Evergreen

The consolidated annual numbers recently released by Evergreen confirmed that Taiwan’s container shipping industry remains one of the weakest spots globally, to put it mildly – in fact, barring state intervention, it is easy to argue that one of the three domestic carriers might well go under within 24 months or so.

Either way, with Pacific International Lines out of the consolidation game in Asia, expect some serious speculation, as early as this year, linking Evergreen and the other two ailing Taiwanese carriers to any possible suitors – CMA CGM, in particular, is in the driving seat, based on market consensus among my sources, although speculation also surrounds Hapag-Lloyd’s plan.

Landscape

Overlooked by most, Evergreen is the only serious contender for state-owned Yang Ming, whose similarly convoluted financials are in perennial distress. A tie-up was ruled out in the past, “but perception has changed since”, said a shipping banker this week.

A domestic tie-up would be more reasonable.

Meanwhile, Wan Hai lags the two bigger domestic rivals and might be less strategic in terms of consolidation, although its latest, 2018 financials too were really bad in places – falling core cash flows, shrinking cash balances, the lowest operating income since 2014 and surging net debts stood out, among other problems.

Despite all this, it has an ambitious heavy investment plan in terms of fleet size, just as Evergreen does.

Capital structure

Evergreen’s latest financials didn’t shine for their strength, and while not being as bleak as Yang Ming’s, they were only marginally reassuring.

(Source Evergreen)

(Source Evergreen)

It consolidated TWD93bn of gross debt ($3bn) at the end of 2018 – which is higher than comparable 2017 liabilities, as the table above shows (given accounting changes, the numbers are not directly comparable) – as well as other maritime/non-maritime assets.

(To know more about its affiliates, please check out its annuals at page 24-27, with subsidiaries M&A at page 28; the basic information of the associates that are material to the group follows at page 51)

The maturity profile of its outstanding debt obligations and funding costs are ok-ish…

(Source Evergreen)

(Source Evergreen)

… but when its debts are gauged against its underlying income and profitability, the resulting metrics point to a rather precarious situation, which is worse than that of major container shipping companies APMM and Hapag-Lloyd, and not far away from the pre-forma net leverage of CMA CGM this year.

Cash flows

Cyclicality played a part in its 2018 unhealthy performance – a snapshot of its net income and operating cash flow trends can be found below.

(Source Evergreen)

(Source Evergreen)

Factoring in a gross cash position of $1.2bn at the end of 2018, its net debt was $1.76bn, implying a net leverage of 4.7x, which is derived from a clean ebitda number that in 2018 I estimate at $373m.

(Source Evergreen)

(Source Evergreen)

Depreciation and amortisation were relatively stable year-on-year, but interest expenses rose significantly, while its operating profits (ebit) were hammered, with ebit of only $29m for the year. Still, the pinch was felt already at gross profit level, feeding through a set of accounts that clearly point to serious working capital strains.

While operating cash flow was only about one-fourth than 2017, total investing cash flow outflows almost tripled, with heavy assets investment, in particular, rising to $320m from $48m in 2017 – ships are typically the heaviest investment of all for Evergreen.

(Source Evergreen)

(Source Evergreen)

This is what the group says in its annuals: “As new ships have been built and put into operation by many carriers around the world, market supply has exceeded demand. Therefore, the market imbalance led to price competition, resulting in unstable profitability for the industry and raising the risk of impairment arising from main operating ship equipment, transport equipment and cargo handling equipment.”

Notably, as a result of last year’s headwinds, its core free cash flow – the amount of excess cash that can be used to pay down debt, when it applies – was negative to the tune of $224m, hence it burned, on this basis (there are other cash outflows/inflows from investment) about $690,000 daily last year.

A sinking feeling ensues as investment in vessels continues: inevitably, a tiny little profit for the year had many trade sources once again trying to understand how this corporate story might pan out, and whether vessel orders were intact. A dismal performance for its shares, which are rather illiquid and trade close to record lows, adds to the mixed feelings.

So, how about a cash call if its balance sheet must be repaired?

Last summer the board of directors “resolved to increase capital by $3m by issuing 300,000 thousand shares at a par value of NT$10. Of which 30,000 shares are reserved for its employee stock purchase plan. All proceeds from share issuance was completed on December 21, 2018” – so, this is just ordinary activity concerning ongoing capital adjustments.

True, it still has $1.2bn of cash on the balance sheet – so it has the time to shine, maybe. But while CMA CGM is understood to be talking M&A with logistics services provider Geodis, it could well be Taiwan and its container shipping activities where M&A appetite might spark some real action, with the French carrier leading the show.

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