacific Atlantic Asia-Europe
Intra Asia Intra
Europe 8%
no.2 no.6 no.1 no.2
6%
no.1
no.3
12%
5% 22%
no.2 no.1 no.1 no.3
Oceania Latin America West-Central Asia Africa
Maersk Line capacity (TEU)
Company snapshot Revenues & profitability A.P. Møller-Maersk (APMM), headquartered in Copenhagen
(Denmark), is a global maritime-oriented conglomerate, which operates in more than 130 countries worldwide. The Maersk Group has five core segments: Maersk Line, Maersk Oil, APM Terminals, Maersk Drilling and the Service & Other Shipping unit. As of 2013, Maersk Line, the global container shipping division, represents the group’s largest operating unit in terms of revenues. However, the container shipping business is extremely volatile. In the past, APMM benefited from the sound profitability of its other business lines to diversify the risk of the cyclical container shipping segment.
Recent developments & Outlook
APMM has a widespread and well diversified portfolio of business divisions, which are largely complementary with regard to their cyclicality:
Considering the continuing supply-demand imbalance within the shipping industry, APMM’s container line division currently is focussed on defending its market share and maintaining its position as the industry cost leader. Maersk Line’s continuous operational cost-saving efforts, focusing on increased network efficiencies and a more efficient vessel-utilisation, are almost unparalleled within the industry. The recently announced 2M alliance, which includes a 10-year vessel-sharing agreement, is another clear commitment to this path. With regard to cost improvements, the reduction of bunker consumption plays an important role. In order to achieve this, Maersk Line implemented initiatives such as slow steaming and blank sailing, and increased investments in vessel retrofits and larger ships, such as the Triple-E class.
The group’s independent oil and gas operator, Maersk Oil, displays some potential for the future but also is facing short-term risks. The division is well positioned with regard to its globally diversified oil field portfolio. Besides existing mature projects, Maersk Oil has a number of new promising projects in the pipeline, including, amongst others, undertakings in the UK (Culzean), the US Gulf of Mexico (Jack Field) and Angola (Chissonga, Flyndre/Cawdor). Therefore, in the medium-term, a key factor will be the securing of these projects for the future production growth. On the other hand, the division has been facing a natural decline in production volumes for maturing fields. This in connection with the general execution risk within the oil business and cost intensive procedures to finding and developing projects has put some pressure on the division’s margins. Moreover, recent developments with regard to a declining oil price aggravate the situation.
APMM’s other segments, such as Drilling and Terminals, are comparatively smaller but have a rather stable operating performance and are very profitable, which also helps to mitigate risks from cyclical exposures on a group level.
Transported volumes & freight rates (Maersk Line)
Bunker consumption & unit costs (Maersk Line)
Fleet structure & total capacity(Maersk Line)
Sources: Company data, Clarkson Research Services, Berenberg Research 0% 15% 30% 45% 60% 75% 90% 0 5 10 15 20 25 30 20 11 20 12 20 13 20 11 20 12 20 13 20 11 20 12 20 13 20 11 20 12 20 13 20 11 20 12 20 13 USD bn
Revenues EBITDA EBITDA margin (rhs)
2200 2400 2600 2800 3000 3200 0.0 2.0 4.0 6.0 8.0 10.0 2009 2010 2011 2012 2013 USD / F F E M F F E
Transported volumes Average freight rate (rhs)
2600 2750 2900 3050 3200 0.0 0.5 1.0 1.5 2.0 2010 2011 2012 2013 Tons / F F E Bunker consumption
Operating expenses per unit (rhs, USD/FFE)
253 245 254 270 275 277 325 391 326 299 2.1 2.2 2.5 2.6 2.6 0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 0 100 200 300 400 500 600 700 2009 2010 2011 2012 2013 M TE U # of v esse ls
Owned vessels Chartered vessels Total capacity (rhs)
Maersk Line Maersk Oil Maersk
Drilling APM
Credit metrics & rating agencies’ view Debt/EBITDA We regard APMM’s size and high degree of diversification as
well as the group’s competitive positioning in several of its industries as key credit drivers. Considering otherwise highly volatile and in part cyclical stand-alone segments, the above factors contribute to a significant reduction in the group’s earnings volatility. In particular, in the past, stable and highly profitable divisions such as the drilling, the port terminals and oil and gas segments (together c.66% of the group’s EBITDA) helped to mitigate swings in the operating margins of the group’s largest revenue contributor, the container shipping business (c. 29% of the group’s EBITDA).
