© Khunaspix Dreamstime.

For those outside the immediate confines of the shipping and freight industry, the headline event from AP Møller-Maersk’s annual results yesterday was actually the sale of its 20% stake in Danske Bank.

APMM will return around $5bn to its shareholders in the form of a special cash dividend, as the Danish shipping and oil behemoth continues to focus on its core assets.

“The divestment of the shares in Danske Bank, denominated in Danish kroner (Dkr), is expected to take place in the second quarter of 2015. The fair value of the listed shares at 31 December 2014 is $5.5bn and the translation reserve recognised in equity is a loss of $79m,” APMM said in its annual report.

This is a smart move. APMM must free-up capital to invest in core divisions, and is taking advantage of a rally in Danske Bank shares of a +486% performance since the bull market started in March 2009.

APMM could have waited a bit longer, of course, yet bank shares in the western world are likely to be volatile at best over the next few quarters – most of them look fully valued, based on price to tangible book value. So, APMM did well to cash in at a 30% discount to pre-crisis record highs for Danske Bank.

Its Danske Bank stake was a non-core asset – although it is tempting to ask what is core and non-core in APMM’s asset portfolio these days.

Sacred cows

There are none in this environment: in fact, APMM could entertain partial divestments or spin-outs of Maersk Oil and Maersk Drilling, if the macroeconomic landscape doesn’t provide a helping hand and if things do not go according to plan over the next couple of years.

APMM’s full-year results were mixed, and did not contribute much to the 12% surge in APMM’s share price in the past two days of trading – the Danske divestment did. It also contributed the strong likelihood that further action may be needed, given that APMM shares trade at a significant conglomerate discount, with a forward EV/Ebitda of five times.

A back-of-the-envelope, sum-of-the-parts valuation indicates that the parts could be worth up to 50% more than the whole, depending on certain assumptions for future growth and profitability.

Despite booking a record profit, APMM’s annual result didn’t strike me as being particularly good because it was boosted by one-off items.

Delve into APMM’s financials and it is easy to determine why it is selling a bank stake that has become less strategic over time – the group’s cash balances are stable, up to $3.4bn from $3.1bn in 2013, but its cash flow profile has deteriorated, with net cash flow for the year at $321m, down from $1.4bn one year earlier.

Capital expenditures have surged by $1.3bn to $6.2bn – representing a 30% year-on-year increase – on mildly lower operating cash flow at $8.7bn, compared with $8.9bn in 2013. Changes in working capital show APMM is good at managing its short-term liquidity needs, and both its debt pile and debt maturity profile do not pose problems, while net leverage is manageable.

However, that does not dispel the following question: what else could go on the auction block if APMM’s cash profile deteriorates further?


There always remains the possibility that shareholders will ask for more, particularly if oil prices remain subdued and Maersk Oil and Maersk Drilling do not buck the trend of declining cash flows.

We have already investigated the economic and strategic merits of selling APM Terminals, one of APMM’s core divisions, and it’s not too difficult to single out a couple of divisions that could become more problematic, such as Damco and Svitzer, whose combined net operating loss after taxes (NOPAT) is in the region of half a billion dollars.

Is there a real market for them, however?

Tankers and supply services, meanwhile, offer limited contribution to revenues, and if you exclude Maersk Line, the group’s main revenue contributor and the core of its business which generates free cash flow of $2.1bn, 77% of the group’s total, then the spotlight is inevitably on APMM’s oil and drilling activities.

Free cash flow for the oil and drilling units came in at $396 and -$1.4bn in 2014, respectively. This is very bad news because the combined capital expenditures of the two units stood at $4.4bn in 2014 – capex is evenly split between oil and drilling operations – and amounts to almost three-quarters of the group’s total.

Maersk Drilling

The drilling division reported a NOPAT of $478m, but the oil unit was in the red to the tune of $861m, and the outlook is challenging.

“Maersk Oil expects a significantly lower underlying result for 2015 than for 2014 as break-even is reached with oil prices in the range $55-$60 per barrel,” APMM pointed out on Wednesday.

“The oil division was Maersk’s biggest profit contributor in six of the eight years through 2013 as the company’s Maersk Line container shipping unit struggled from excess industry-wide capacity and declines in freight rates,” Bloomberg also noted on Wednesday.

Of course, a sale of either division would signal a massive u-turn in strategy, and would leave APMM exposed to shipping risk. How likely is that, though?

Well, much depends on the price of Brent crude in the near future.

On the one hand, asset disposals may become necessary, yet they may be difficult to execute if Brent crude doesn’t surge to about the $80 per barrel – at that price level however, APMM would be unlikely to need to undertake divestments.

On the other hand, if oil prices drop below $50 and stay there for some time, say a year or two, losses could widen. At that point, the obvious action for APMM would be to seek buyers that may be enticed by a distressed sale.

Comment on this article

You must be logged in to post a comment.