While the recent history of container shipping has been turbulent, to say the least, one of the weirdest constants has been the AP Møller-Maersk Group share price.
In private conversations with senior Maersk executives, it has become clear that while the plaudits of being a bellwether company are welcome, the glow recedes over time.
“We have retuned profits year after year to investors in an industry that often fails to do that, and yet our share price has stubbornly remained the same – one of management’s biggest challenges is increasing the share prices,” one candidly told me a few months ago.
Indeed, go back five years to 2011 and you will find Maersk’s share was Dkr10,390 ($1,594), while today it stands at Dkr9,255 ($1,422), and although there have been some highs and lows, the story is of a share price that almost appears etched in stone.
So, in the spirit of speculation that all blue-chip conglomerates attract, we wondered what would happen if the AP Møller-Maersk board took the radical, nigh-inconceivable, step of separately listing its container shipping unit – what it would look like in terms of the market, and how that might affect the corporation’s other divisions.
Craig Jallal, senior data editor at vesselsvalue.com, says:
Since the start of the global economic downturn in 2008, AP Møller-Maersk has tried and tested many strategies to keep container division Maersk Line in profit. These range from the introduction of ever-larger vessels to lower the cost per teu, to the Daily Maersk, which offered guaranteed delivery times to entice shippers to stay loyal to its service.
On the operational side, Maersk Line was a one of the first to adopt slow-steaming and warm lay-up. But none of these strategies have produced the gains expected. For a while, the profits generated by Maersk Oil kept the group in the black, but with a prolonged downturn in the oil price and the dire state of the container sector, is there any point in being a conglomerate?
Maersk Group defines its business units as Maersk Line, APM Terminals, Maersk Oil, Maersk Drilling and APM Shipping Services (Maersk Supply Service, Svitzer, Maersk Tankers and Damco). In this article, we examine if there is any value and/or cost savings that would accrue from spinning-off Maersk Line as a separate entity via an IPO.
As such, Maersk Line would still be the largest container line by value, with a current fleet of 262 owned vessels with a value of $12.1bn (live vessels and newbuildings).
This is far larger than any of the currently listed public container companies (see table below, which includes liner companies and vessel-owning container companies). However, even including the likes of Seaspan fails to find a champion close to the value of the Maersk Line fleet.
We can take the speculation one step further and estimate the size of the market capitilisation of a publicly quoted Maersk Line, based on the currently listed publicly quoted container companies.
The table lists the public container companies by size of market cap. To estimate the potential size of the market cap of Maersk Line, we have used the median of the ratios of the above companies’ market cap to fleet values.
On this basis, a publicly-quoted Maersk Line might have a market cap of around $8.5bn. Of course, the potential range of market cap based on the range of ratios is very wide, ranging from a minimum potential market cap from $2.8bn and the maximum was $36bn. However, given Maersk Line’s relative prominence in the market, a reasonable estimate might be in the region of $20bn. This would make the company the largest of any other shipping-orientated company, apart from its parent AP Møller Maersk, and Carnival Cruise.
However, in comparison with other industrial sectors, a market cap of $20bn hardly registers in the rankings. Wal-Mart Stores, a major shipper using container services, has a market cap of $216bn. Analysis of the size of the dominant companies in each industrial sector shows there is domination by four or five companies. Therefore, to be on an equal to these companies in investors’ eyes, Maersk Line would need to have a market cap in the region of $100bn, which implies a fleet with a value of at least $50bn, or five times its current size.
To achieve such a size could not be done through purely organic growth. There would have to be a considerable round of mergers and consolidations (lots of fees for lawyers and bankers), but the end result would be a clear and easily sellable container shipping story for US investors.
Alessandro Pasetti, The Loadstar financial analyst & founder of Hedging Beta, says:
Maersk is very unlikely to consider a radical overhaul of its existing assets portfolio following a few years during which several non-core assets were divested. But Maersk Line continues to absorb a huge amount of capital and investors are wary of a prolonged downturn — these two elements do not bode well with value creation.
It could also be argued that its prospects weigh on the valuation of the entire Maersk group – so, how about a partial spin-off aimed at retaining control of its shipping line division?
Its quarterly results, released on Wednesday, show the level of invested capital in Maersk Line is a whopping $20.1bn, or 43.3% of the group’s total. Its return on invested capital (ROIC), which remains one of the group’s most important metrics, stood at 0.7%, which compares with 2.9% at group level and implies that the unit doesn’t make its cost of capital.
However, assuming it swings back to a normal level of underlying profitability, returns could be much higher, while its prospects as a standalone entity could be more appealing for investors. In this context, consider that in the first quarter of 2015, its ROIC stood at 14.3%, or 40 basis points above the group’s average.
Assuming Maersk Line’s worst days are over, it should be safe to assume that the unit could hit a normalised annual Ebit in the region of $1.5-2bn — its underlying profit was over $700m in the first quarter of 2015.
If we place on the unit an Ebit multiple of between 10x to 12x, the enterprise value (EV) of Maersk Line could range between $15bn and $24bn, while its equity value would sit between $11bn and $20bn, assuming it retains some $4bn of net debt on its books. As a reference, Maerk’s current EV is $39bn, while the shares of Hapag-Lloyd trade on a forward EV/Ebit multiples of 15.6x — so the upside could be greater.
One key element, possibly backing a value-accretive spin-off scenario, is that the value of several other assets – APM Terminals, Maersk Drilling, Maersk Tankers and Svitzer – remain subdued due to cyclicality, but also because they belong to a conglomerate that includes problematic shipping assets, although most of them currently earn much higher returns than Maersk Line and have significantly lower capital requirement, as the table below shows.
Source: AP Moller-Maersk
Maersk’s first-quarter performance in shipping was only slightly better than break-even. But it was far better than expected, helped by a 7% volume growth and better utilisation rate. If it hit rock bottom in the fourth quarter, now could be time to think creatively about the ultimate corporate structure of the group.
Admittedly it is quite difficult to see such a split taking place, but it’s a fascinating thought experiment.