APMM exhibits strong credit metrics which is reflected by the strong debt/EBITDA of 2.7x and FFO interest coverage ratio of 7.3x. Metrics could even be further strengthened by the planned 2M alliance which would help to further reduce costs and optimise network efficiencies of APMM’s largest segment, the container shipping division.
Berenberg also views APMM’s management efforts to continuously improve the group’s cost base and maintain a conservative capital structure over the business cycle as credit positive. Moreover, there are signs that there will be a greater focus on key business lines in the future. For example, the divestment from the Dansk Supermarket Group in 2014, which realised proceeds of $ 2.8bn, had the objective to reduce debt and increase the cash position to finance substantial investment needs of key divisions over the upcoming years.
The main credit constraint is APMM’s execution risk related to the oil and gas business, which is the group’s most profitable segment (c.51% of the group’s EBITDA). The recently announced $ 1bn share buyback by contrast has no credit negative effect, considering the strong results of H1 2014 and the updated expectations for H2 2014.
We regard APMM’s maturity profile as well balanced. Moreover, the group has a solid liquidity profile with a large cash reserve (around $ 3.6bn as of Y/E 2013) and available credit facilities until September 2015 (around $ 6.75bn).
FFO interest coverage
Maturity profile
Sources: Company data, Moody’s, S&P, Berenberg Research
Positive rating drivers Rating constraints
• Large and diversified scale of operations (Moody’s/S&P) • Strong competitive market positions (Moody’s/S&P) • Well diversified business profile (Moody’s/S&P)
• Strong financial flexibility and solid/strong liquidity (Moody’s/S&P)
• Exposure to cyclical, competitive industries (Moody’s/S&P) • Highly capital intensive operations (Moody’s/S&P)
• Historically volatile free cash flow generation due to material swings in earnings and working capital patterns (S&P)
Upward rating pressure could arise from… Downward rating pressure could arise from…
• More conservative financial policies (S&P)
• Sustainable FFO/debt ratio of c.40% and positive FOCF (S&P) • Sustainable reduction of debt/EBITDA below 2.2x (Moody’s) • FFO interest coverage above the current level of 7.5x (Moody’s)
• Aggressive financial policy (S&P) • FFO/debt sustainably below 25% (S&P) • Increase of debt/EBITDA above 2.75x (Moody’s) • FFO interest coverage below 6.0x (Moody’s)
3.3x 1.9x 2.3x 2.8x 2.7x 1.5x 2.0x 2.5x 3.0x 3.5x 2009 2010 2011 2012 2013 Debt/EBITDA 4.2x 7.9x 6.7x 7.1x 7.3x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x 2009 2010 2011 2012 2013
FFO interest coverage
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 2014 2015 2016 2017 2018 2019 2020 >2020 USD bn
Drawn debt Corporate bonds Undrawn revolving facilities threshold for downward rating pressure
threshold for upward rating pressure
threshold for downward rating pressure threshold for upward rating pressure
CMA CGM S.A.
Bloomberg Ticker: CMACG <Corp>
Recommendations:
Overweight
Bond (Pricing: 27/10/14 BGN Close) Price Z-spread YTW Callable Volume Recommendation
CMACG 8 ½ 04/17 101.5 696.2bps 7.4% Y € 396m Overweight
CMACG 8 ¾ 12/18 102.8 740.1bps 7.7% Y € 300m Overweight
CMACG 8 ⅞ 04/19 102.9 730.1bps 7.6% Y € 286m Overweight
Investment thesis & recommendation
CMA CGM ranks among the top three container shipping operators worldwide, with leading positions in most of its regional markets. We are particularly considering CMA CGM’s good business profile and strong global footprint as credit positive. The company’s flexible fleet structure in connection with efficient cost-cutting measures enables the carrier to rapidly respond to changing market conditions and hence, generate above industry-average earnings as seen over the past years (in 2013, CMA CGM’s core EBIT margin exceeded the industry average by approx. 6%). We therefore initiate on all CMA CGM bonds with an overweight recommendation, albeit the highly levered capital structure. Our assessment is based, in contrast to our view on Maersk, on a largely missing reflection of the company’s successful efficiency efforts in the past and of future prospects in bond prices. Especially the latest spread widening should constitute an attractive opportunity for investors. In particular, the recently announced Ocean Three alliance should further improve CMA CGM’s network efficiencies and cost base, both securing the company’s leading market positions at least on a mid-term horizon.
