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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).
Source: Vesselsvalue.com
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.
Comment on this article
CHAS DELLER
May 05, 2016 at 6:18 pmExcellent article that’s what sets you apart from your peers in this industry
Gavin van Marle
May 06, 2016 at 8:48 amThat is most kind of you sir!
chas deller
May 06, 2016 at 2:10 amFROM TIM ROUTH OF CHINASEARATES IN SYDNEY
most hedge fund managers, asset managers and stock pickers are the ones who have the most concern. Again I will use numbers and you tell me what you see, that’s what they did with me.
Apple’s share price is $93.24 today. There first quarterly revenue for 2016 was $50.6 billion with a net profit of $10.5 billion. That’s quarterly.
Maersk has a share price of $1,422.00. Their first quarter was $1.3 billion in revenue and a profit of $214 million.
Maersk is valued at 14 x times that of Apple. Does that make any sense? Pick any other stock and see, Google is around the $700 mark.
Now we look at the Maersk business as a whole and what it attracts.
What sort of finance and lending comes with that valuation? Quite a bit.
How do they use the lending and finance? Profits?
What about the asset classes? Do they have suppliers or do they have assets? Assets, yet that seems to be less expensive by say 14 times a company that has sullpiers.
Insurance, what are they insuring and for what? I issue finance and it comes with assurances and insurance. What are they putting up as collateral? Are they shadowing the assets, ie using one asset for 3 purposes.
If a business is too consistent then it is outperforming the market and as such it cannot be relied upon or used as a benchmark. Like Enron, Maersk never loses. No matter the market, prices, assets or finance conditions.
Maersk is Denmark’s biggest business and the government and others I think steps in not only with $$$$$ but it allows the group to report bullshit figures. I know they have independent auditors who are the world’s best, but they are reporting the news not making it.
There is a black hole at Maersk. I would like to point out I was a massive Maersk advocate, but every moneyman I meet regarding my business says “How the hell are Maersk doing it?”
You bring the beer and I will bring the popcorn, it will be amazing when this opens up.
Gunther Ginckels
May 06, 2016 at 8:53 amStating that the Danish government and others steps in not only with $$$$$ and allows the group to report bullshit figures has no foundation. Comparing Apple figures with the figures of a shipping company if comparing apples with lemons and only confirms how limited the industry knowldge of these stock wizzards is.
Ale Pasetti
May 06, 2016 at 9:15 am“Maersk is valued at 14 x times that of Apple. Does that make any sense? Pick any other stock and see, Google is around the $700 mark.”
Chas, that is not how to value a business, but a stick split on a higher free float would make a lot of sense. As Gunther said, however, there are significant barriers there.
Bjorn Hojgaard
May 13, 2016 at 8:50 amA simple question: Have you tried checking the NUMBER of shares for Apple vs. Maersk? You will see that Maersk’s market cap is much (much!) less than Apple’s, despite a higer PER-SHARE price. There is nothing BS about Maersk’s market cap… it is exactly what it is, the market’s valuation of the company. Now, whether that’s cheap or expensive is for everyone to judge for himself, but it’s not some arbitrary number picked out of thin air and decided by the company. Just saying.
Ale Pasetti
May 13, 2016 at 5:29 pmI assume your comment is for somebody else, Bjorn, and I agree — we are not interested comparing the market cap or the EPS of Apple and Maersk and I am not sure why this conversation ended up there. So, why?
More importantly, however, with regard to Maersk, there is clearly a problem with its equity valuation given its trailing and recent performances (stock is down 6% since we published this column). The yield is attractive, albeit riskier than that of others operating in less cyclical sectors, and I would not be surprised if it was cut at some point in future given persistent headwinds into 2017.
Thanks.
Ale
Bjorn Hojgaard
May 16, 2016 at 9:09 amHi Ale,
You are right, my comments were not in response to the article (which is well written and argued) but as a reply to chas deller, who in his comments seems to think that because Maersk’s share price is higher than Apple’s then the company is worth more… I was merely pointing out that it is not a correct way to value a business or a company.
Bjorn
Ale Pasetti
May 16, 2016 at 10:25 amYou are right, thanks.
Gunther Ginckels
May 06, 2016 at 7:55 amWhat these finance figure crunching wizzards overlook is who is holding the stock. APMM shares are for the majority in hands of the Family and the public holding-on to their share(s), framing it as decoration and not trading or willing to sell. With 91,000 registered shareholders it will be a challenge to value an IPO.
Ale Pasetti
May 06, 2016 at 9:02 amThanks for your comment, Gunther — we did not overlook that element. Rather, it was the premise of what we defined “as a fascinating thought experiment.”
Clearly, its shareholding structure and tiny free float are elements that will continue to weigh on its equity value for a long time.
Also: “With 91,000 registered shareholders it will be a challenge to value an IPO.”
Do you have past evidence to back that statement?
Because I think that’s a minor issue on the road to the public market.
Gunther Ginckels
May 06, 2016 at 9:13 amThanks Ale. My view “With 91,000 registered shareholders it will be a challenge to value an IPO.” will be difficult to back-up with past evidence however i donot believe that it is a minor issue on the road to the public market. APMM’s historical shareholding composition makes it very much an emotional share and offcourse never say never but i would be very surprised to see the Danish public abandoning their share(s). Than again i am not Madame Soleil and have – occassionally – been wrong before.
Ale Pasetti
May 06, 2016 at 9:33 amGunther,
We really need some evidence to back up that statement, or that is just an opinion. In my experience, the number of shareholders on the register is just a tiny little detail when it comes to corporate strategy/spin-offs and so forth.
That said, I would agree with you that there are several moving parts here, but then consider the performance of Heineken, whose dual-tier shareholding structure over the years has prevented a takeover and has been single out as being one of the biggest value threats for shareholders.
Its share price has doubled since 2011.
Of course, it operates in a very different industry, but there you go: there are many moving parts and several value drivers to consider when it comes to gauging fair value.
Thanks for sharing your views with us.
Ale
Ale Pasetti
June 27, 2016 at 2:20 pmAP Møller-Maersk considers break-up
http://www.ft.com/cms/s/0/4d78d0e0-3944-11e6-9a05-82a9b15a8ee7.html#axzz4Cmz7cWeF