CMA CGM network and geographical capacity split
Company data Selected financials 2013 LTM 06/14
Headquarter: Marseille (France) Revenue ($m): 15,902 16,157
Market cap/employees: n.a./18,000 EBIT ($m): 945 753
Major shareholders: Family owned via Merit Corp. (97.00%) EBIT margin (%): 5.94 4.66
Ratings/Outlook KPIs 2013 LTM/Q2 2014
Moody’s: B2/stable Total capacity/vessels: 1.5 MTEU/428 1.6 MTEU/430
Standard & Poor’s: B+/stable Own capacity/vessels: 0.5 MTEU/81 0.5 MTEU/79
Fitch: n.r. Orderbook: n.a. n.a.
Bond ratings: Caa1/B- (04/17, 12/18, 04/19) Transported volume: 5.7 MFFE 5.8 MFFE
Strengths/Opportunities Weaknesses/Threats
• A flexible fleet structure and high degree of geographical diversification help to mitigate market risks
• Substantial liquidity reserve secures financial flexibility in a cyclical and volatile industry
• Highly levered capital structure negatively affecting the company’s credit metrics
• Tight market due to demand and supply imbalance and prevailing low level of freight rates
25% 11% 16% 16% 32%
Asia-North Europe Lines Asia-Med Lines US Lines Intra area Lines North-South Lines Kingston Port Kelang Khor Fakkan Tangier Malta North America South America Europe Southern Africa Northern Africa Central
Asia EastAsia
Australia South
Asia Middle
East Central America &
the Carribean
Source: CMA CGM, Berenberg Research Major trading routes (CMA CGM, Delmas & ANL) Primary hub
Company snapshot Revenues & profitability CMA CGM S.A. (CMA CGM), headquartered in Marseille
(France), is one of the leading global container shipping companies, employing more than 18,000 people across 150 countries. Established in 1978, CMA CGM today still is owned by its founder and CEO, Jacques R. Saadé. In the past, CMA CGM’s growth was mainly driven by acquisitions (CGM in 1996, ANL in 1998 and Delmas in 2006), which transformed the company from a regional carrier to the world’s third-largest marine shipping liner. Besides shipping activities, the company also provides related services such as container terminal operations and transport logistics.
Recent developments & Outlook
In spite of difficult market conditions since 2009, CMA CGM has managed to defend its position among the top container shipping operators worldwide (as of June 2014, CMA CGM has a market share of around 8.4% in terms of capacity, only behind MSC and Maersk with market shares of 13.4% and 14.7% respectively).
This is primarily attributable to the company’s continuous focus on operational cost efficiency. Besides the implementation of general, industry-wide measures such as slow steaming, CMA CGM has put a special emphasis on the competitiveness and composition of its fleet. The company is keen on keeping a high share of chartered vessels in its fleet (more than 80% in 2013), which results in a reduction of running costs and the possibility to more efficiently manage the orderbook. Moreover, it is ensured to have a higher degree of flexibility which is particularly important with regard to the current overcapacity (more than three quarters of its chartered vessels can be redelivered within 12 months). Currently, CMA CGM’s strategic positioning is also favoured by weak time charter rates.
Besides focussing on direct cost reductions, CMA CGM also is putting an increased emphasis on improving network efficiencies. At the moment, the company’s global network is organised around several major trading hubs and comprises approximately 170 shipping services. This allows CMA CGM to more efficiently allocate containers between major intercontinental and local trading routes, resulting in increased network efficiencies and hence cost savings. Moreover, following the non-approval of the P3 alliance, the company is striving for new alliances to increase network efficiencies. Recently the vessel-sharing alliance with CSCL and UASC, better known as the Ocean Three alliance, was announced, which will only be subject to regulatory approval in the US. Finally, CMA CGM’s broad geographical diversification (as of May 2014, no regional market represented more than 20% of revenues) and presence in smaller niche markets helped to partially offset impacts from low and volatile freight rates.
Fleet structure & charter costs
Bunker consumption & unit costs
Transported volumes & freight rates
Sources: Company data, Clarkson Research Services, Berenberg Research -8% -2% 5% 12% 18% -2.0 3.0 8.0 13.0 18.0 2009 2010 2011 2012 2013 USD bn
Revenue EBITDA EBITDA margin (rhs)
79 91 91 84 81 297 305 303 330 347 50 80 110 140 170 200 0 100 200 300 400 500 2009 2010 2011 2012 2013 USD /day pe r TE U # of v esse ls
Chartered container vessels Owned container vessels
Time charter rate index (rhs, index 2009=100)
2500 2625 2750 2875 3000 0 0.4 0.8 1.2 1.6 2010 2011 2012 2013 Tons/FF E Bunker consumption
Operating expenses per unit (rhs, USD/FFE)
800 900 1000 1100 1200 0.0 2.0 4.0 6.0 8.0 2009 2010 2011 2012 2013 M F F E
